Advisors who have been in the business for a while will recall when variable annuities (VA) were pretty simple to explain and sell. The products essentially were mutual fund-type subaccounts inside an insurance wrapper. Tax-deferred growth was the primary benefit and the mortality charge provided beneficiaries with downside protection on the policy value.
Product features and benefits have evolved considerably since then. That’s generally a good thing because the benefits became richer but the additions also made the products more costly and complex. (Seriously, when was the last time you actually tried to read a VA prospectus cover-to-cover? Ugh.)
The advisory industry was changing at the same time as the contracts. Fee-based and fee-only business models became more prominent and many of these advisors shun high commission products. David Lau, chief operating officer of Jefferson National in Louisville, Kentucky, believes these changes necessitate a new generation of VAs.
He points to a Jefferson National survey as evidence of the industry’s desire for a new approach. Fifty-one percent of the advisor-respondents used VAs with income guarantees to generate retirement income. But more than half of that group said they’re not satisfied with those income guarantees and 70 percent said they’re unsatisfied because of VAs’ increase in costs and decrease in benefits, says Lau.
Back to Basics
Jefferson National didn’t want to compete in the VA-benefit arms race, he explains, and they believed the shift in business models would lead a growing number of advisors away from commissions. They also recognized that while tax deferral is a valuable benefit, high product fees reduce or even eliminate that deferral’s economic value to the VA-buyer. “Tax deferral doesn’t have unlimited value,” he explains. “Depending on the research you cite, it’s got 100 to 200 basis points of value to a portfolio. The average annuity costs over 135 basis points, more than eating up the value that tax deferral is bringing to the client. So, we wanted to create a product that enabled the client to get the value of tax deferral when they invested.”
That goal led to the Jefferson National Monument Advisor VA, which Lau believes represents the next product generation. The product’s sales have been ramping up, says Lau, growing from $270 million three years ago to $730 million in 2013. This year he expects sales to exceed $1 billion.
He cites several reasons why roughly 3,000 advisors now work with the product. The VA has a competitive, broad line of investment options—over 380, according to the website. The company avoids the wholesaler model and works directly with advisors. He believes the product’s technology platform provides an edge with fee-based and fee-only advisors, as well. Lower contract costs are another factor. The industry average mortality and expense (M&E) fee is 135 basis points, Lau says. The Monument Advisor VA does not charge for M&E; instead, the company charges a flat $20 monthly insurance fee regardless of contract size.
If Lau is correct, we’re likely to see low-cost VAs with a focus on the product’s original tax deferral benefit capturing more of the market. In a sense, “It’s like deja vu all over again,” as Yogi Berra would say.