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Attack of the Annuities

Andrew Foerch
November 15, 2021

Citywire

Attack of the Annuities

Is it time for RIAs to shed their fear of the controversial insurance products?

‘I would die and go to hell before I would sell an annuity’

These grave words, spoken by Ken Fisher in a few-years-old video advertisement for his giant Camas, Washington-based RIA Fisher Investments, epitomize the vitriol felt towards annuities by many fiduciary advisors, who generally condemn the asset class for its lofty commissions andstiff, sometimes opaque, fees. 

However, annuities proponents say the industry has changed in the last decade and urge advisors to give the asset class another look. They say that insurance companies and third-party annuities issuers have retooled their products in meaningful ways for advisors.
‘For the most part, all the barriers have been removed,’ said David Lau, founder and chief executive of DPL Financial
Partners, which develops and distributes commission-free insurance and annuities products for RIAs. ‘It’s RIAs that need to catch up.’ 

While fiduciary advisors typically point to complexity and expansiveness as reasons to eschew annuities for alternative fixed-income strategies, many say that their aversion is actually the product of an inherent conflict.

‘If you go back just five years ago, there were very few annuities available for RIAs which were no-load, commission-free. That’s the origin of the problem,’ Lau said. 

For AUM-fee-only advisors, recommending that clients move big chunks of their assets out of investment accounts and onto an insurance company’s books is not exactly a tempting proposition. 

However, as the independent RIA business grows, annuities providers have started to take that fact into account.

 

Meanwhile, back in the lab...

Before bringing DPL to market in 2018, Lau was the chief operating officer of Jefferson National, an insurance carrier focused on developing products that could work within the traditional RIA
business model. During his tenure there, Lau helped architect one of the industry’s first flat-fee variable annuity products, Monument Advisor. 

‘I launched DPL to take on that broader challenge of bringing lots of carriers and products to market for the benefit of RIAs. Today there are, I don’t know, 70 annuities that are commission-free in the marketplace that you can bill an assets-under management fee on,’ Lau said, referencing products sold by such massive carriers as Allianz Life, Great
American Insurance Group, Equitable, Security Benefit, and Global Atlantic Financial Group.

One such product is Constance, a commission-free contingent deferred annuity launched a few weeks ago by RetireOne. The product offers insurance protection on ETF or index fund investments in a client’s IRA, Roth IRA, or taxable brokerage accounts without requiring the underlying assets to move to the insurance company’s administrative platform.

The clients’ assets stay in an account at whatever custodian the advisor chooses, using the funds, ETFs or strategies the advisor wants to, as long as they are approved by the carrier,’ explained RetireOne chief executive Ed Mercier. ‘The billing comes out of the account just like how they would normally bill advisory fees. There’s just an additional certificate to pay for the insurance that comes out.’

When most people think about annuities, they may think of the classic single premium immediate annuity, which immediately turns the assets over to the issuer to begin making income payments. Variable, fixed, and fixed index annuities work differently.

With these three types of annuities, ‘those assets are available until the point you turn it into income,’ Lau explained. ‘The primary way people do that, rather than through annuitization, is through an income rider. When you use a rider, the assets remain yours until they’ve been depleted.’ Riders often come with an additional fee for the investor. The advisor can then bill the client one of two ways: they can use a ‘data feed’ to import information from the insurance carrier into their portfolio management system, billing on the annuity in a centralized way alongside the client’s other assets; or they can bill directly out of the annuity itself.

 

Open Waters

Mercier suggested that built-for advisors products like Constance will become more prevalent as annuity issuers compete to become leaders in the largely untapped advisor space. Constance itself is issued by what Mercier described as a ‘forward looking’ carrier in Midland National Life Insurance Company, a subsidiary of Sammons Financial Group.

‘RIAs have the lowest percentage of any type of insurance penetration of any market or distributor segment out there. They’re just not going to take these traditional commission-based solutions and run them through like some sort of insurance agent,’ Mercier said. ‘Midland sees the opportunity in the RIA space as a completely blue ocean. It’s open water. Nobody’s really playing in it. They want to be one of the first ones to reach that market.’

Even the Internal Revenue Service is adjusting to account for the growing role of RIAs, having released several private letter rulings in 2020 and 2021 that allowed certain insurance issuers to pay fees to customers’ advisors directly from the annuity contract value, meaning the annuity holder won’t have to include the annuity’s advisory fees in their federal taxable income.

The advent of commission-free annuity products – and their compatibility with the fee-only advisor model – is a good thing for people who believe annuities generally benefit the retirement prospects of the average American worker.

Jared Finkelstein, who is registered as an advisor and broker with insurance company MassMutual, is one of those people.

‘For somebody who has longevity or life expectancy on their side, annuities take a lot of the risk of running out of
money off the table,’ Finkelstein said. ‘If you ask a retiree what their biggest fear is, that’s it. I don’t care how good an
investment advisor is, they can’t guarantee that. An annuity can.’

 

The Curse Lives On

It won’t be easy for the asset class to shed its less-than-stellar reputation with the advisor community. Financial planning guru Michael Kitces, who runs financial planning affinity network XY Planning Network, tweeted that ‘poor sales practices’ have ‘tainted the label’ for annuities issuers.

Take the somewhat extreme
perspective of pension consultant Chris Tobe, who told Citywire he believes ‘almost all annuity products are a breach of fiduciary duty, and any RIA when they recommend them is breaching his fiduciary duty,’ citing the single entity credit and liquidity risk of annuity products, as well as ‘hidden profits via spreads many times in excess of 200 (basis points).’

Estate planning attorney James Watkins, for one, is unimpressed with the industry’s progress. He said variable annuities – traditionally the most amenable type of annuity for advisors who want to maintain control of ongoing asset management – are especially problematic, and argued that income riders are just another way for insurance companies to gouge investors with additional ‘unnecessary’ fees.

As much as the insurance industry argues that annuities have changed for the better, Watkins believes that an old
industry saying remains accurate: ‘Annuities aren’t bought – they’re sold.’ ◊