By

Washington

Some clients say, “My annuity has come due,” or “My annuity has matured,” noted Richard Randa during a panel here. But that is not what the annuity is for, declared the director of retirement plan services, annuities and IRA marketing for Wachovia Securities, Richmond, Va.

Going forward, “if we see a lot of 1035s [from L-share annuities] at the end of 3 years, well raise the surrender period to 4 or 5 years. Were not going to mess around.”

The comment came during a panel discussion on L-share variable annuities at the annual meeting of the National Association for Variable Annuities, Reston, Va.

This panel, plus one on mutual funds and separately managed accounts (SMAs), revealed a distinct investor trend: Although many investors have retreated from traditional equity investing during the past 3-plus years, some have been open to investing in less traditional productslike L-share VAs and SMAs.

For example, L-share sales, as a percentage of nongroup VA sales and assets under management have grown steadily from 1999 through the 2nd quarter of 2003, said panel moderator Frank OConnor, director of research and analysis at Finetre Corporation, Herdon, Va., (formerly AnnuityNet/VARDS).

Exchange traded funds and hedge funds also have seen substantial increases in assets, said Thomas W. Keffer, senior vice president-product management, at Oppenheimer Funds, New York, in another panel.

The same is true for various types of fee-based products such as SMAs, multi-disciplined accounts (MDAs), and “custom style portfolios,” said James Vitalie, executive vice president for Curian Capital, LLC, Denver, Colo.

The landscape is continuing to change, noted Greg Gloeckner, moderator of the alternative product panel and vice president of business development at Curian Capital.

Mutual funds are adding new features, SMAs are evolving, and technology is a driving force in distribution and competition, Gloeckner said.

To stay competitive in this environment, he said, the insurance industry must stay aware of the trends.

Todays investment choices dont reflect “just another rise and fall in the market,” maintained Keffer. “We believe investors now are fundamentally more risk averse.”

Many investors no longer are thinking about how great the capital markets are, he continued. Now, they are “less likely to go it alone in picking stocks, more cost conscious and more distrustful.”

In this climate, Keffer said, advisors need to spend more time relationship building and managing that relationship.

As for products, he said principal protected equity funds, asset allocation funds of funds, dividend yield funds and inflation protection funds are gaining popularity in the traditional mutual fund arena.

In the alternative arena, exchange traded funds and hedge funds are on the rise.

The ETFs are seeing “tremendous growth,” mostly from institutional investors and most of it is index-oriented, Keffer pointed out. And the hedge funds are targeting sophisticated investors, giving them access to alternative asset classes and investments not tied solely to the direction of the U.S. capital markets.

As for the fee-based businesses such as SMAs, their growth has been fostered by technological advances and tax efficiencies, said Vitalie.

This trend started in 1978 with the debut of SMAs, he said. The business later branched out to mutual fund wrap accounts, starting in 1991, MDAs starting in 1997, and custom style portfolios starting in 2003, he said.

In SMAs, a sponsor selects money managers who trade for clients on an account-by-account basis, he said.

In MDAs, a “sponsor” establishes a portfolio of accounts, and client and advisor pick the model they want (not the manager, as under SMAs).

SMAs and MDAs tend to target clients with $100,000 and more to invest. By contrast, the new “custom style portfolios” are available to smaller investors, too, starting at $25,000 and up, said Vitalie.

The custom style products take a packaged approach. The client sets investment preferences, and the financial advisor places the business with the sponsor, which recommends allocations and managers and provides other services. This has many of the benefits of a mutual fund, and the technology solves the paperwork dilemma, says Vitalie.

What is the appeal of the L-share VA? When compared to B-share VAs, liquidity is a key factor, said Noel Abkemeier, a consulting actuary in the Chicago office of Milliman USA. (L-share VAs typically limit surrender charges to 3 to 4 years, he noted. B-share VAs tend to run them for 6 to 8 years.)

Also, the front-end commission of 4.5% to 5.5% is higher than the aggregate C-share VA commission that could be paid in the early years, he said.

Liquidity is the big appeal for investors, said Bruce Ferris, senior vice president and director of IDP sales and marketing at Hartford Life Inc., Simsbury, Conn.

Meanwhile, VA manufacturers like the L-share products asset gathering potential, distributors like its capability to help advisors transition to fee-based service and brokers like how it helps them align themselves with the investor, Ferris said.

Insurers believe they have factored into the product the possibility that “shock lapses” may occur after the L-shares surrender charges end, he added. And carriers are hoping the L-share trailer commissions will help incent brokers to encourage persistency, he indicated.

Still, the panelists agreed the industry will watch for lapse and 1035 exchange activity in this product line.

In the L-share, clients can get most of the features that are available in longer surrender period products, pointed out Randa of Wachovia. These features include dollar cost averaging, fixed interest accounts, enhanced death benefits and living benefits.

Its a popular product that has seen “explosive” growth, he continued.

So far, the persistency “seems to be very good,” even after the surrender period ends, Randa added. “I hope this will bode well for the L-share and [we can] keep the assets in there.”


Reproduced from National Underwriter Life & Health/Financial Services Edition, November 26, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.