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Variable Annuity Providers Cozy Up To RIAs

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,

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.

The Innovators

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 in Bank Holding
Companies: 2007
(#s in millions)
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
6 106.0 Citigroup Inc. NY 2,187,631 225,077
7 91.0 U.S. Bancorp MN 237,615 87,809
8 68.5 PNC Financial Services PA 138,976 55,787
9 58.0 HSBC North America IL 487,755 68,237
10 46.8 Bancwest Corporation HI 74,209 32,273
11 42.3 Fifth Third Bancorp OH 110,962 55,569
12 41.9 BB&T Corporation NC 132,618 65,808
13 41.3 KeyCorp OH 99,567 47,734
14 35.9 National City Corporation OH 150,384 73,282
15 33.8 M&T Bank Corporation NY 64,876 27,278
16 32.0 Huntington Bancshares OH 54,629 35,806
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
21 15.9 Unionbancal Corporation CA 55,728 26,844
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
24 10.3 Associated Banc-Corp WI 21,592 11,313
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
28 8.0 FirstMerit Corp. OH 10,408 6,551
29 7.1 BOK Financial Corp. OK 20,903 10,829
30 6.6 New York Community NY 30,600 11,888
31 6.4 BancorpSouth, Inc. MS 13,204 8,382
32 6.3 TCF Financial Corp. MN 16,068 7,336
33 5.6 Synovus Financial Corp. GA 33,018 21,078
34 5.4 Comerica Incorporated TX 62,757 30,951
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
42 3.5 Commerce Bancshares MO 16,212 11,138
43 3.4 Susquehanna Bancshares PA 13,078 7,652
44 3.3 Cullen/Frost Bankers TX 13,646 6,932
45 3.3 NewAlliance Bancshares CT 8,227 3,896
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.

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