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RetireOne, Midland Launch New Zero-Commission, Unbundled Annuity

RetireOne says its new contingent deferred annuity is the first widely available CDA built for registered investment advisors.

RetireOne, an independent open architecture fiduciary platform built for fee-based insurance solutions, and Midland National Life Insurance Company have launched a zero-commission contingent deferred annuity, Constance, which unlike other fee-based annuities, unbundles the annuity’s insurance component from its underlying investments. That allows the advisor to manage the portfolio and the assets, which stay at their custodian.

The novel part about this is that the assets don't move. They stay directly at Schwab; they stay directly at Fidelity,” said Ed Mercier, president at RetireOne. “And the benefit for the advisor is, instead of having to pay 40 to 80 basis points on average for the underlying variable insurance sub-accounts, I could use my BlackRock, DFA, Schwab index funds, whatever I'm using and I can get single digit product expenses there.

The other part of it is, you're not limited to 20% of a client's portfolio," Mercier said. "You could actually wrap the entire portfolio as a designated retirement asset, and you don't run into concentration rules or diversification guidelines or anything like that.

With a traditional annuity, the advisor’s client has to write a check out of their investment account to fund the annuity at the insurance company, and the assets leave the advisor.

No longer do I get to manage it in my low-cost ETFs or index portfolios, I've got to manage it over there,” Mercier said. “And then they've got more expensive funds from their variable insurance trust products. So my client's costs go up for investing; there's mortality and expense fees. And I lose tax efficiency.

This product costs about a third to one-half that of a traditional annuity, Mercier said. The fees range from 110 basis points to 200 basis points, depending on whether the client wants rising or stable income in retirement and whether the advisor manages the portfolio with a higher equity allocation.

In addition, with this annuity, there’s less of a need to de-risk the portfolio as the client gets older, because the portfolio is insured, Mercier said. And because the insurance component is simply wrapped around an existing portfolio, there’s no taxable event.

Midland still has to OK the funds that advisors can use in the portfolio, given that they’re providing hedging against market risks. But the approved list already includes funds from BlackRock, Dimensional Fund Advisors, Franklin Templeton, Vanguard, ARK Invest, PIMCO, Schwab and State Street, among others.

In late 2019, RetireOne announced it would acquire EF Legacy Securities, a broker/dealer platform owned by Edelman Financial Engines, in a bid to expand insurance and annuity back-office services for RIAs who are interested in transitioning from commission-based to fee-based annuities options.

While annuities sales are primarily commission based, firms are innovating in an attempt to create new opportunities for RIAs interested in pursuing fee-only options.

Advisors have long shied away from annuities, complaining that they’re too expensive and complex. But a recent survey by DPL Financial Partners indicates that they are warming up to them, with 84% of respondents saying they would prefer an annuity that pays 6% guaranteed for life (net of fees), while retaining cash value (until depleted by withdrawals). The other 16% said they would prefer a bond portfolio yielding 1.5%, down by almost half from last year. Client attitudes toward annuities are also shifting, with about 40% of advisors saying clients “strongly like” or “somewhat like” the products, up from about 14% in 2019.

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