RIAs have long avoided variable annuities like they were bad breath. But LPL Financial (NASDAQ: LPLA), among others, is trying to change that with its new fee-based variable annuity platform. The insurance carriers on the new LPL platform (and others) have stripped away commissions, lowered the mortality and expense fees and eliminated the surrender charges.
In the past, RIA aversion to variable annuities has mostly been related to high expense ratios and commissions, said Douglas Dannemiller, senior analyst at Aite Group. But over the past several years, a number of fee-based annuities have made their way into the market. And yet, resistance to the product among RIAs remains. According to a Cogent Research survey of 1,569 advisors, only 26 percent of RIAs said they had used variable annuities in 2010, versus 90 percent of independent broker/dealer reps.
Raymond James, which offers seven no-load variable annuities to its advisors, has little enthusiasm for the investment vehicles among RIAs. “We’re not convinced that the market exists, but we’d love to see LPL prove us wrong,” said Scott Stolz, president of Raymond James Insurance Group. LPL tends to make things work, when it puts its mind to it, he said.
While LPL is not the first to have fee-based variable annuities on its platform, the firm is the first to offer an integrated platform of this kind, which includes annuity products specifically designed for the fee-based advisor. Carriers on the platform include Allianz Life Insurance Company of North America, Allianz Life Insurance Company of New York, AXA Equitable Life Insurance Company, The Lincoln National Life Insurance Company, Lincoln Life & Annuity Company of New York, Prudential Annuities and Sun Life Financial.
“They’ve been out there, but they’ve never been out there with this level of commitment,” said Robert DeChellis, president of Allianz Life.
As opposed to creating a no-load version of an existing annuity, these carriers designed fee-based products from the ground up. For example, Allianz Life recently launched its Retirement Pro fee-based variable annuity, which has a 30-basis-point M&E fee.
DeChellis said Allianz hasn’t signed on to put the product on other platforms yet, but other broker/dealers have expressed interest, which he declined to name. Others that offer fee-only VAs include Jefferson National, Fidelity, Ameritas Insurance, Pacific Life, MetLife, and Nationwide Financial.
Dannemiller said a fiduciary standard could make it difficult for advisors to sell annuities because of their high commissions. But the fee-based platform would “position LPL very well for future utilization of annuities under a common fiduciary standard for advisors.”
Commissions on annuities are generally 7 to 8 percent, higher than other investments advisors sell, he added. Under a fiduciary standard, regulators might look at commissions in a different way. The fee-based program would allow advisors to sell annuities without worrying about whether they’re carrying out their fiduciary duty.
“They’ve [LPL] made it so that advisors can use it without being scrutinized,” said G. Andrew Ahrens, principal with Ahrens & Associates, and LPL affiliate. “This levels the playing field for the investor. It makes compensation for the advisor tied to the performance of the annuity.”
The move also puts LPL in a position to continue to generate revenue should a common fiduciary standard go through, Dannemiller said. Variable annuities account for about 20 percent of LPL’s revenue, said Kevin Loffredi, vice president of annuity solutions, Morningstar.
“There’s a significant distribution force behind LPL,” Dannemiller added.
Wooing the RIAs
According to Stolz, what holds advisors back from using a typical no-load annuity is that when all the fees are taken into account, it ends up being the same as you’d pay for a C share, so it doesn’t save clients any money.
Also, pure RIAs have no interest because they don’t see the value of protections. Most RIAs structure a portfolio using diversification, and they can build protection into a portfolio without needing to pay extra for it, he added.
Still, LPL has seen interest in VAs from RIAs, if it’s done right, said John Moninger, executive vice president and head of advisory and brokerage consulting at LPL. The new platform allows advisors to manage the annuities on a discretionary basis, something advisors said they wanted. The purchases of fee-based VAs will also be integrated, steamlining the process for opening accounts for investors and giving advisors the ability to view all the data within LPL’s web-based technology platform.
The events of 2008 and 2009 have also put an exclamation point on the need for protected income, Moninger said. Market volatility has caused a lot of investors, especially Baby Boomers, to postpone retirement and shift their focus to accumulation of income, said Morningstar’s Loffredi. This demand for guaranteed income could be seeping into the RIA channel, he said.
“The tide may change a little bit.”
Charles Zhang, managing partner with RIA Zhang Financial, an LPL affiliate, said he doesn’t use annuities because of their much higher costs. Also, these vehicles are not guaranteed if the insurance carrier goes bankrupt. That said, “If some day I want to use it, I’d rather have fee-based rather than commission,” he said. “I’m glad that they have that option.”