John Ritter is an unusual case, but he may also be a harbinger of things to come. A fee-only advisor with Ritter Daniher Financial Advisory, an RIA in Cincinnati, Ritter has over $2 million of client assets in annuities, and says he plans to put more into the tax-deferred vehicles this year.
“In the fee-only community, it's historically been that you literally have the ‘Scarlet A' if you use annuities,” says Ritter. In fact, just a couple of years ago, Ritter felt that way himself: Most variable annuities were expensive, commission-based products with few underlying investment options. But things are beginning to change, Ritter and others say. No-load products have been around for about a decade, but in the last couple of years a few companies have begun offering even lower-cost and flat-fee products with a wider range of investments. And they're beginning to get the word out, he says.
Today, just 27 percent of RIAs use variable annuities, making them the smallest distribution channel in the business, according to a report by Cogent Research published in January. But that number is growing. “That's up slightly from a couple of years ago, with pent-up demand for more,” says Bruce Harrington, who worked on the research. “If you look at the RIA channel, it's one of the faster-growing channels [in terms of assets], and we also see a big increase in asset-based compensation among advisors, so really it's an opportunity for variable-annuities providers.”
Certainly, sales of no-load variable annuities are booming. They almost doubled to $4.2 billion at the end of 2007, up from $2.2 billion in 2005, according to Morningstar. Industry-wide variable-annuity sales grew at a much slower pace over that period, climbing 38 percent to $182.6 billion at the end of 2007 from $133.1 billion in 2005. But it's the flat-fee products that may do the most to attract fee-only RIAs, because even the no-load products often have hefty embedded mortality and administration expenses that advisors say undercut the tax-deferral advantages of the products.
Jefferson National, Old Mutual and Ameritas are a few of the companies rolling out RIA-targeted products. Jefferson National launched its low-cost variable annuity, Monument Advisor Variable Annuity, in 2005, and charges a flat fee of $20 per month with no load, no surrender fee and no mortality and administration expense. It also stripped out all of the major insurance riders, but plans to start offering these soon on an à la carte basis. In the past two years, Jefferson has been adding additional sub-advised mutual funds to its variable-annuity platform, and these now number around 200, including sector funds, commodity funds and funds that short the market. More are on the way, including Vanguard no-load funds.
“We stripped out the costs, and pulled out the riders,” says Larry Greenberg, President of Jefferson National. “We streamlined the product as a tax-deferred investment.” The average account size in these products is $200,000, he says, so the average cost to a policyholder is just 12 basis points, plus the underlying mutual-fund management fees.
Compare that with a typical variable annuity, which might charge 135 to 150 basis points in annual mortality and administration expense, up to 5 percent or more in upfront commissions, plus huge surrender charges, and hefty fees for death-benefit guarantees and riders.
In February, Old Mutual introduced its “Beacon Advisor” product, specifically designed for distribution through RIA advisors. Like Jefferson's product, the Beacon VA has a $20 per month flat fee, no mortality charges, zero commissions and no surrender charges. There is an additional 0.05-percent administration charge for the first five years, and optional income and death-benefit guarantees are available for an additional 20 to 70 annual basis points.
The underlying investments offered in the Beacon product, numbering some 70 in total, include mutual funds, such as Rydex long and short stock and bond funds, as well as commodity funds and exchange-traded funds. Old Mutual provides asset-allocation model data and tools through Standard & Poor's.
The New New Thing
One of the ways that fee-only RIAs are using the new products is to replace higher-cost variable annuity products the clients may have brought with them from other advisory relationships, using 1035 tax-free exchanges — especially if the clients are past their surrender-charge periods. “There are a lot of advisors transitioning to fee-based business,” says Patrick Ferrer, vice president of Old Mutual. “There is a block of high-cost broker-sold annuities maturing.” Indeed, so far 80 percent of Old Mutual's sales of the new VA are being driven through 1035 tax-free exchanges, says Ferrer.
Chris Cordaro, chief investment officer of Regent Atlantic, Chatham, N.J., says he has routed over $20 million in 1035 exchanges into Jefferson National's Monument Advisor product. “I've had clients with $300,000 to $600,000 in variable annuities with annual expenses of 3 percent,” he says. Transferring them into the new low-cost products saves his clients a lot of money, and allows him to manage these additional assets.
Maxing Out Qualified Accounts
But low-cost VAs can also be used for baby boomers whom have maxed out their qualified accounts and still have more money to set aside, says Ritter. Of course, because capital gains and ordinary income taxes these days are so low, exchanging them for the ordinary income-tax rates that will be paid when the money is withdrawn from a tax-deferred variable annuity doesn't always make sense. But Ritter says it's good to be able to diversify a client's assets from a tax perspective. “Some of it is subject to capital-gains taxes, some to ordinary tax rates, etcetera. As a planner that gives us more options.”
And if the investment is long-term, the higher tax rates may not matter because of the compounding effect. Jefferson's Greenberg says the firm did a study showing that if an investor holds a moderate-risk portfolio for over 20 years, tax-deferral can give you an 80 basis point pick up — before costs. And that's why low costs are so essential when you're talking about tax-deferred investments.
The Annuities Kings
The top bank-holding companies, ranked by annuity fees and commissions collected in 2007.
Overall annuity sales through banks have been flat in recent years, says Andrew Singer. But that doesn't tell the whole story. Whereas times are currently tough for fixed annuities, given the flat or inverted yield curve, sales of variable annuities have gotten stronger, he says. Estimated fixed-annuities sales for 2007 totaled $65.1 billion, down 9 percent from 2006, according to Chicago-based Beacon Research. Meanwhile, variable annuities sales for 2007 totaled $179 billion, up 15 percent versus the previous year, according to Morningstar. Below is a list of bank-holding companies, ranked by fees and commissions the firms collected on annuities for the year.
|Annuity fees and commissions in 2007||Bank Holding Company||State||Assets||Deposits|
|1||$483.0||Wachovia Corporation||NC $782,896||$360,814|
|2||163.0||JPMorgan Chase & Co.||NY||1,562,147||376,194|
|3||125.5||Bank of America Corp.||NC||1,720,688||500,061|
|4||116.0||Wells Fargo & Company||CA||575,442||206,563|
|5||114.9||Suntrust Banks, Inc.||GA||179,574||92,502|
|8||68.5||PNC Financial Services||PA||138,976||55,787|
|9||58.0||HSBC North America||IL||487,755||68,237|
|11||42.3||Fifth Third Bancorp||OH||110,962||55,569|
|14||35.9||National City Corporation||OH||150,384||73,282|
|15||33.8||M&T Bank Corporation||NY||64,876||27,278|
|17||28.3||Citizens Financial Group||RI||160,286||90,027|
|18||21.6||Capital One Financial||VA||150,590||68,336|
|19||19.4||First Horizon National Corp.||TN||37,017||11,975|
|20||16.5||Webster Financial Corp.||CT||17,208||10,634|
|22||13.6||First Citizens Bancshares.||NC||16,230||11,623|
|23||13.0||Bank of New York Mellon Corp.||NY||197,839||21,103|
|25||9.5||Fulton Financial Corp.||PA||15,923||8,383|
|26||9.2||Colonial Bancgroup, Inc.||AL||25,971||17,169|
|27||8.0||Bank of Hawaii Corp.||HI||10,473||6,853|
|29||7.1||BOK Financial Corp.||OK||20,903||10,829|
|30||6.6||New York Community||NY||30,600||11,888|
|32||6.3||TCF Financial Corp.||MN||16,068||7,336|
|33||5.6||Synovus Financial Corp.||GA||33,018||21,078|
|35||4.9||Citizens Republic Bancorp||MI||13,524||7,146|
|36||4.7||Old National Bancorp||IN||7,848||5,205|
|37||4.5||TD Banknorth Inc.||ME||60,165||37,598|
|38||4.5||Commerce Bancorp, Inc.||NJ||49,372||36,381|
|39||3.6||Hancock Holding Company||MS||6,104||4,102|
|40||3.6||First National of Nebraska||NE||16,021||11,138|
|41||3.6||Regions Financial Corp.||AL||141,044||67,716|
|46||3.1||UCBH Holdings, Inc.||CA||11,804||5,792|
|47||3.1||International Bancshares Corp.||TX||11,167||5,645|
|48||3.1||Provident Bankshares Corp.||MD||6,467||3,471|
|49||3.1||First Midwest Bancorp||IL||8,096||5,201|
|50||3.0||Bremer Financial Corp.||MN||7,250||4,447|
Source: Singer's Annuity & Funds Report
Note: This is the first year that bank-holding companies and operating banks have reported annuity fees and commissions to the government. 387 reported some annuity income. The rankings here are based on an examination of recent Federal Reserve Board Y-9 filings.