Nationwide to Acquire Annuities Company Jefferson National: Deal reflects impact of Labor Department’s new fiduciary rule
October 3, 2016 by Lisa Belifuss
Nationwide Mutual Insurance Co. is acquiring an annuities company that specializes in fee-based products, a sign of how new federal retirement-savings rules are starting to transform parts of the financial-services industry that rely on commission-paid agents.
The Columbus, Ohio, property-casualty and life-insurance company is buying Jefferson National Insurance Co., an issuer of annuities that are marketed to financial advisers who prefer fee-based compensation arrangements with their clients, rather than sales commissions.
The transaction is to be announced Wednesday. The companies, which aren’t disclosing the terms of the deal, said they expect to complete the transaction early next year.
The Labor Department’s new fiduciary rule, set to take effect in April, holds advisers who work with tax-advantaged retirement savings to a “fiduciary“ standard, meaning they must work in the best interest of their clients and generally avoid conflicts, which can come about with commissions. Previously, advisers were required to offer only “suitable” guidance, a less-rigorous standard.
The stiffer rules for sales to millions of Americans are expected to make life tougher for many different types of financial firms, including insurers that sell annuities. Many companies say they are still trying to figure out what changes they will have to make in their compliance departments, in addition to possible acquisitions or divestitures.
Some types of annuities are savings contracts for risk-averse consumers who otherwise might buy bank certificates of deposit. Another type, a variable annuity, provides a tax-advantaged way to invest in stock funds. Some versions provide guarantees of lifetime income streams.
The acquisition of Jefferson gives Nationwide access to a flat-fee variable-annuity platform that will help it adapt to the new regulation, Nationwide President Kirt Walker said in an interview. He said half of Nationwide’s business is affected by the new rule.
The deal will help “meet the needs of investors and retirement savers who want to do business in a fee-based adviser environment after implementation of the DOL fiduciary standard,” he said. “We’re giving everyone in the chain the option to choose.”
Jefferson, based in Louisville, Ky., has been a pioneer in fee-based versions of these products. Chief Executive Mitchell Caplan said in an interview that part of Jefferson’s focus on a fee-based model was an attempt to carve out space in a landscape dominated by bigger players.
Then, “we got to a point where we saw the power of this distribution and saw the [Labor Department] as a force emerging,” he said.
Mr. Caplan, a former CEO at E-Trade Financial Corp., said Jefferson was looking for a buyer for the past nine or 10 months, and sees in Nationwide a chance to attract more registered investment advisers, fee-based advisers and their clients.
Jefferson counts about 4,000 registered investment advisers on its Monument Adviser platform.
Firms must become compliant with the spirit of the new Labor Department rules by April 2017 and are required to be fully compliant by the start of 2018.
Under the new standard, to continue to earn such sales-based compensation with retirees in tax-advantaged accounts, advisers will generally need to have these clients sign a “best-interest contract” that includes detailed disclosure of the adviser’s compensation and obligations to the client.
Erin Sweeney, an attorney at Miller & Chevalier Chartered who represents parties in litigation regarding fiduciary obligations, said the new standard “essentially imposed requirements that [annuity sellers] could never accomplish.”
—Leslie Scism contributed to this article.
