Fee-Based VA Filings Shatter Records

With the Department of Labor’s new fiduciary rule set to go into effect early next month, insurers and annuity companies have reported a record 26 filings for fee-based variable annuities in the six-month period that began Dec. 1. That was the word from Morningstar.

New filings for fee- and commission-based variable annuities typically number about a dozen over a 12-month period.

Insurers want to release fee-based variable annuities to give advisors and distributors more options under the fiduciary rule, which takes effect June 9.

Fee-based compensation is seen as one way to narrow compensation disparities in how agents are paid.

In the past, an agent could earn a much higher commission than another agent selling a similar class of annuity depending on the insurance company manufacturing the annuity.

Whether a new era of fee-based variable annuity sales is at hand, however, will have to wait for market reaction.

Only 1.2 percent of all variable annuity sales last year were fee-based, said Kevin Loffredi, senior product manager, annuity solutions, for Morningstar.

Not only do fee-based variable annuities make up a very small percentage of overall sales, but the variable annuity market is going through a nasty slump.

New variable annuity sales last year dropped 21 percent to $101 billion from 2015, Morningstar reported earlier this year.

Fee-based variable annuities have never been popular with advisors, who have traditionally preferred commission-based models that tend to pay agents as soon as the contract is purchased.

But broker/dealer firms, through their advisory platforms, are likely to be more receptive to fee-based variable annuities. This is not only because of the fiduciary rule, but because advisors can charge a fee based on a percentage of the assets in the contract.

Under a commission-based model, the firm receives a commission immediately on the investment made instead of receiving less each year on an amount that might be declining annually due to withdrawals.

With a fee-based model, “There’s potentially more in it for the firm in the long run,” Loffredi said.

Insurers likely would welcome the shift to the fee-based model as it would unburden insurers of upfront costs and lower administrative costs associated with paying and tracking commissions, Loffredi said.

A Dozen B-Share Filings Reported

Commission-based variable annuities, most commonly represented by the B share, represented 85.2 percent of new variable annuity sales in the fourth quarter 2016. They make up by far the largest variable annuity sales class.

About a dozen new B-share filings have been reported by variable annuity insurance companies in the six-month period beginning Dec. 1, 2016, and ending this month, Morningstar data also show.

The typical B-share filing comes with a seven-year surrender schedule and an average of 1.30 percent in contract fees, Loffredi said.

In the past two months, Transamerica Life, Guardian, Principal Life and Pacific Life have filed to launch B-share variable annuities.

Insurance company executives say they intend to continue offering commission-based variable annuities since in many instances a commission-based model is less expensive than a fee-based one and therefore in the “better interest” of a client.

Industry analysts say that as the fiduciary rule takes hold, they expect to see more annuities with shorter surrender periods.

Surrender charges penalize an annuity contract holder for canceling the contract before a certain date. They also allow insurance companies to recoup their commissions paid upfront to advisors on the sale of an annuity contract.

Although most fee-based and commission-based compensation structures are connected to a variable annuity’s surrender charge period, there is little or no relationship between a fee-based or commission-based compensation structure and the living or death benefits paid out by a variable annuity.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at c[email protected].
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