In the recent past, insurers have viewed stronger relationships with registered investment advisors (RIAs) as a critical element of their growth strategies. Compared with other types of asset managers, RIAs have seen their asset bases expand – a trend many in the industry expect to continue. To capture market share in the RIA channel, variable annuity (VA) writers have introduced customized versions of their core offering targeted to RIAs. In fact, 18 of the top 20 variable annuity insurers offer RIA variable annuities, according to 2012 sales data from LIMRA. But the expected VA growth in the RIA distribution channel hasn’t yet materialized, leaving many insurers perplexed as to why.
We will briefly discuss what we believe are some of the factors that have limited insurers’ ability to capture market share through RIAs and suggest a range of strategies and tactics that insurance companies can adopt to improve growth in this channel.
1. Overcome negative advisor bias. In our experience, many fee-based RIAs seem to be biased against annuities. In some cases their view is based on an educated analysis of VA products, in others a bad past experience with a company representative, or an uncomfortable client experience with a complex VA contract. In addition, fiduciary duties toward clients and standard compensation structures also impact the RIAs’ perceptions of VAs. Whatever the case, many advisors are not fully convinced that these financial instruments are a good fit for clients. Thus, they are reluctant to recommend VAs. As one of my mentors in the business would say, “A sale is first made in the advisor’s mind.” Whatever the reasons for the bias, insurance companies face an education challenge. Specifically, they must improve their communication and storytelling efforts as to the merits of VAs and their usefulness (and appropriateness) for different types of investor objectives and how they fit within a client’s portfolio. Further, insurers must spend more time with RIAs developing their understanding of the objections and concerns most frequently expressed by fee-based advisors. For example, RIAs often want to see some credible analysis with hard numbers showing that variable annuities are good alternatives. Co-developing credible responses that improve the likelihood of a sale in the advisor’s mind can be the solid foundation for a growing relationship.
2. Justify the cost structure. The higher fee structure of VA products (compared to other investments offering a guaranteed source of income) is far and away the top reason clients do not purchase VAs. Higher costs are a big issue for RIAs, who have a well-earned reputation for being hypersensitive to fees. Many RIAs may focus on a total return type of analysis, utilizing tools and materials that they have in place today for evaluating investment options. If insurers are to drive growth through the RIA channel, they must be ready and willing to justify the higher costs of contractual guarantees by clearly demonstrating the superior client outcomes when it comes to either the income benefits, death benefits or tax benefits. In some circumstances, companies may need to sharpen the pencil on management and administrative expense fees in order to gain acceptance. For example, the combination of a balanced-risk fund and a growth-of-dividends fund is likely to be discussed as a retirement income solution with lower total fees than a typical RIA-channel VA, once the latter’s management and administration fees, mortality expense charges and rider fees are taken into account. An insurer should educate and enable RIAs regarding the cost-value propositions to increase the likelihood of VA sales.
3. Enable advisor compensation. Because of the design of annuities, withdrawing advisor fees from the basic VA contracts can generate negative tax consequences for clients. Similarly, when clients elect an income rider, withdrawn fees can either reduce the guaranteed income available to the client or undermine the rider guarantees. As such, RIAs have historically needed to collect fees from other client accounts under management – something that could be solved through RIA-friendly contracts. A basic objective for insurers would be to educate RIAs on efficient ways to collect fees and enable them with tools or technology to collect fees, even if they not collected from the VA. Further, client-friendly materials explaining to clients how such fee withdrawals work would be appreciated by RIAs.
4. Adjust for dual registration. There is one other complicating factor worth mentioning – the growing number of dual-registered agents in the market today. Such agents may find a better value for clients by selling annuities as registered representatives, rather than as RIAs. There are clear benefits of this approach for clients, who ultimately benefit from lower costs. Dual-registered agents are likely to compare both retail and RIA versions and choose whichever is more beneficial – a fact that insurers must address in their product design and marketing programs.
5. Refine segmentation. Because VAs are complex, flexible financial instruments with a variety of uses, they have suffered from an identity crisis. Is the key benefit income generation or tax deferral? Given the tax rules for annuities, it can’t be both. To help RIAs understand appropriate uses for VAs, insurance companies need to clearly articulate the target customer profile and the value proposition. For example, let’s assume the target customer is an ultra-high-net-worth couple with a small qualified portfolio relative to their overall wealth. It’s likely that this couple is in the top income tax bracket and the advisor may be avoiding certain asset classes that would diversify the portfolio because of potentially adverse tax consequences (think hedge fund or other actively managed investment with a high annual turnover). If the client and advisor can elect the desired investment within a low cost VA, the tax benefits would create a compelling value proposition. Several carriers have designed private placement VA products that are specifically tailored to this market.
None of these five factors is necessarily a deal breaker for insurers seeking to grow their business with RIAs. However, they each represent a challenge that must be addressed both strategically and tactically in order to improve adoption. Insurers that can design VA products that meet client needs in specific customer segments and clearly communicate the value proposition have an opportunity to gain a substantial competitive edge in the RIA market.
The views expressed herein are those of the author and do not necessarily reflect the views of Ernst & Young LLP.
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