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.
To help illustrate what the commission-based products are up against, consider again solutions from AllianceBernstein and Jefferson National. Strategic Retirement Strategies, the AllianceBernstein VA-like target date fund and GLWB rider described in my feature, carries no commission for the selling producer–assuming there is one. The fund does not need be advisor-sold, as it is the default option inside a qualified plan. And because the product pays no commission, there is no surrender charge.
Commissions and surrender charges are also absent from Jefferson National’s Monument Advisor. The insurer has custom-built a no-load VA for fee-only advisors that carries an administrative charge of just $20 per month or $240 per year. So whether the client puts $100,000 or $2 million into the product, the annual expense will be the same. Assuming an average policy size of $200,000, that converts to an administrative charge of 12 basis points, observes Jefferson National President Larry Greenberg, who adds the figure is significantly less than the industry average.
Other variable annuities I’ve previously written about provide no commission for the sale. Or–and this is increasingly common not only in respect to VAs, but also variable universal life products–they offer exclusively trailing commissions (or trailer fees). This is a commission paid annually to the sales agent for as long as a client’s money remains in the VA account.
How might trail-based commissions be advantageous to the producer? Apart from offering access to highly competitive products, this compensation model also more closely aligns the producer’s interests with the client’s by encouraging them to periodically review VA subaccount holdings and to offer ongoing investment advice.
Trailers fees are also easier to explain: If clients know the advisor is being compensated in terms of how well their accounts are performing, and that the advisor has a vested interest in the account performance, then they’ll be more accepting of the commissions paid.
Additionally, by generating a steady flow of income from year to year, trailers lesson the pressure on producers to rely on heaped commissions to meet monthly expenses. They thus can focus more of their attention to serving existing clients and, later, to exiting the practice. For the revenue stream will add value to the business when the time comes to sell it–and secure a nice nest egg on the sale for one’s retirement years.