RIAs, Manufacturers Find Middle Ground on Fee-Based Indexed Annuities

By Cyril Tuohy

In a fee-based world, independent agents want to know - above all else - why fixed indexed annuities come with surrender charges and how they are going to get paid.

Manufacturers are working with agents/advisors and providing answers as both camps make the rapid transition to a fee-based world. Consider a new fee-based product developed by Great American Insurance Group in Cincinnati.

It was just over a year ago that the fee-based fixed indexed annuity (FIA) marketed under the name of Index Protector 7 hit the market.

Since Index Protector 7 was launched Aug. 22, 2016, more than 50 registered investment advisors (RIAs) - Raymond James, Commonwealth Financial and Brookstone Capital Management among others - have agreed to sell the annuity.

As one of the first fee-based FIAs in the market, the journey of Index Protector 7 offers a glimpse into the dialogue that unfolded between product manufacturer and distributors in the independent channel, which is responsible for 50 to 60 percent of all FIA sales.

By the standards of the company that created Index Protector 7, 12 months is quick, given the traditional reticence on the part of RIAs to sell FIAs.

Index Protector 7 flew out of the gate after a campaign to educate and explain to RIAs why it had a (seven-year) surrender charge period, said Tony Compton, vice president of broker-dealer and RIA sales at Great American.

With no surrender charges on comparable fee-based variable annuities, RIAs questioned the need for such a charge on Index Protector 7, a fee-based asset.

Seven-year surrender charges penalize annuitants for turning in their annuities during the first seven years they own the contract. Insurers use those charges to recoup the costs of their investment loss and for marketing expenses.

Fee-based variable annuities and fee-based FIAs are two different products, Great American managers told RIAs. Surrender charges are necessary on fee-based FIAs because of the guarantees associated with fixed annuity contracts.

Fees, FIA Values at Issue

In a second sticking point, RIAs wanted to be able to withdraw their fee out of the annuity instead of out of a separate account.

It is common in the RIA channel for the advisor fee to come from the third-party money manager that is managing the client’s assets.

Great American obliged and made that option available of their fee-based FIA, Compton said.
But RIAs persisted with their questions: For example, how to handle billing and reporting.

An RIA normally uses a software platform that creates consolidated reporting for clients, but historically that reporting software has not displayed FIA values.

Based on technology already in use at Great American, along with new RIA agreements, annuity account values appear on several major reporting platforms, Compton said.

Insurer-advisor discussions aren’t always easy, especially with new advisors who had never sold FIAs, Compton said.

The Interest Rate Context

Based on potential challenges to fixed income that come from a rising interest rate environment, RIAs were open to look at a fixed income alternative.

A fee-based FIA is a great option for RIAs concerned about their bond and bond fund portfolios, Compton said. The conversations had to break down the advantages and the drawbacks of FIAs, and outline where they fit in a client’s portfolio in today’s investing environment.

For insurers and distributors, much is at stake.

FIA sales, the bulk of which fall under commission-based transactions, will range between $50 and $60 billion this year, after a record $58 billion last year, according to market forecasts.

For the moment, though, fee-based FIA sales are nowhere near that.

The industry reported an estimated $21 million in fee-based indexed sales in the second quarter, double the volume from the first quarter but still a fraction of overall indexed sales, according to LIMRA Secure Retirement Institute.

Higher Caps, Liquidity, More 'Upside'

Product managers and compliance experts at Commonwealth Financial Network, one of the nation’s largest broker-dealers/RIAs, began seriously considering Index Protector 7 for their shelves in the first quarter.

Once Commonwealth managers completed their diligence and combed through pages of documentation, they liked what they saw.

“Strip away the commission in FIAs and you generate more upside for investors,” said Ethan Young, director of annuity research at Commonwealth Financial Network.

Cap rates, spreads, participation rates, liquidity and living benefits on Index Protector 7 offered attractive terms, Young said.

It took between three and five meetings with Great American over a period of six to eight weeks for Commonwealth to include Index Protector 7 on the broker-dealer’s shelves, he said.

A Landing Space for Fee-Based FIAs

Commonwealth advisors also sell FIAs from Lincoln, Allianz Life, Symetra and Global Atlantic, so Great American was one of a handful of insurers with products available on Commonwealth’s FIA shelf.

Like many RIAs and broker-dealers who saw the influx of new fee-based annuity products from innovative insurance companies, “We wanted to provide a landing space for fee-based products,” Young said.

“A product free of commission should help to mitigate any perceived stigma around the FIA,” he added.

Young admits to Commonwealth’s “modest” success” with Index Protector 7 so far, but also points out that success isn’t solely measured by sales volumes but how people are using it.

So long as the product is competitive and offers feature not available by other insurers, Commonwealth intends to keep Index Protector 7.

“If and when the DOL standards are applied and we were to switch over to all fee-based annuities with qualified money, that would really tell us how popular these are,” Young said.

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

Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].