LPL expanding menu of fee-based VAs

LPL Financial soon will unveil to its representatives an expanded menu of fee-based VAs — a product that has proved unpopular among brokers so far. The nation's largest independent broker-dealer expects to offer its 12,000 brokers access to fee-based VAs through a handful of major insurers. Currently, representatives who use its platform have access to just one fee-based variable annuity, a product from Prudential Financial Inc. Among the insurers with which LPL is talking is Allianz Life Insurance Company of North America, according to industry sources. Laurie Bauer, a spokeswoman for Allianz, declined to comment. New York Life Insurance Co., which is preparing to roll out a fee-based single-premium immediate annuity, also has been working with “a couple of major national broker-dealer platforms” to offer the product, confirmed Matt Grove, vice president for guaranteed lifetime income in New York Life's retirement income security group. He declined to identify the broker-dealers involved. Expanding its fee-based offerings gives LPL a way to broaden its appeal to dually registered advisers who charge clients fees based on their total assets instead of earning a commission on products that they sell. “For people who are primarily fee-only, it fits into your business plan, where you're being paid for management,” said Austin A. Frye, president and founder of Frye Financial Center and an adviser with LPL. “It just fits into the overall business of working with the client and charging a fee over many years rather than doing something upfront.” An expanded fee-based menu suggests that LPL is embracing a more “holistic” adviser business model, rather than one that focuses just on transactional business, said Joan E. Boros, who is of counsel at Jorden Burt LLP. “The advisory channel is a natural channel to sell retirement products, but it needs to be made compatible with the adviser's way of operating,” said Ms. Boros, who was approached in the fall by two insurers in discussions with LPL about offering fee-based VAs. The move could also be LPL's way of luring more wirehouse reps into its fold, said Kathy Boyle, president of Chapin Hill Advisors Inc. and an adviser with LPL. “They want to bring on teams from big wirehouses, and a lot of them will have annuities on the books,” she said. “It's a way of offering another arrow in their quiver and supporting advisers from wirehouses who want to move as much of their business to a fee-based platform as possible.” Thus far, LPL has been tight-lipped about its plans. “LPL Financial is always exploring ways to enhance the product offerings that advisers can access on behalf of its clients,” company spokesman Michael Herley said last week. He declined to comment further. Unlike traditional VAs, fee-based and fee-only VAs don't come with a large upfront commission. Instead, they may pay a low trail commission or none. Financial advisers who work with these products collect a flat fee for managing the assets. Of course, it remains to be seen whether LPL will be successful in getting its brokers to embrace fee-based VAs. Traditional VAs generated $490.2 million in commission revenue at LPL during the first nine months of 2010, accounting for 41% of the firm's total commission revenue. Sales of fee-based VAs historically have paled in comparison with their traditional VA counterparts, especially when the two are offered alongside each other. For example, Commonwealth Financial Network sold $7 million in fee-based VAs last year, accounting for less than 1% of the firm's $800 million in total VA sales. At Raymond James, 2010 premiums on no-load VAs accounted for just $20 million of $1.8 billion in overall VA sales. “There have been products like this, and they just haven't taken off,” said Andrew Kligerman, a life insurance analyst with UBS Investment Bank. “I think it can be structured in a profitable way, but are the brokers willing to forgo the big upfront commission that they're used to seeing?” Commissions aren't the only reason that brokers shun fee-based VAs. In certain cases, such annuities can wind up costing investors as much — if not more — than traditional VAs, said Scott Stolz, president of the insurance group at Raymond James & Associates. “From the adviser's point of view, it's no cheaper than a C-share variable annuity, and in some cases, it's more expensive,” he said. “Even if you had a product that costs 65 basis points, by the time you throw in the fee for the adviser, the client is paying just as much as they would in the C share.” Broker-dealers have also been reluctant to make a big push into fee-based VAs, in large part because of the expense involved in updating their fee- and performance-reporting programs to accommodate the product, Mr. Stolz said. Brokers themselves are also loath to take on the additional paperwork associated with fee-based accounts. An adviser is using a VA on the fee-based platform must complete an extra layer of formalities in order to assess a so-called wrap fee on it. “Some advisers like the transparency, but the fact is that it's one more step. It's a contract that has to be signed, allowing the adviser to charge the fee [on the fee-based account],” said Ethan F. Young, annuity research manager at Commonwealth. As it is, traditional VAs are notorious for requiring lots of paperwork. Reaction from LPL's advisers to the prospect of an expanded menu of fee-based VAs was mixed. “I would absolutely use it if it were available,” said Stephen Lovell, an adviser with Forsyth Heritage, an LPL affiliate. “Clients don't want surrender periods; they don't want penalties.” Doug Flynn, an adviser with Flynn Zito Capital Management LLC, isn't sure that fee-based VAs will find much of a following among LPL's reps. “Lots of these fee-only people won't touch annuities,” he said. E-mail Darla Mercado at dmercado@investmentnews.com.