Is the commission-based annuity market primed for disruption?
October 10, 2018 by Nick Thornton
Annuities have long been the whipping boy of the financial services industry, and for good reason, thinks David Lau, founder and CEO of DPL Financial Partners.
“Insurance products have forever had a very bad reputation,” he said.
Lau is not a plant or acolyte of Ken Fisher’s, the head of Fisher Asset Management who in advertisements claims he would “die and go to hell” before recommending an annuity product to retirement investors.
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In fact, Lau spent a decade as chief operating officer for Jefferson National Life Insurance Company.
In that role, he set out in 2004 to explore distribution inroads to fee-only fiduciary RIAs, who by law are prohibited from accepting the commissions affixed to the vast majority of insurance products.
What he found when he led that seminal effort were intransigent barriers to the RIA market and its investors, which account for $2.5 trillion in assets nationwide.
“I got to understand the problem that insurance is for RIAs,” Lau told BenefitsPRO. “Every other investment product is available to fiduciary advisors on a no-load basis. This was an insurance industry problem that clearly needed to be addressed.”
Ken Fisher may not have to go to hell after all
As the Labor Department spent years crafting a fiduciary rule that put sales of commission-based variable and fixed indexed annuities squarely in its crosshairs, more carriers rolled out fee-based alternatives in an effort to shield incumbent broker distribution channels from liability under the rule.
Fee-based products’ market share grew, but nonetheless remained fractional compared to commission-based products.
The most recent data from LIMRA Secure Retirement Institute shows that FIAs enjoyed a record-setting second quarter in 2018. But fee-based FIAs represented less than one-half of one percent of the total FIA market.
Those numbers reflect how most fiduciaries regard annuities. Fisher’s views on the products are shared by the vast majority of RIAs, says Lau.
“No one will argue against the value of guaranteed lifetime income or principal protection—those insurance benefits are inarguable, and certainly valuable for the right RIA client,” says Lau.
But those indisputable values come with a “pricing problem” for RIAs, who are legally beholden to place their client’s interests first. The costly, complex, and often opaque product features of annuities inherently challenge fiduciaries’ obligation of prudence to investors, said Lau.
Addressing the pricing problem was the primary motivation behind DPL Financial Partners, which officially launched a platform for fee-based insurance products– specifically for fiduciary RIAs–last February.
“The insurance industry is ripe for disruption in terms of pricing and transparency—two things RIAs value,” explained Lau. “I thought the better way of handling this problem and working with fiduciary advisors would be to do it from an independent point of view, and to work with carriers across the industry to help them better understand the RIA market. And then go to the RIAs with a product-agnostic point of view, one that aligns with their fiduciary values.”
Beyond access to commission-free insurance products, DPL’s network serves as an outsourced insurance department for RIAs. The platform vets existing fee-based products, and Lau’s team works with carriers to create new offerings or enhance existing options.
DPL also audits insurance products when they do exist in RIA client portfolios, and works with RIAs that don’t offer insurance to identify clients that could benefit from income streams and other protections.
RIAs pay an annual fee to access the platform and services. Insurance companies do not pay for space on the platform, as they do on broker and wirehouse platforms, but they are charged an administrative fee, which Lau said is a fraction of traditional commission expenses.
In seven months, DPL has signed 125 RIA firms, which range in size from $50 million in AUM to $20 billion.
Allianz, TIAA, Great West, AXA, Great American, Security Benefit, Columbus Life, CBLife, and Integrity Life are the carriers listing products on the platform, which include investment-only variable annuities, FIAs, fixed annuities, and life insurance products.
Under one analysis provided by DPL, an unnamed fee-based product comes with annual costs that are about one-third of a traditional commission-based counterpart.
The largest savings are on mortality and expense fees, which range from 50 to 150 basis points in commission-based products that guarantee income. Morningstar says the average M&E charge on variable annuities is 135 basis points. DPL’s platform has products with charges as low as 20 basis points.
KISS for RIAs
Along with pricing, product complexity has been the primary hurdle for RIAs.
“You want to design products that are more straightforward,” said Lau. “A lot of annuities come with bells and whistles designed to sell the product, but RIAs are not selling products—they are buying them.”
Lau sees insurance investments as another product in the RIA toolkit. They would not change an RIA’s annual fee on AUM. Fees on insurance products would be paid by investors, just as they pay management fee costs on mutual funds.
According to Lau, the investor wins with access to products through their RIA that could better secure retirement income, protect principal, and create tax advantages. The RIA wins by not having to move clients out the door to access insurance. And carriers win by detaching large commissions from their products, and in turn reducing liability that comes with incentivizing sales forces with commissions.
“This is an industry evolution that I think has to happen,” said Lau, who predicts an ongoing fiduciary movement even though Labor’s rule is off the books.
“The fiduciary world is coming because of a lot of stimuli—not just regulations. Transparency is a societal and consumer evolution. That’s the permeating point of view throughout the financial services industry,” said Lau. “We just want to be part of the stimulus.”
