No-load variable annuities begin to
attract interest among fee-based advisors.

No-load variable annuities continue to comprise a miniscule percentage of the market, but in the world of fee-based advice, the role they serve is a big one.
That's because they're the only type of variable annuities a typical fee-based advisor will touch.
Insurance and mutual fund companies apparently are growing more cognizant of this fact. As the fee-based advisory profession continues to grow, so it seems does the number of variable annuity offerings specifically catered to them and their business structures. It's getting easier to find no-load variable annuities that are stripped of costly riders, benefits and other bells and whistles, as well as surrender fees and other charges, and boiled down to low-cost, tax-deferred savings vehicles. Pressure by regulators such as the SEC and NASD has also given companies an incentive to provide variable annuities that are easier to understand and use, through an advisor distribution channel more apt to consider product suitability when dealing with clients.
Hence, the no-load variable annuity market has undergone growth in recent years, albeit not dramatically. Cash flows in the no-load variable annuity market amounted to about 1.8% of the overall variable annuity market-or about $2 billion-year-to-date as of the end of the third-quarter 2006, according to Morningstar, the Chicago-based research company. That figure is double what it was a year earlier, when no-load products accounted for 0.9% of the variable annuity market.
The majority of the no-load annuity producers tracked by Morningstar gained business in 2006, with the bulk of the increase coming from Fidelity Investments' introduction of the low-cost Personal Retirement variable annuity, a stripped-down no-load product with mortality and expense risk charges of 0.25%-the industry's lowest. "The increase is almost entirely due to Fidelity's success with the relatively new [Personal Retirement] annuity product," says Frank O'Connor, manager of Morningstar's VARDS products.
Jeff Cimini, executive vice president of Fidelity Investments Life Insurance, says he feels the company's low-cost product resonates with advisors because it allows them to align client assets with their fee structures. He notes that about 20% of investors own annuities.
"From my conversations with a lot of the RIAs, I think they are selectively warming up to annuities," Cimini says.
The product brought Fidelity cash flows of $871.8 million as of third-quarter 2006, leading all no-load annuity offerings tracked by Morningstar. Vanguard, the second largest, saw its business grow from $417.1 million to $521.8 million during that time span, with a no-load offering that carries a 0.30% in M&E charges. Ameritas, which introduced its no-load annuity in June 2005, was third largest with a flow of $179.5 million, according to Morningstar.
A recent offering by Ameritas is its Genesis No-Load Annuity, which is designed for active investors and offers 22 different investment options managed by ProFund Advisors LLC. "This is designed for sophisticated advisors who are active managers," says Mitchell Politzer, president and CEO of First Ameritas Life Insurance Corp. of New York.
TIAA-CREF also is among the top no-load annuity providers in the industry, but it has stopped taking on new investors and generates cash flow exclusively from its existing contract owners, according to O'Connor.
Some companies have shaken up the no-load variable annuity market in ways other than sales growth. Jefferson National Life Insurance Co., in a dramatic departure from the market's usual business practice, launched the Monument Advisor VA in May 2005, which offers a no-frills variable annuity that substitutes a flat monthly fee for an M&E charge. And, unlike an M&E charge, the fee is completely independent of what a customer puts into the annuity. Customers pay $20 per month for the annuity no matter the value of the account.
As with other no-load products, customers continue to pay whatever fees are charged by the mutual funds contained in the annuity's sub-accounts. Laurence P. Greenberg, CEO of Jefferson National, says the product grew out of a desire by the company to distinguish itself from the competition and provide a product that would allow customers to concentrate on accumulating for retirement in a low-cost manner. "We asked ourselves, why do people have to pay so much for tax deferral?" Greenberg says.
The other piece of the equation is the fee-based advisor community. The Monument Advisor VA, according to Greenberg, is aimed squarely at the fee-based advisor market. Unlike some of the larger players in the no-load variable annuity market, such as Fidelity and Vanguard, Jefferson National does not sell through a direct retail channel, and provides its variable annuity exclusively through independent advisors. "Advisors want something that's low cost, provides a broad selection of funds and fits in with their business model," he says.
Mindful of those needs, he says, Jefferson National has beefed up its subaccount selections, providing more than 120 mutual funds for advisors to select from. The average no-load variable annuity, he notes, has about one-third as many selections.

Is all that enough to entice fee-based advisors-a group that normally shuns annuities-to make the product a standard tool in their financial plan-making?
Greenberg thinks he's already seeing a change in attitude, adding that since the launch of Monument Advisor VA, the product has gained about $150 million in assets under management. The savings afforded by a flat fee, he says, are undeniable. For an annuity account of $250,000-which he says is currently the average size of a Monument Advisor VA-a customer is paying $240 per year with the flat fee. The typical variable annuity account, meanwhile, carries 1.35% in M&E charges, which would amount to an annual cost of $3,375 on the same account.
He also stresses that advisors will be increasingly looking for cheap options for annuity rollovers in the coming years, as studies indicate existing RIA clients hold about $40 billion in variable annuities. "If you create a strong value for the consumer, and the advisor is in many ways a super consumer, you will get traction," Greenberg says.
How much traction remains to be seen. O'Connor of Morningstar, noting that the largest gains in no-load annuity sales have been through direct sales to customers, says that the fee-based advisor market is still largely untapped. While companies have made some inroads in the market, it is not by a significant amount.
"If there's increased acceptance, it is not dramatically revealed in the statistics yet," he says. "We are not seeing it in the sales numbers."
O'Connor, however, does suggest that the increasing number of retirees brought on by the aging of the baby boomer generation could potentially create a higher demand among advisors. "How much of an impact that is going to make is kind of an unknown at this point," he says. "We have yet to see if there is going to be a tipping point where they start to en masse leverage these products."

Annuities In Fee-Based Planning
Even fee-based advisors who are ambivalent about variable annuities say that it is hard to avoid them. They invariably take on clients whose assets include annuities, including ones that may still be locked up in surrender charge periods.
That's reflective of the variable annuity industry overall. Various estimates indicate that more than half the business generated in the market is through exchanges rather than the purchase of new contracts. "A little bit of a concern to the industry is that there hasn't really appeared to be a whole lot of new money coming in," O'Connor says.
Wendell Stewart, a CFP who is president of Executive Financial Services in Windham, N.H., has been running a primarily fee-driven practice the past eight years. He avoids using standard variable annuities at all costs, saying, "A lot of these commissionable products rely on all these bells and whistles and value-added services that eat up your performance big time."
Stewart, however, does find uses for Ameritas' no-load products for clients who have annuities with large built-in gains. "These would be cases where it's not worthwhile to cash it in and get hit with a major ordinary income tax," he says.
One of the reasons he prefers Ameritas is because of its fund selection, which includes low-cost funds offered by Vanguard and Fidelity. He notes that it's not uncommon to see annuity owners get hit with sub-account charges of 100 basis points or more on top of their M&E charges. "It really comes down to fund selection and overall expense ratio," he says.
Other advisors cite Ameritas' service center, which is designed specifically for advisors who have new clients with high-cost variable annuities and no exit without big penalties. Ameritas' executives report that more than 75% of their new assets come from these 1035 exchanges, which typically account for 50% of new sales in the overall market.
At Denver Money Manager in Denver, about 15 clients have a total of $4 million to $5 million allocated to Jefferson National's flat-fee no-load product, says Aaron Grey, the firm's director of operations. The total represents about 10% of the firm's assets under management.
"Right off the bat, the fee savings is what gets your attention," says Grey.
The firm uses no-load annuities in rollovers for clients with pre-existing annuities, and in cases where clients have maxed out their qualified tax-deferred retirement accounts, he says. The firm has done due diligence on commissionable products, with features such as guaranteed returns and insurance benefits, but has yet to find a worthwhile deal for clients.   
"Many of those insurance benefits are washed away because the accounts over the years have performed enough that the value of the annuity itself is worth more than any kind of insurance benefits or minimum gains built into the contract," he says.
Some advisors use no-loads variable annuities along with commissionable products. Jim Brown, president of JM Brown & Associates in Tulsa, Okla., says, for example, that he will use commissionable products with income guarantees for clients with a high aversion to risk.
"There are clients who can't sleep at night if they think they will have a huge loss in their money," Brown says. For such clients, he says, a variable annuity that guarantees a certain level of income for life is appropriate.
Brown also says annuities play an important role for clients who have maxed out their qualified retirement accounts and have a significant amount of stock holdings, including small business owners and corporate executives. In those cases, Brown will often set up a charitable remainder annuity trust, creating a stream of income in the form of 5% or 6% payouts for their children or other beneficiaries while maintaining tax-deferred growth.
Brown says he expects the continued use of such strategies will increase the demand for annuities in the coming years.
"As baby boomers transition into retirement, we are looking for opportunities for what we call parked plan assets," he says.