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Commission-Free Annuities: No Longer an Oxymoron

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When you’re a market disrupter, countless folks will be troubled by your moves; others will be pleased as punch. Enabling RIAs to sell annuities has provoked the latter response from these advisors. 

“I’ve been told several times over, ‘You’re doing God’s work!’” says David Lau, founder and CEO of DPL Financial Partners, first in marketing commission-free annuities, and arguably the leader, in an interview with ThinkAdvisor.

As fiduciaries, RIAs are unable to accept commissions, which insurance companies typically pay advisors for selling annuity products. But Lau has created a form of distribution that allows these advisors to incorporate annuities into their practices and receive compensation for them from clients as part of their AUM fee.

DPL’s turnkey insurance platform, available to RIAs and fee-based advisors by membership subscription, includes commission-free products to address other needs too, such as life insurance, long-term care and disability.

The Louisville, Kentucky-based firm, launched in 2018, has worked with 20 insurance carriers and has a base of more than 10,000 advisor clients from more than 3,500 RIA firms.

Lau, 54, pioneered the idea of commission-free insurance products at Jefferson National, where, as chief operating officer, he designed the first flat-fee variable annuity, he says.

Before Jefferson, Lau, as chief marketing officer, helped build E-Trade Bank after its merger with TeleBank, the first pure-play internet bank, where he was chief marketing officer and strategist.

Between E-Trade Bank and Jefferson, he co-founded a management consulting firm, The Oysterhouse Group. Clients included Merrill Lynch, Ace Insurance Group and Shinsei Bank.

His “mission,” he says in the interview, is to build a marketplace of “low-cost, no-load insurance products for advisors of every channel.”

He also explains how his way of distributing annuities allows RIAs and fee-based advisors to be compensated for these products as part of their AUM fee.

The technology-focused firm models 3,000 different annuities — including variable, fixed indexed and registered index-linked annuities (RILAs), plus 40,000 riders, and at 400,000 different price points, he says.

ThinkAdvisor recently interviewed Lau, who was speaking by phone from Louisville. He discussed his innovative method of distributing annuities, then looked back at the rollercoaster ride of working at pioneering internet banks before and during the dot-com bust.

Here are highlights of our interview:

THINKADVISOR: Are RIAs applauding you for giving them an opportunity to sell annuities? 

DAVID LAU: In general, the RIA market is really happy with us. I’ve been told several times over: “You’re doing God’s work!”

Is that the way you see it, too?

For me, it’s a twofold mission. If we can bring simple, low-cost, value-added products to market, it’s a really important thing to do for the end client, especially today, when retirement is lasting a whole third of your life, and you have to self-fund it for 30 years. At the same time, we’re enabling fiduciaries to do the implementing. So the client is now getting their annuity advice from a fiduciary rather than a salesperson who might be selling them an inappropriate product.

How do you deliver value with annuities?

By changing the distribution. We basically eliminated those big annuity commissions paid to reps; wholesalers [who sell annuities to reps] also make a lot. We’re distributing through technology.

What’s significant about RIAs selling annuities?

[As fiduciaries], RIAs couldn’t sell annuities before [our way]. Annuities weren’t products built for their business model because the carriers [offered] only annuities that were built with commissions. RIAs can’t accept commissions; so they couldn’t use the product. And many aren’t insurance-licensed [anyway] — they had no need for that license since they couldn’t sell annuities.

Please explain how your firm enables RIAs to sell annuities.

In essence, they’re referring their clients to us. We analyze the available annuities based on the client’s particular circumstances and needs, and find the most efficient one. Then we sign as the agent of record [with our insurance license] to issue the policy. From there, the advisor can manage the annuity as part of the client’s portfolio.

And that’s the way the advisors make money selling annuities?

Yes. They allocate a certain portion of the client’s portfolio to the annuity and get paid a normal assets-under-management fee, as they would with any other asset. So, the client is paying them. Typically, it’s the insurance company paying a salesperson a commission for selling the product. With [our model], it’s the client paying their financial advisor for the financial advice of providing an annuity that’s in their best interest.

RIAs selling annuities can be quite helpful for their clients’ retirement planning, correct?

Yes. The annuity is now a tool for RIAs to help solve for retirement income for their clients, which is a massive challenge in today’s low interest-rate environment. According to academic research, annuities do it more efficiently than traditional fixed income.

Do your clients get the frequent consumer objection about annuities: They don’t want to pay a big lump sum up front?

There are some consumers who feel that way, but many don’t. There are lots of [end] clients who really enjoy the benefits of annuities. And in this interest-rate environment, the benefits are so compelling that, I think, you’re seeing lots of people becoming users who never thought they’d even consider annuities. 

Why is that happening?

Annuities solve [for the issue of] volatility of the market. They solve [for] what could happen to people’s retirement savings if left unprotected. 

But amid the pandemic, annuity sales dropped 9% in 2020 vs. 2019, according to the Secure Retirement Institute. What about your firm’s sales?

Our sales have been growing rapidly. We’re going into a different market. Our model has never been [selling] face to face, the way annuities are primarily sold. And I understand that because of [the pandemic’s virtual meetings], [selling] has been a challenge. [In contrast], we work with advisors by phone and through technology. Historically, RIAs have never used annuities. So we’re bringing new advisors into the insurance market. And our sales have continued to increase.

You were chief marketing officer of E-Trade Bank and its predecessor, TeleBank, which was the first pure-play internet bank. In 2000, E-Trade acquired TeleBank. Was it exciting to work there?

Those early internet days were crazy and pretty exciting times — really fast paced and fast growth. You were working with all kinds of dot-com companies. Some were utterly ridiculous; some were quite brilliant. There was so much money moving around that anybody with an idea they put a “dot-com” at the end of was [raising millions]. I remember going into any number of companies and thinking, “I don’t know who in the world would have given them money!”

And then came the dot-com bust.

Yes, which was a whole other ride. It happened when we were going through the merger with E-Trade. It was one of the first bank and brokerage mergers in the country. We announced in May of 1999 and struck the deal near the [dot-com] peak. By the time we got full regulatory approval 10 months later, the [market] was well into the bubble’s bursting. 

(Pictured: David Lau)