More On Tax Planningfrom The Advisor's Professional Library
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- Annuities: Estate Tax The value of certain types of annuities may be included in an estate’s value. Understanding the intricacies of these inclusions is a critically important aspect of estate planning.
As Jefferson National works on building its reputation as the variable annuity company that registered investment advisors can trust, the firm is reminding RIAs that annuities, if the cost of buying is cheap enough, can offer a nearly unlimited tax deferral beyond maxing out clients’ 401(k) and IRA contributions.
It’s true that the variable annuity has always offered a tax deferral of up to $10 million, but the base fees and riders for most VAs have negated those tax advantages, said Jefferson National President Larry Greenberg and Chief Operating Officer David Lau during an interview last week in New York.
“Our challenge is to convince fee-only advisors to get over their inherent bias against variable annuities,” Greenberg said, adding that JeffNat charges a flat $240 annual fee for its Jefferson National Monument Advisor variable annuity and earns additional revenue from the 400 underlying funds it has on offer. “It’s a super-low-cost product, so you get the benefit of tax deferment.”
A VA for Bargain-Conscious Bogleheads
Greenberg and Lau said their variable annuity was catching on with advisors, with their current “loyal base” of 2,000 fee-only advisors and RIAs expected to grow to 2,400 by year end on sales of $700 million.
Strikingly, members of Vanguard founder John Bogle’s online fan club, the uncompromisingly bargain-conscious Bogleheads.org, have discovered the JeffNat VA and are excitedly talking about it in a long message thread.
For example, one commenter named EnlightenMe wrote: “I've been there for a while now. I love the annuity and the fee structure. It's about the same cost as owning an IRA. Lots of funds to choose from, even hedge funds, etc. Website works great. Highly recommended. I am just a contract owner and am not tied in any way to the company.”
Advisor Partners President Dan Kern, a CFA who doesn’t have a financial position in Jefferson National, said the enthusiasm around the JeffNat VA is due not only to its low cost but its transparency.
“What I like about what they do is transparent, reasonably priced and flexible in an industry that has traditionally been anything but transparent and reasonably priced,” Kern said in an interview last week.
Further, as Shareholders Service Group Executive Vice President Dan Skiles noted a year ago, the Monument Advisor VA is wooing traditionally skeptical fee-only advisors into the annuity space because it allows them to do a 1035 exchange into the product.
“Often, an advisor will have a client that has an annuity they were sold by someone else,” Skiles said. “They almost have to ignore it because the costs involved with a 1035 exchange make it prohibitive to move. There’s nothing they can really do to help them.”
Tax Advantages in a VA Wrapper
As for the JeffNat VA’s tax advantages, this year is a good time for advisors to seek shelters for their clients as taxes across the board start to rise, Greenberg and Lau said. They compared their VA to a money management account and cited Cerulli research showing that rising taxes and ongoing volatility are driving higher demand for tactical management and alternative strategies.
Jefferson National Monument Advisor offers more than 70 alternative investment options among its 400 underlying funds along with model portfolios designed to achieve higher after-tax returns.
Barron’s has named Jefferson National along with Symetra and Security Benefit as being quick to respond to higher tax rates by launching cheap, liquid and simple variable annuities. In an article written in May, Barron’s writer Karen Hube quotes John Capets, an advisor and vice president at Harbor Capital Management in Charlotte, N.C., saying that he has started using the Jefferson National Monument Advisor Variable Annuity for his high-net-worth investors.
“The alternatives portfolio can generate a lot of short-term capital gains, but inside the tax-deferred annuity it has no impact,” Capets told Barron’s.
Former E*Trade CEO Mitch Caplan first understood the business potential for a firm that could exploit the inefficiencies of commission-driven variable annuities while he was working as an advisor at a private equity firm in 2009. A year later, he came across Jefferson National, based in Louisville, which had already redefined the VA in 2005 by stripping away its traditional and hard-to-understand living benefits, upfront loads and surrender charges.
By early 2012, Caplan led a management buyout of JeffNat in an $83 million deal so he could deploy an aggressive distribution strategy for RIAs and fee-based advisors. Joining him in the management shakeup were Greenberg, previously a first vice president of consumer banking at Merrill Lynch and then COO of Telebank, now E*Trade, and Lau, a principal and co-founder along with Greenberg of management consulting firm The Oysterhouse Group.
“We organized a company to offer low-cost variable annuities as a sustainable and disruptive business model,” Lau said. “We’re going to be one of the top-selling annuities this year.”
Read Blogger Mike Patton on What I Learned From Investigating a Prospective Client’s Annuity at ThinkAdvisor.