Carriers Target RIAs with Fee-Only Variable Annuities
Variable annuities designed for sale in fee-only distribution channels have nearly doubled in number compared to just one year ago, according to Morningstar.
That is putting more variable policies into the hands of advisors who do not charge commissions when recommending a variable annuity purchase.
This has happened at the same time as commissioned advisors have seen their variable choices shrink due to much publicized feature suspensions, living benefit rider cuts, and even some market exits.
The Chicago-based Morningstar says its database of “active” fee-only variable annuities now lists 61 such products. That’s up by more than 90 percent from 34 such products last year, according to John McCarthy, product manager-advisor software in Morningstar’s insurance solutions business.
That is a big jump in one year, points out McCarthy in an interview.
The Morningstar database shows that 30 carriers are actively selling those products (see list below). The firm did not keep a carrier count on this last year, but McCarthy says the number is also up from 2011.
Going in another direction
He attributes the growth in products for the fee-based market to the desire of many variable annuity carriers to go in another direction than offering products with competitive living benefits guarantees.
“Because interest rates have been so low for such a long time, and because carriers expect the rates to continue staying low in 2013, the carriers have found it difficult to offer as generous living benefit features as they would like,” he explains.
“They need to pick up profitable business in a low-yield world, so they are looking to innovate by offering products for an as yet largely untapped distribution channel.”
That channel is the registered investment advisor (RIA) market. “Insurers have low penetration in this market,” he says, so they’ve begun designing products that will help build penetration there.
The RIA business is easier for carriers to manage, he notes. “That’s because most of these contracts don’t have living benefits attached, which makes the hedging easier.”
Morningstar terms these policies “I-share contracts.” These are variable annuities designed for fee-only/non-commissioned use in an advisory program, McCarthy says. The surrender charges and policy fees are structured to fit into the RIA business model, in which advisors typically charge fees on an assets-under-management basis.
Some carriers also sell these contracts directly through firms such as Schwab and TD Ameritrade, McCarthy says.
Morningstar’s list of carriers in this market reads like a Who’s Who of the variable annuity world. Many of the carriers also sell other types of variable annuity products through commissioned insurance agents and other distribution channels. But the expansion of the fee-only designs suggests that carriers are definitely increasing their moves into full multi-channel marketing — of variable annuities, at least.
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Source: Morningstar, Chicago, November 2012. This list shows that 30 carriers are now actively selling 61 fee-only/non-commissioned variable annuities. The carrier count treats affiliated carriers as separate companies if the Morningstar database lists them with different business names. For instance, XYZ Insurance Company of NY would count as one carrier and its sister company, XYZ Insurance Company, would count as another carrier.