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Can annuities with no 'pesky' commissions win over RIAs?

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PHILADELPHIA — In an attempt to win over a skeptical audience of NAPFA members, the founder of DPL Financial Partners presented a novel case for annuities: selling them without commissions.

The new offerings from insurers “take away those pesky commissions which cause the conflicts of interest, as well as the pricing problems within the products,” David Lau, whose firm is a new species of insurance broker for fee-only advisors, said in a session at the association's fall conference.

“Once you’ve eliminated the commission,” he continued, “now you can take that benefit of guaranteed lifetime income and actually put it to productive use within a client portfolio and reap the benefits that it brings to a financial plan.”

Fee-only versions of the historically commission-based products allow for both cost savings and extra money for retirement, Lau says. His firm announced in September that it had added its 100th member RIA, just six months after DPL began offering RIAs access to fee-only annuities and life insurance.

However, many advisors at the conference apparently had yet to buy into the concept, as evidenced by their barrage of technical question on the products for Lau.

The queries included a potential conflict of interest if an advisor does not receive any compensation, providing them a disincentive to recommend the product. Not every advisor agreed with Lau that they should bill clients for placing some assets into a product like a single premium immediate annuity.

The largest firms’ combined VA and FA revenues hit a three-year low in 2017, but the products still make up a significant portion of their businesses.
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One advisor in the audience also pointed out that the annual fee of around 200 basis points, in a hypothetical variable annuity example offered by Lau, still imposes a high cost. The fee comes from basic insurance expenses, sub-account expenses and optional benefits.

Another advisor there, Irene Giman of RTD Financial in Philadelphia, said afterwards that the high fees have made her steer clear from recommending annuities to clients.

She came to hear Lau’s talk, she said, to “keep an open mind” about the new offerings, while upping her knowledge for clients who joined her practice with existing annuities.

Although sales of fee-only VAs jumped 49% year-over-year to $850 million in the second quarter, they represent just 3% of the market, according to the LIMRA Secure Retirement Institute. Sales of commission-free fixed-index annuities soared by almost 200% to $67 million, or about one-half of 1% of all FIAs.

Insurance firms like Jackson National Life Insurance and third parties like Lau’s firm and others are betting that RIAs will adapt such fee-only offerings into their practices, rather than sending clients to outside brokerages for them. Issuers are launching waves of fee-only products under the push.

“You have segments of the advisory industry that currently don’t offer protected income solutions, for whatever reason," Jackson CEO Barry Stowe said earlier this month at an event for a trade organization of insurance firms and asset managers.

"Maybe the way we manufactured the products in the past hasn’t suited their business model,” he went on. “Pretty much all of us have now introduced versions of the products that don’t have a commission.”

Issuers have not fully tapped the market to this point. Only about three of more than 350 marketing organizations “really concentrate on RIAs,” Michael Robinson, co-founder of The Blueprint Insurance Services, in an earlier interview. His firm currently works with 16 RIAs, but is expanding.

“It’s an exciting time for our firm. We feel we’re in the right marketplace at the right time to bring enterprise value to the RIA community,” Robinson says. “It’s an underappreciated community in the marketplace for insurance.”

At the conference, Lau displayed hypothetical client scenarios involving VAs, fixed indexed annuities and single premium immediate annuities to show how much money could be saved by slashing commissions.

For example, removing the commission from a VA contract of $250,000 would result in annual fee savings of $2,055, he said at one point.

A SPIA without a commission, with an initial contribution of $300,000, would pay the client an extra roughly $1,160 in additional income after one year, according to Lau. And after 20 years, the commission-free product would produce an extra $23,300.

That still failed to convince Giman.

“I didn’t think it made up enough, considering that there are so many other fees included,” Giman said. “It’s still quite expensive.”

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