Prudential Financial Inc.'s latest variable annuity release goes into all-bond territory, a development that is getting a lukewarm reception from broker-dealers and representatives.
The insurer unveiled its Prudential Defined Income variable annuity in February, offering clients a shot at the roll-ups and income withdrawals that they love. For instance, right now, for a 65-year-old, the product allows clients' guaranteed-income base to accumulate at 5.5% and throw in a withdrawal rate of 5% — levels that are becoming scarcer across the industry.
The trade-off is that clients will be investing exclusively in fixed income, and Prudential will retain the right to adjust on a monthly basis its roll-up and withdrawal-rate offerings for new business.
'CERTAINTY IN INCOME'
“We see the need to provide certainty in income,” said Bruce Ferris, head of product management and marketing, and head of sales and distribution, for Prudential Annuities.
"There are unprecedented amounts in cash and fixed income on the sidelines," he said. “It's there because of fear of loss and exposure to equities.”
Three months after the launch, however, broker-dealers and financial advisers are still finding the offering iffy. The product isn't available at a number of firms, including Raymond James Financial Services Inc. and Wells Fargo Advisors.
It is still under review at LPL Financial LLC, the broker-dealer with the most in VA revenue last year at $815.4 million, according to InvestmentNews' Broker-Dealer Database.
And those who have added it aren't necessarily thrilled about the prospect of a long-dated bond portfolio as the anchor of a client's variable annuity.
“We will keep a close eye on it as it relates to a percentage of net worth,” said Kraig Lange, first vice president and manager of the insurance department at Stifel Nicolaus & Co. Inc. “Sooner or later, interest rates have to go up, and that can't be good for the bonds.”
ValMark Securities Inc. also has approved the product.
“Advisers want to have their cake and eat it, too, and that's why the broker-dealers aren't overly excited,” said Judson Forner, a senior analyst at ValMark. “We're not excited about it, but we're intrigued by how it can apply and provide an additional solution on how we do business.”
Although Prudential wouldn't share initial sales figures, the debut has been a strong one, Mr. Ferris said.
“We think the reception has been overwhelmingly positive at the broker-dealer level,” he said.
Nevertheless, “like anything that's new, the sales cycle is a little longer, and you have to go through how it works and who it's appropriate for,” Mr. Ferris said. “With that comes a higher level of educational needs for advisers and distributors.”
Indeed, Prudential is bringing a novel approach to the annuities game this time.
The Advanced Series Trust AST Long-Duration Bond Portfolio features bonds with an average duration of eight to 10 years, and annual portfolio operating expenses come in at 83 basis points. Insurance charges add up to 1.9%.
The roll-up and lifetime-income benefit don't come as benefits that are separate from the core VA contract, as is the case with most products.
Rather, the roll-up and withdrawal are built into the VA chassis. This way, clients know right away what kind of income levels they can expect from the contract.
There is a benefit for Prudential, as well, in that it can more easily predict and control its liability. Prudential gave itself the flexibility in its product filing with the Securities and Exchange Commission to change the withdrawal and roll-up rates each month for new buyers so that it can adjust its offering and not refile.
“It's built so that we can respond nimbly to the capital markets,” Mr. Ferris said.
Facing risk from equity markets and low interest rates, insurers have tailored their VA products with an eye toward minimizing the sizes of long-term liabilities tied to living benefits. The latest offerings are giving advisers the choice of either a broad investment array or a relatively rich stream of income.
FADING FAST
The days in which advisers could have both are fading fast.
“[PDI] is richer than the standard guarantee, but there are no equities,” said Tamiko Toland, managing director of retirement income consulting at Strategic Insight. “You don't have as much upside potential in contract value, but if you're concerned about the income guarantee, then it's no big deal.”
One of the stumbling blocks to getting wider understanding of the product is the fact that advisers will say that they can construct an income stream on their own for a client — and do so without the added expense of the variable annuity.
“Isn't the whole point [of the variable annuity] that you should take the equity risk?” asked Carrie Streets, president and senior financial consultant at Crest Financial Strategies.
“We can generate a bond portfolio without additional expenses,” she said. “Even if the VA fees are only 50 basis points, that's going to weigh significantly on the value of the portfolio.”
Mr. Ferris noted that while advisers can build bond ladders, Prudential provides something that they can't replicate.
“They can't guarantee income, and they can't guarantee the portfolio won't lose value,” he said. “They can't guarantee the bond portfolio won't have reinvestment risk as the bond portfolio matures.”
That kind of product innovation is key to ensuring that insurers have the supply to meet clients' demand for income guarantees, Mr. Ferris said.
“We don't want to be a provider who is in and out of the market, bringing out products until we can't sustain it anymore or disrupting supply chains to say that we're out,” he said. “That's not Prudential's approach.”
