A new rule raising investment advice standards will usher in an era of consolidation on product shelves as broker/dealers solidify ties with some mutual funds and variable annuity insurers while letting other relationships wither.
But where does that leave registered representatives, agents and financial advisors on the front-lines of the distribution chain?
Hints about what advisors can expect from variable annuities that survive on broker/dealer shelves in the wake of the Department of Labor’s new fiduciary rule are visible on the horizon, if you know where to look.
“It’s a mixed bag,” said variable annuity expert Steven McDonnell, founder of Soleares Research in New York. “Some insurers feel confident they can sell through commission but, for some, things might change a little.”
Variable annuities with high upfront commissions are likely to be pruned from the broker/dealer shelves as insurers replace them with fee-based options and where compensation is paid on an ongoing basis instead of a one-time upfront commission, he said.
The changes won’t take place overnight, however. Grandfather clauses allow existing commission structures to remain but, over time, more fee-based variable annuities are expected to be available for advisors.
Analyst Expects Break Points in Fee-Based VA
Fee-based variable annuities are starting to crop up within variable annuity families sold by insurers. There's no question that fee-based annuities represent a big distribution growth opportunity, Dennis R. Glass, president and CEO of Lincoln Financial Group, said in a conference call with analysts.
Lincoln Financial’s American Legacy, Investor Advantage and ChoicePlus product lines offer fee-based contract options, according to the company’s website.
McDonnell also said he expects more fee-based variable annuities to offer advisors break points in which the higher the amount invested in the variable annuity, the lower the fee paid to the advisor in the form of a percentage.
The few fee-based variable annuities offered in the past had few or no guaranteed benefits attached to them to lower the costs. But McDonnell said more recent variable annuity filings indicate that insurers are adding guaranteed living benefits.
Jackson National’s Perspective Advisory, a fee-based variable annuity, offers a variety of optional death benefits and living benefits, he said.
Guarantees are likely to reappear since tax deferral advantages of variable annuities become redundant in an individual retirement account, which already offer tax advantages.
“A lot of advisors will have to move to the fee-based format and if they are already familiar with living benefits guarantees, advisors will want to see them on the products they sell going forward,” McDonnell said.
Insurance company executives will breathe a sigh of relief once they know their products will remain on the broker/dealer shelf. This likely will signal the intent of a broker/dealer to deepen its relationship with a variable annuity insurer.
But which variable annuity insurers remain and which products offered by an individual annuity insurer broker/dealers will decide to keep is still an open question.
Broker/dealers can cut back in several ways.
A broker/dealer could simply trim the number of variable annuity companies on its platform. Or a broker/dealer might discontinue selling an entire family of variable annuities offered by an insurer.
For example, on April 10, 2017, the day the first clauses of the fiduciary rule sweep into effect, the broker/dealer may drop Pacific Life’s Pacific Choice variable annuity but retain the Pacific Odyssey and Pacific Value Select variable annuity families.
Or a broker/dealer could remove a handful of variable annuity products within a family of a dozen or more variable annuities on the platform, for example.
Michael Wong, a senior analyst covering investment services with Morningstar, said retail financial advisors should expect to see more uniformity around pricing for similar products.
What investors pay in fees or commissions to buy into a mutual fund or variable annuity must be roughly equal across similar products.
For example, a fund that charges a commission of 5 percent and another, similar fund charging a commission of only 3.15 percent would come under scrutiny, he said.
Stocks and bonds, which trade frequently, deliver transparent pricing. But with alternative investments, pricing is often opaque and complex. It is more difficult for such products to satisfy the best interest of retirement investors, he added.
Examples of alternative investments include private, nontraded real estate investment trusts, hedge funds and private equity fund-type products.
InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at email@example.com.
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