Insurers are touting no-load, low-cost VAs

Registered investment advisers just might be the next big ticket for the insurance industry. That is what carriers are betting on as they craft new variable annuity products for a fee-only philosophy. "The issue with the variable annuity has been the fee structure," said Matthew Appelstein, senior vice president of product strategy and retirement solution planning at Old Mutual Asset Management in Boston. "We think a no-load, low-cost variable annuity is an interesting product to mix into a full financial plan for many boomers," he said. Last month Old Mutual Financial Network, the Baltimore-based insurance unit of Old Mutual (U.S.) Holdings Inc. of Boston, launched its Beacon Advisor platform for RIAs. Mr. Appelstein's perspective contrasts sharply with that of some industry observers who view the RIA market as an impenetrable one that has been suspicious of annuities and slow to flock to less expensive alternatives offered by major providers. "Fee-compensated RIAs have been precluded from showing variable annuities — they still see high client fees and proprietary investing solutions," said Nick B. Scalzo, chief executive of Claremont Financial Group Inc. The Claremont, Calif.-based firm manages $225 million. Mr. Scalzo participated in a panel on this topic last week at the 2008 NAVA Marketing Conference in La Quinta, Calif.
RIAs are willing to look at variable annuities in their practices, but the right products just aren't out there at the moment — especially as carriers keep piling riders onto their annuities, said Bruce Harrington, managing director of syndicated research at Cogent Research LLC of Cambridge, Mass. A report his group released in December showed that just 27% of RIAs used variable annuities, making it the smallest distribution channel for the product. That survey looked at 1,266 financial professionals, of which 123 were RIAs. Even so, "the RIA channel is growing steadily and more customers are looking for independence," Mr. Harrington said. "This is a trend VA providers should prepare for to get ahead of the curve." Carriers see that if they put subaccount investment decisions into the advisers' hands and adjust their wholesale approach, RIAs just might give the variable annuity another chance. Fitting the fee-only business model helps address the worries of advisers, said Larry Greenberg, president and chief executive of VA provider Jefferson National Life Insurance Co. of New York. Those worries, he said, can be broken down to "the four C's": cost, complexity, control and commissions. Mortality and expense charges raise the fees of most VAs to about 135 basis points, undoing the benefits of tax-deferred growth, Mr. Greenberg observed. Meanwhile, the commission structure of the product makes the annuity sit outside of the adviser's realm. To compensate, "we did away with the M&E charges on our Monument Advisor [platform], so whether you have $100,000 or $1 million in the VA, it's the same fixed cost," Mr. Greenberg said. The company charges clients $20 a month for administrative costs, and has stripped the surrender charges.

CUSTOMIZING SUBACCOUNTS

Some advisers want options beyond the 35 or 40 subaccounts they can choose from.
"If I could wave a magic wand, I'd want an open platform brokerage account in a VA contract with unlimited mutual funds, stocks and bonds," said Ted Kerr, president of Kerr Financial Group of Pittsburgh, Pa., which manages $70 million. To address that, Old Mutual, Jefferson National and Nationwide Financial Services Inc. of Columbus, Ohio, teamed up with Rydex Investments of Rockville, Md., to offer exchange traded funds, managed futures and other alternatives as choices for VA subaccounts. Through its new Beacon Advisor platform, Old Mutual has given fee-only advisers the chance to customize their subaccounts using offerings from Rydex and XTF Global Asset Management Inc. of New York. Access to these types of investments answers RIAs' calls for strategies and assets that have a low correlation to stocks and bonds, said Trisha Miller, vice president and institutional sales director at Rydex. "RIAs are more institutional in their approach to investing," she said. "They have high-net-worth clients, focus on wealth management, and they're looking for cost-effective solutions that meet needs in terms of taxes and income." That type of protection comes with a cost, and clients can pay an additional 10 to 30 basis points to access alternative investments, Ms. Miller said. "Advisers are thinking about what they're saving on the downside," she added. For example, through Old Mutual's Beacon Advisor platform, clients pay a monthly contract fee of $20, plus a 0.05% expense charge for the first five years only. Fees in the subaccount are included in the cost, along with whatever the adviser charges, according to Al Harrington, Atlanta-based senior vice president of variable distribution at Old Mutual Financial Network of Baltimore. Additional guaranteed minimum withdrawal benefits and death benefits are available at an extra cost.

SUBCONTRACTING SUPPORT

The carriers also noted that in order to trim back administrative costs, they would have to reassess their marketing and wholesale efforts. Advisers need training and wholesalers can step into a consultative role, Mr. Scalzo said. "You need to create a consultative wholesale process to deliver to the adviser, and tell them how and when to use the benefits," he said. First Ameritas Life Insurance Corp. of New York responded to that need by providing advisers with call centers, where they can reach licensed professionals with questions on the firm's no-load and no-surrender-charge VA. "Advisers need information," said Mitchell Politzer, president and CEO of First Ameritas. "The professionals at the call centers will help them case by case." At times, advisers recognize the value of using VAs, but would rather not spend time getting high-ranking life insurance certification — and that's where the call center experts can help, he added. Carriers such as Old Mutual have also recognized the value of marketing through education, using white papers and conferences. "You're not going to see forty or fifty wholesalers, but a team that's working with the industry," Mr. Appelstein said. It seems to be working; RIAs, though cautious, are open to this approach. "A professor did a white paper on using a VA on the fixed income portion [of a portfolio]," said John O. Hetzel, managing partner at Cadence Financial Advisors LLC in Dallas, which manages $10 million in assets. "You have more return potential, and you still have the security of the 6% guarantee. "My partner and I haven't bought into it, but the numbers make sense," he added. E-mail Darla Mercado at dmercado@investmentnews.com.