Want to go RIA with annuities? Here’s where to start

As more and more advisors consider breaking away to go independent, and with RIAs expected to control one-third of intermediary asset market shares, the question remains: what about those who have an annuity-based book of business?

For advisors who have grown their book of business through annuity-based sales, the fear of losing that revenue could make-or-break their decision to remain where they are, halting their independent aspirations. However, several experts say that might not be the case as annuities can still be kept in the books when making the transition.

Annuities and insurance products serve a purpose that other investments can't, says Adam Handler, vice president of product management at Axtella. “Having the backing of insurance allows for things like complete principal protection guarantees and riders and benefits that, otherwise, you'd have to try and create with portfolios that would assume risk.”

While annuities are known for having a bit of risk in the past, that’s certainly changed over the last decade. Handler argues that even though the commissions associated with annuities can still be seen as expensive compared to other investment portfolios, the benefits that come with annuities make it a lot more feasible to have.

“Today, those commissions have come down significantly,” he said. “They're no longer 10 or 12 percent, you're seeing maybe a maximum of 7 percent. It’s still pretty high but when you look at the overall structure of what the annuity is doing for the client, if they have that need, then the purpose that it serves is welcome. I don't think they're really being seen as a negative anymore.”

Matt Radgowski, CEO of Halo Investing, a Chicago-based financial products platform, highlights a few things to know for advisors who are making the move to the independent space with annuities under their belts.

Along with picking a new custodian, technology, infrastructure and systems, advisors should ensure they’re still licensed to sell insurance. After that, there’s three options to decide, he says. One is they can decide to become an RIA and affiliate with an RIA friendly broker dealer. Radgowski noted that even though the client will receive the same experience, the advisor’s situation changes in terms of business operations.  

“They’re now affiliated with a third-party and there are requirements of maintaining that registration. To a large degree, it might be too close to what they might have had in the first place.”

This is the choice Howard Erman, president & founder of Erman Retirement Advisory, an Edelman firm, made when he decided to go independent.

“That's the only way to continue to do variable annuity business,” he wrote in an email. “It's a broker dealer product. The hard part is actually moving to 100 percent investment advisory. The insurance business goes away. We have now done that and no longer receive compensation for our insurance recommendations.”

The second and third options, Radgowski highlighted, are either selling their annuity book of business completely or affiliate their RIA with an outsource insurance desk (OID).

Chuck Failla, CEO and founder of Sovereign Financial Group, argues that “there is no reason to leave annuities behind anymore”. He credits David Lau of DPL Financial for creating a program called “Breakaway Accelerator”. Advisors who drop their Series 7 can transfer their annuities to DPL, then DPL acts as the broker dealer, allowing the advisor to keep their legacy annuities safe and away from the broker dealer they leave. 

“You can move your commission-based business and DPL will collect the commissions for you and then DPL will hire you as an “advisor” and pay you an advisory fee, which is a pretty neat concept,” Failla explains.

“This means you now have two options: convert those legacy annuities into fee-based annuities or utilize a system like the one they have a DPL, to park them at DPL safe and sound away from the predators at your old firm, and you still receive your advisory fee,” he added. “So there's no reason to leave them behind anymore. A few years ago, yes, you sometimes had to make that decision, but today, you do not.”