With the dust still settling on the now finalized Department of Labor fiduciary rule, insurance and financial service professionals active in the retirement plan arena are scrambling to make sense of the 1,000-plus regulations being phased in through year-end 2017.
Many among them are coming to a stark conclusion: To avoid the conflict-of-interest rule’s more draconian requirements, the best option will be to jettison commissions and shift to a fee-based compensation model.
That may present producers selling variable annuities with a conundrum. Most of the market’s products are sold on commission; with optional minimum guaranteed income, withdrawal or accumulation benefit riders attached, the up-front payouts can also be quite big. Where can one find a variable annuity that fully complies with the new rule?
Enter Monument Advisor. The signature offering of Jefferson National, the fee-based VA boasts nearly 400 investment choices — all within a wrapper that, for a flat $20 monthly fee, lets clients secure the benefit of tax-deferral at low cost.
To learn more about the solution and the growth potential for similar fee-based VAs during the DOL rule’s phase-in, LifeHealthPro interviewed Larry Greenberg, Jefferson National’s president. The following are excerpts…
LifeHealthPro: Now that the DOL fiduciary rule is finalized, do you foresee increased demand for fee-based variable annuities like Monument Advisor?
Greenberg: The industry is continuing to shift to a fee-based model, a trend the DOL rule will accelerate. In a short number of years, I expect that all advisors will be moving to fees, either a fee-only a hybrid fee- and commission-based structure.
But the shift isn’t just being driven by the new rule. Commission-based Vas are more expensive products: The average cost is 135 basis points, even before factoring in living benefit guarantees. Our product is not only fee-based, but also low cost. VAs are an exceptional vehicle for growing retirement savings tax-deferred. And tax-deferral, when used with an asset allocation strategy, can add a significant return to a consumer’s portfolio, allowing them to grow their savings at a faster rate. At the end of the day, that’s the best way to build a retirement savings account.
Jefferson National has created a tax-advantaged investing platform for Registered Investment Advisors (RIAs), fee-based advisors and the clients they serve. (Photo: iStock)
LHP: How is Jefferson National’s VA platform evolving?
Greenberg: Since Monument Advisor’s launch in 2006, we’ve been building out the portfolio available to the market we serve: RIAs and fee-based advisors. For a flat $20 annual fee, their clients now have access to nearly 400 institutional share classes —fixed income vehicles, alternatives, passive and actively traded mutual funds, commodities and equities.
This low cost lets consumers derive the maximum benefit from tax-deferral. A typical VA might save you 100 basis points based on tax-deferral. But if you add in riders — such as a guaranteed income or withdrawal benefit — you’re adding an average 135 basis points annually to the product’s cost. So you’re not getting a tax-deferral benefit.
Now consider what a client would pay with Monument Advisor. Assuming the VA holds $240,000 in assets, a $20 annual fee would equate to 10 basis points — a big difference. That much-reduced cost really allows consumer to get the full benefit of tax-deferred growth.
LHP: How would categorize the advisors affiliated with Jefferson National? Are they mostly fee-only RIAs?
Greenberg: About 70 percent of the financial service professionals who work with us — we have north of 3,500 advisors — are RIAs, so fee-only. Another 30 percent are dually registered with broker-dealers and RIAs, and so do some business on commission.
LHP: As the DOL fiduciary rule is phased in between now and 2018, do you expect that many more producers will shift to fee-based VAs to comply with the finalized rule?
Greenberg: We definitely believe this will occur. To be sure, the rule concerns qualified plan retirement accounts; our market is the non-qualified space.
But the key takeaway here is that the world is moving to a fee-based model — and not only for compliance reasons. Financially, fee-based compensation makes more sense for advisors. Fees allow them to have a stickier, long-term relationship with clients. A fee-based model also provides an ongoing income stream, so advisors are not wholly dependent for revenue on the next product sale.
As a result, we’re seeing increased interest among broker-dealers in our solution. When we started in 2006, broker-dealers’ registered reps probably represented 5 percent of our advisors. As I noted earlier, that share has increased to about 30 percent.
LHP: How do you view the market for so-called contingent-deferred annuities: qualified plan mutual funds or managed accounts that offer a guaranteed lifetime income stream in retirement?
Greenberg: Our focus from the start has been on maximizing the benefits of tax-deferral, not guaranteed income. That said, because of the DOL rule, we’ve started to think about ways to reengineer Monument Advisor. Jefferson National potentially could offer consumers cost-effective and simple guarantees within a qualified plan.
This would appeal to consumers who are so risk-averse that they demand guarantees. But from an investment perspective, consumers are better off, we think, buying a no-guarantee product that can take maximum advantage of tax-deferred growth.
Jefferson National beleives that its products can be suitable for clients and prospects with low-risk tolerance. (Photo: iStock)
LHP: For those clients and prospects who have a low risk-tolerance, non-guaranteed VAs would not be suitable products, yes?
Greenberg: From our perspective, they actually can be. With almost 400 mutual funds, Monument Advisor lets fee-based advisors create a very conservative, risk-averse portfolios. We recently introduced, for example, a mutual fund that provides protection against a down market. Again, because of the cost differential, this may make more sense than buying an income or withdrawal benefit rider on a conventional VA.
LHP: For those looking for downside protection, fixed-indexed annuities — products that capture a portion of market returns and come with a floor to guard against market slides — may also be and appealing option. How do you view this product segment?
Greenberg: There has been tremendous growth in these products. But because the current crop of FIAs are commission-based, they’re not available to RIAs.
We’re looking at this space more closely, as there may be a way to also reengineer FIAs for fee-based advisors. But anything we might create has to have strong value for the consumer. That would entail cutting out the commission and providing the product at low cost. So, yes, this market represents a potential opportunity for us.
LHP: Retirement savers have other tax-deferred vehicles available to them — 401(k)s, 403(3)(b)s, individual retirement accounts and the like. Commissions aside, why put your nest egg in a fee-based VA?
Greenberg: Many clients of RIAs have maxed out their 401(k)s and IRAs. Our product gives them an unlimited ability to growth their nest eggs tax-deferred. And depending on the strategy, you can pick up a significant return simply by shifting the investment strategy to a tax-deferred VA structure. That’s how we think o Monument Advisor: a variable annuity platform that lets advisors execute an investment strategy with unlimited tax-deferral.
LHP: Do you also see fee-based variable annuities like Monument Advisor being incorporated into a laddering strategy, one where each investment vehicle in the portfolio — be they bonds, CDs, annuities, mutual funds or equities — would have a different start date as part of retirement income plan?
Greenberg: Actually, you can run multiple strategies within Monument Advisor: a fixed income strategy, REIT strategy or other strategy, all within a tax-efficient portfolio. You wouldn’t need multiple Monument Advisors; you can do it all within a single Monument Advisor. Think of the solution as a tax-deferred investment management platform offering an unlimited choice of investment funds and strategies.
LHP: What’s the company’s go-to-market distribution strategy? Are you reaching out to new advisors and looking to grow your advisor base?
Greenberg: We have in the marketplace a unique approach to distribution. From the beginning, we’ve focused solely on RIAs and fee-based advisors — our growth engines. By necessity, we’ve spent all of our time tailoring our solution to their business practices, methods and strategies.
We’ve built out our distribution network using a combination of direct educational marketing and an internal sales desk. That’s allowed us to grow our customer base to more than 3,500 RIAs and fee-based advisors, and do so in a cost-effective way. And we’re continuing to grow: By end of year, we expect to have more 4,000 advisors using the Monument Advisor platform.
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