If there is any doubt that variable annuity providers are taking the alternative subaccount movement seriously, some figures from Morningstar should set the record straight.
Today, 40 carriers are offering a total of 1,538 alternative subaccounts in their various variable annuity products alternative subaccounts, said Frank O’Connor, director of insurance solutions for Morningstar.
That’s up from 35 carriers and 536 subaccounts a little over a year ago.
Alternative subaccounts invest in non-traditional assets such as real estate, energy and commodities, as opposed to the traditional stocks, bonds and cash. Their presence in annuity products makes news because at one time, they were viewed as risky, complex or esoteric investments and not suited for “Main Street” America. Now, some insurance people are considering it risky not to offer those options inside of variable annuities because of growing demand for the products.
At least 15 companies in Morningstar’s alternative subaccount provider list are affiliates of another carrier, so the number of annuity companies offering alternative subaccounts this year might be viewed as fewer than 40. Similarly, many carriers offer the same subaccount in several of their variable annuity products, so the number of alternative subaccounts currently available may be viewed as fewer than 1,538.
Still, the data is meaningful for insurance professionals, because Morningstar used the same method for tracking alternative subaccount presence in both years.
Outsider looking in? This looks like a stampede to alternative offerings, not a trot.
The trend is occurring outside of variable annuities, too. For instance, the number of "heavy users" of alternatives among institutions rose to more than 20 percent in 2013, up from 17 percent last year, according to a survey which was published a few weeks ago by Morningstar and Barron’s magazine.
In addition, the surveyed institutions said they expect alternative investments to make up more than 40 percent of holdings over the next five years.
Insurance producers should find the Morningstar numbers especially valuable because they show that alternative investments are increasingly present in variable annuities, not just in the broader retail mutual fund and institutional arena where they have long resided.
The important facts are that not only are more carriers offering more alternative options, but that some of the alternative subaccounts have gathered substantial assets under management. For instance, the top alternative subaccount in the Morningstar data has nearly $52 billion in assets under management.
Advisor demand has spurred growth of these options inside of variable annuities. Financial advisors who sell variable annuities are requesting alternative funds in the products, said Ann Hughes, vice president and head of business and sales development for Sammons Retirement Solutions in Des Moines, Iowa.
Various surveys confirm this trend. For instance, only 4 percent of advisors polled in the Morningstar/Barron’s study said their typical client had no money in alternative investments. That is down from 17 percent in a similar survey in 2008.
In addition, a little over a year ago, Natixis Global Asset Management published a survey showing that 49 percent of advisors were regularly employing alternative investing strategies across their client base.
Worth noting is that advisors see alternative investments as not just something for the well-heeled. According to Natixis, 64 percent of advisors say they would employ alternative investment strategies even for mass-market clients with $200,000 to $300,000 in investable assets.
What’s the appeal? Seventy-nine percent of the advisors use alternatives to improve diversification, 68 percent to reduce risk, 51 percent to enhance returns and 42 percent to dampen volatility, according to the Natixis survey.
When the alternative options are inside a variable annuity, the advisor can also offer tax deferral and other annuity advantages, Hughes pointed out.
So it is that the blossoming of alternative options which began in variable annuities at a few firms a decade or so ago is now well under way.
Midland National Life, a Sammons Financial Group company, today offers 28 alternative options in its variable annuities, Hughes said. That’s out of 128 funds from 23 fund families. The company’s LiveWell variable annuity has 20 such options.
Jefferson National, which was a very earlier player in this market, has gone large with alternatives. Its Monument Advisor variable annuity has 75 alternative funds among the nearly 400 funds available in the product, the company said.
Jackson National includes many alternative subaccounts in numerous variable annuity products. The company’s Elite Access variable annuity now offers 18 alternative investment options, for instance.
Nationwide Financial also has numerous alternative options in its variable annuities. That includes America’s marketFLEX® series, which the company has even dubbed an “alternative asset variable annuity.” The advisor version of that product has 17 alternative subaccounts.
Not just a numbers game
Adding more and more alternative funds is not the only trend related to alternatives in variable annuities. Another trend is that carriers are designing the products for sale through specific distribution channels.
For example, in the case of Jefferson National, the company has built its Monument Advisor to meet the needs of advisors in the registered investment advisor (RIA) and fee-only advisor marketplace.
Sammons is going in a different direction. It has designed its LiveWell variable annuity for distribution through representatives of independent broker-dealers and through small community banks — not for RIAs, fee-onlies or wirehouses. The contract is sold only on a commission basis, and its alternative offerings tend to involve real estate, gold, natural resources or other investments rather than exotic or complex investments suited to sophisticated buyers.
Nationwide does it both ways. It offers America’s marketFLEX® Advisor Variable Annuity for fee-based advisors, and America's marketFLEX® II Variable Annuity for commission-based advisors.
There is also the matter of the value-added extras, such as simplifications and education for advisors. Nationwide recently added new “guidance models” — the Nationwide® Guided Portfolio Strategies — to its America's marketFLEX product. According to the company, this is a “check the box” solution for advisors that includes 10 pre-packaged options focused on alternatives.
Jackson National offers multi-pronged advisor training on alternative assets. The program includes a website, regional seminars, webcasts, training programs, multimedia marketing materials and a tool that helps with alternative asset classes and correlation analysis.
Sammons is using external and internal wholesalers to support advisor education.
The matter of cost
The increase in alternative options is happening at the same time as carriers are looking for ways to cut variable annuity costs and fees, Hughes pointed out. For instance, carriers are shifting from offering bonuses and guaranteed living benefit riders to offering policies with greater investment choices and smaller transaction fees.
In the post-recession economy, the tab for variable annuities with living benefit riders attached sometimes runs as high as 4 percent (with other policy charges and fees included), and that is perceived as too high, she said. “The cost consciousness is coming from both advisors and consumers.”
Carriers have cost concerns of their own, what with the low interest rate environment making support of living benefit guarantees a bit like dancing on hot potatoes.
As a result, carriers are searching for ways to pare back costs -- for themselves as well as for their customers. Some have curtailed their living benefit riders or dropped them altogether.
One of the fascinating developments in all of this is that some of the carriers that offer alternative subaccounts do not offer a living benefit guarantee at all, thus shearing off a percentage point or more from the total cost of the product. The thinking is that this savings plus investment variety, the non-correlated benefits of alternative investments, and the tax deferral will have greater appeal to today’s customers, while making the contract less risky for the carriers to support.
Does Sammons offer a guaranteed living benefit rider with its LiveWell variable annuity? “No,” Hughes said. “We are committed to offering a low cost structure and tax deferral. In addition, we provide a death benefit (return of premium) and 100 percent liquidity (all the funds in the product are no-load).” And the fee? It’s 1.35 percent plus standard fund expenses, she said.
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