My survey in this issue of the current variable annuity marketplace comes with several important take-aways. Producers would do well to take note.
One conclusion to be drawn from the VA survey is that the products are becoming much more attractive as investment vehicles. That’s evident in the mix of new fund options available in the products’ subaccounts, including alternatives like gold and oil indices and REITs. Some of the VAs are also impressive by virtue of the sheer number of choices on offer.
Case in point: Monument Advisor, a VA from New York-based Jefferson National Financial. The product boasts an extraordinary 300 mutual funds managed by Ibbotson, Pimco, Janus Aspen, and other fund families. The VA also offers a wide range of asset classes, from bonds and asset allocation funds to international, small-/mid-cap and specialty stocks.
Another key take-away: The products are using increasingly sophisticated hedging techniques, a point that I touched on in my feature. A prime example is the Dynamic Asset Allocation service that AllianceBernstein employs as sub-advisor for Transamerica Asset Management’s VA portfolio. The approach de-risks portfolios when investors are not adequately compensated for bearing a high level of volatility; and the strategy modestly increases portfolio exposure when opportunities outweigh the risks.
A third, weightier conclusion is that advisors need to consider revising their compensation structures to leverage some of the most attractive VAs. Translation: They may have to jettison “heaped” compensation that pays high first-year commissions and reduced renewal commissions in favor of fees or fee-like commissions.
To be sure, many among the current crop of VAs that pay heaped commissions appeal to consumers because of the low assets under management fees assessed against the VA subaccounts. Examples include products from MetLife and Western & Southern Financial Group, which boast low expense ratios for the ETFs available in the products.
But sales entailing heaped commissions also result in often substantial surrender charges imposed for cashing in an annuity before the end of the stipulated term (typically 6 years or longer). The cost to the consumer may be all the greater for bonus contracts that offer buyers a high “teaser” or payout rate during the initial year of the contract, the crediting rate then dipping to a standard payout in subsequent years.