Commission-Free Annuities Drive Elusive Organic Growth: David Lau

RIA valuations are set according to a number of factors, but the prospect for organic growth is probably chief among them, Lau told ThinkAdvisor during a recent interview in New York.

“That’s a big reason why our platform is having the success that it is, because RIAs have come to see our commission-free annuity platform as a key source of organic growth,” Lau said.

He noted that the platform has grown from about $1.4 billion in assets to more than $5 billion in just the past two years.

“We can help advisors address held-away annuity assets and expand wallet share with clients," he said. "That’s what organic growth is all about.”

Traditionally, Lau added, RIA acquirers have shied away from buying firms with big books of annuity business, given the unattractive economics of traditional annuities’ trailing commission fees in comparison with asset-based or planning fees assessed on clients’ overall portfolios. There are also fiduciary considerations involved.

“Today, our technology can proactively review and convert that annuity block, moving the assets from low-yielding commissioned revenue into a meaningful asset-based fee — while the client is being moved into a better annuity product that delivers more value,” Lau said. “We think of it as a win-win-win.”

Lau said he is optimistic about his platform and the RIA industry in general, especially as baby boomers transition into retirement and require more guidance on retirement income. The trends bode well for annuity issuers as well, especially if the industry is able to educate clients about improvements in the product set relative to prior decades.

Here are highlights from our conversation, edited for length and clarity:

THINKADVISOR: Your firm recently announced that it has grown beyond $5 billion in platform assets. In what ways has the platform and its underlying technology evolved in the years you have been running DPL?

DAVID LAU: It’s a common theme, I imagine, when you speak with other technology platforms in the RIA space, but the real story for us in the past few years has been about providing a scalable solution.

From the very beginning, we had a very strong capability to help advisors review individual annuity contracts and transition those to a better product serviced via asset-based fees. You could take a photo of your statement and get an instant comparison that showed you a better-priced annuity that included all the key features you were seeking, whether that's immediate income or a growth component or whatever.

That’s a fantastic service on a one-to-one basis, because doing that analysis without our technology could easily take multiple hours of work for even a highly skilled advisor. We can turn that job into seconds, but the challenge for big firms with a lot of annuity assets was, how do you effectively use the tool to review and potentially convert 10,000 or 15,000 individual policies?

Doing that would still be a mammoth project even with our technology, so we have been focused on creating a more scalable version of the platform that can consider large batches of annuity contracts all at the same time. Now, the platform can service enterprises and do all the things we could do for individuals — mapping them into better products and pre-filling the application to put in front of a client.

So, that's been a huge accelerant of growth for us and for our advisor clients. We’ve also moved many people into annuity products that suit them far better and deliver much more value, so that’s also a big win.

THINKADVISOR: What percentage of people who own a commission-based annuity find that they can be connected to a better annuity product after a platform review? I imagine it’s the vast majority? 90% or more?

LAU: It’s high, yes, but not quite that high. It’s probably more like 80% if I had to say off the top of my head.

But you’re right in the sense that there are some very attractive annuity products available today versus what was available in the past, and the primary reason that a person doesn’t end up transitioning their annuity is because they are still subject to a significant surrender charge. Even in these cases, there are ways an advisor can use our platform to help. What we’ll do is monitor those policies on a proactive basis, so when they are no longer subject to such significant surrender charges and the economics make sense, we can then go ahead and make that move.

If an advisor really wants to move away from their captive broker-dealer, we can also move these stuck policies to our own broker-dealer as sort of a holding pattern. We give them a safe place to reside, basically, until they can be favorably exchanged. And in the meantime, their old broker-dealer isn't trying to poach that business, or at least they have a much harder time doing so.

It’s also not just about annuity conversions, of course. The platform helps advisors and their clients use new annuities as part of their retirement income strategy, complementing Social Security, pensions, individual retirement accounts and other sources of wealth.

THINKADVISOR: To take a step back, what are your thoughts on the role that artificial intelligence is playing in financial services? It’s obviously important for your platform, but do you think about the topic more broadly?

LAU: It’s funny, because I think I have somewhat of a contrarian view on this question, at least as it pertains to annuity sales and distribution.

I go to a lot of insurance industry events and I hear all the time that AI is going to totally transform how the business works, and I actually chuckle a little bit. The reason why is that we are still an industry that relies on notarized paper forms and fax machines. We are so far behind even the technology that preceded AI. I have trouble seeing how AI transforms the annuity industry overnight while we are still dependent on things like certified letters to request withdrawals.

But, to be clear, I do think AI has an important role to play in client service and scalability. Rather than training individuals on prospectuses and servicing client accounts, you know, you could have AI doing a lot of that and answering service-related questions. That’s happening, and it’s happening quickly.

In a way it’s a bit scary, actually, because you wonder about all the entry level and analyst jobs that help people to get a foothold in this industry. Will they all be replaced by AI? What would that mean for the long-term future of the profession?

We recently redid our financial model internally. It's a massive Excel spreadsheet that used to take months for our analysts to review and update. Well, recently, we fed it into an AI tool, because we wanted to reformat and recategorize the data in some new ways. The AI did it in 15 minutes. That's a big deal.

Pictured: David Lau