Advisers now questioning value proposition for products
Rising fees for variable annuities at Prudential Financial Inc. are making some financial advisers and broker-dealers question whether the value proposition for VAs is shrinking.
The insurer has filed with the Securities and Exchange Commission to raise the cost of its Premier Retirement variable annuity, increasing the mortality-and-expense fee for its B share by 15 basis points. The changes are expected to go into effect Feb. 25.
That will bring the M&E fees to 145 basis points and, counting the cost of a living-benefit rider, peg the product's single-life version at about 245 basis points.
Some advisers are asking: When does an annuity become too expensive to offer?
OTHER CARRIERS
“You have to take a look at whether the cost is going to be prohibitive,” said Marc Silverman, an adviser at Silverman Financial Inc. “It's getting to that point where fees are outweighing the benefits and where you have to look elsewhere.”
A longtime fan of Prudential, Mr. Silverman said that he also likes Protective Life Insurance Co. but that fees are rising there, as well.
“You're almost over 4%, and in my opinion, that's pretty high,” he said.
Prudential's cost increase was too much for Raymond James Financial Inc., which places a 235-basis-point limit on the combined cost of a variable annuity and its rider.
“With this product change, Prudential is going over the limits,” said Scott Stolz, president of Raymond James Insurance Group. “They will raise the M&E to the point where [the chassis] is the most expensive variable annuity on the street.”
The firm has decided not to offer Premier Retirement B and C shares, and instead will consider adding Prudential's O share, he said.
That class has no upfront charges and assesses M&E expenses through the surrender period; those costs decline over time. Clients can take advantage of break point discounts, leading to lower fees for those who deposit more money.
“As the universe of selections is narrowing, it's going to challenge us to meet client needs,” said Mitchell Kauffman, a managing director at Kauffman Wealth Services Inc., which is affiliated with Raymond James' independent broker-dealer.
Wells Fargo & Co. also is mulling Prudential's product revision.
“Those are meaningful changes that they're making to this product, based on what's going on in the industry,” said Bernie Gacona, director of annuities.
However, even those who have decided to continue doing business with Prudential said that the trend is downhill for variable annuities.
“We're taking a look at indexed annuities with roll-ups and living benefits, and a different cost structure,” said Kraig Lange, manager of the insurance department at Stifel Nicolaus & Co. Inc.
Higher fees for fewer benefits in the VA business are “a continuation of an industry trend line, and nobody is happy to see it go down that way,” he said.
“Whenever a benefit changes, we need to evaluate the relative value versus the other products, and that's under way now,” said Merry Mosbacher, a principal in the insurance marketing unit of Edward Jones.
There is no plan to remove the insurer from the platform, she said.
"ALL-IN FEES'
Rather than look at a particular component of a variable annuity's cost, distributors should weigh expenses against what clients get in exchange, said Bruce Ferris, vice president of sales and distribution at Prudential Annuities.
“What matters are the all-in fees you pay for the benefits,” he said.
Attempts to stem VA volume at the Big Three — Jackson National Life Insurance Co., MetLife Inc. and Prudential — have continued for well over a year as the insurers fret about taking on long-dated liabilities amid lengthy periods of low interest rates. However, advisers already are gravitating toward insurers that they find more attractive.
Raymond James advisers had muted reaction to the Prudential development.
“For the most part, advisers understand what we're doing and why we're doing it,” Mr. Stolz said.
Prudential once made up 15% to 20% of the broker-dealer's VA business but is down to about 7%, he said.
Jackson National continues to be a big seller, but Lincoln National Corp. and The Ohio National Life Insurance Co. have climbed into the top three at Raymond James, Mr. Stolz said.
dmercado@investmentnews.com Twitter: @darla_mercado
