Commissions
Besides being cheaper and more transparent, the new breed of no-load annuities is specially tailored for fee-only RIAs.
David Lau, founder and CEO of DPL, the firm behind the survey, says the main problem with traditional annuities “stems from commissions.” Many annuities are sold on commission, which doesn’t work in the fee-only RIA’s business model, Lau says. Clients are paying RIAs for unbiased expertise, regardless of the products recommended.
Moreover, in order to pay the commissions to their sales force, insurance carriers charge customers a premium. “Commissions are what drive the pricing up,” Lau says.
Many fiduciaries are also leery of annuities because some have been misrepresented or sold with misleading promises. “The industry doesn’t do itself any favors when you have bad actors who use deceptive sales tactics or are overly aggressive in selling the products,” Lau acknowledges. “But again, that comes down to the commissions they’ve stood to gain. They’ve been incentivized to sell as much as possible.”
Licenses
But commission-free annuities solve only part of the problem. “It’s one thing to remove commissions from the products, but then you still have to integrate into an advisor’s desktop with appropriate software,” explains Lau.
Annuity providers that want RIAs to represent their products “have to be able to support a nonlicensed advisor within their software,” says Lau, noting that most RIAs aren’t licensed to sell insurance products like annuities, which require separate certification, “so they can have oversight just like they do with their custody platforms.”
At the same time, a growing number of advisors are getting multiple certifications so they can represent the full spectrum of investment products, including annuities. One example is Global View Capital Management, a full-service firm in Milwaukee. “Even though the majority of our business is fee-only, there are times when a commission-based product can be appropriate for certain clients,” says Global View’s president and chief investment strategist Dina Fliss. “A lot of our advisors are actually triple-licensed.”
Still, Fliss anticipates there will be more commission-free annuities coming to the market. Clients are demanding the kind of ongoing advisory relationships that only true commission-free fiduciaries can provide, she says, as opposed to the quick-sale, commission-based transaction. “In today’s fiduciary environment, people don’t want to be sold a product with no long-term relationship, no service model,” she says. “They want somebody who will hold their hand and develop a relationship.”
Lau would agree. “If you’re an RIA today and you don’t provide annuities,” he says, “you’ve almost got a kind of negative differentiation.”