Fee-based annuities have been slow to catch on. Sales have hovered at around 4 percent of variable annuity (VA) sales for the last couple of years, according to Morningstar.

But with the Department of Labor’s (DOL) fiduciary duty rule issued in April 2016, fee-based VAs and fixed indexed annuities (FIAs) got a shot in the arm.

Jackson National Life (Denver), the nation’s largest manufacturer of variable annuities, introduced its first-ever fee-based variable annuity product, Perspective Advisory, in September 2016.

In early January 2017, Pacific Life Insurance Company announced that it had launched Pacific Odyssey, the company’s fee-based VA, at LPL Financial within LPL’s Strategic Asset Management (SAM) and Strategic Wealth Management platforms.

“Interest is accelerating [in fee-based annuities since DOL’s fiduciary duty rule],” Symetra Executive Vice President Richard LaVoice, told BISA Magazine in September. Distributors are working hard to figure out how to comply with the new rule, which favors levelized compensation for sales representatives (i.e., fee-based solutions), and many manufacturers are looking to beef up their offerings. For certain firms, Vas will be the first fee-based priority, but eventually manufacturing could encompass both fixed and variable annuities, LaVoice said.

Impact of the election
But then came the 2016 presidential election and the ascent of an apparently regulation-averse Trump administration. (At the time of this writing, Andrew Puzder, a critic of tighter regulation, had been nominated as Labor Secretary by President-elect Donald Trump and was awaiting Senate confirmation; he has since withdrawn his nomination.) If the DOL’s new rule is postponed, or repealed, will the wind be shaken out of the sails of the fee-based annuity?

BISA Magazine checked in again with LaVoice in early January. “I would say interest [in fee-based annuities] is slowly accelerating, with at least a couple of major firms looking to go advisory-only for qualified business,” he said.

Symetra, for its part, will have a fee-based indexed (i.e., fixed) annuity on the market by early second quarter 2017, LaVoice told us. That said, “There remains some uncertainty after the election, and it is unclear whether or not our partners will modify their strategies if the fiduciary rule is impacted.”

Why has it taken so long (i.e., until DOL) for the insurance industry to develop a fee-based annuity? “The old ways were entrenched, and nothing was broken,” LaVoice explained, thus, there was no need to change the model. Meanwhile, a few firms tried fee-based VAs, and they didn’t really catch on, so that discouraged other manufacturers from trying. (Apparently, advisors did not really embrace fee-based annuities with a 1 percent annual fee when products with 5 percent commissions—albeit one-time—were still viable.)

Then there were technical challenges, like getting the fee out (without it being considered a distribution, which would be taxable), but many of these were “manageable” in LaVoice’s view. (For example, the client could just write a check instead of paying the fee via a distribution, avoiding the taxable event.)

A surrender charge
The carriers still need some kind of surrender charge, says LaVoice. Indexed annuities are not like bond funds where the customer assumes all the risk. “With our [i.e., Symetra’s new fee-based] product, there is no risk to the client.” Their gains are “trapped.” Their principal is safe, and so on. The insurance company takes the risk, investing seven or eight years out, which is a big commitment. “We need some protection” for that, comments LaVoice. That is why he anticipates that some kind of surrender charge will be “baked in” to fee-based annuities looking ahead. 

For some client firms (e.g., broker/dealers), this could be “eye-opening,” he concedes, but in the real world, insurance underwriters need some “protection against customers disintermediating early.” As for the consumer (i.e., the end customer), “they will understand that these are long-term investment vehicles and will understand why and how that product is set up this way,” LaVoice adds.

What does this mean for sales reps? They may have to evolve. Indeed, fee-based annuities might offer an opportunity for banks “to get to a different financial advisor than they have today, a fee-based (only) advisor,” says LaVoice. (Of course, on the other side, advisors may simply leave the industry, or retire, if fee-based products become predominant.)

It is the Symetra EVP’s view that most firms will offer both versions: fee-based and commission-based annuities. Asked if that doesn’t make things too complicated in the real world—given potentially different compliance regimes and other factors—he answers, “It is a challenge, but I feel we can do both.”

Indeed, half of the indexed annuities sold in the bank channel could be fee-based five years hence, opines LaVoice, and in the variable annuity world, the fee-based share could be higher—perhaps 60 percent—he speculates.

Growing Sector
According to Cerulli Associates, a research and consulting firm, interest in fee-based variable annuity (VA) products has been “slowly growing” within the industry over the past few years because most insurers and distributors believe they will be needed to comply with DOL’s fiduciary duty rule.

“Adoption of the fee-based model has been mostly overlooked by the industry,” said Donnie Ethier, associate director at Cerulli. “However, what was once considered an opportunity is now a necessity.”

In September 2016, Jackson National Life (Denver), the nation’s largest manufacturer of variable annuities, introduced its first-ever fee-based variable annuity product, Perspective Advisory.

“Jackson has seen increased interest in the fee-based space,” Bill Burrow, national sales director, investment only & advisory variable annuities, Jackson National Life Distributors, told us in mid-January.

“Following ongoing conversations with our broker/dealer partners, we think the legal and compliance costs of managing a commission-based platform under the DOL fiduciary rules will result in even more demand for fee-based variable annuity products,” added Burrow.

More recently, on Jan. 23, 2017, Jackson released Elite Access (EA) Advisory, its first fee-based investment only variable annuity. The product has a contract charge of $10 per month, with no mortality, expense and administration charge. It has a relatively short surrender-charge period: A three-year withdrawal charge schedule of 2 percent, 2 percent, 1 percent, and 0 percent thereafter.

The product was developed prior to the release of the fiduciary rules, said Burrow, adding that the “real trend is that under the fiduciary standard, advisors will be more compelled to talk to their clients about opportunities to receive guaranteed income for life.”

Asked how fee-based annuities may be impacted by the new Trump administration (with a possible rollback of DOL), Burrow answered, “While we can’t comment on possible changes that may be enacted by the Trump Administration in the coming months, Jackson remains on track to comply with the current DOL guidelines by the April 10, 2017 applicability date.”

The Pacific Odyssey product (cited in the main article) has a mortality and expense and administrative charge of 0.3 percent annually, and no withdrawal charges. That is, there are no front-end loads or back-end withdrawal charges, allowing clients full access to their account values anytime in the form of partial or lump-sum withdrawals.

Warren Posner, LPL Financial senior vice president of product management, said, “While LPL Financial continues to focus on brokerage variable annuity solutions, and believes they are and will continue to be an important and relevant solution to meet retirement planning needs in a post-DOL environment, we are excited to expand our existing fee-based variable annuity lineup with the competitive features offered by the Pacific Odyssey product to meet a growing interest and demand in that space.”

Not all are jumping on this wagon, however. Fee-based annuities don’t appear to be part of Athene USA’s product development plans. “There has been a lot of talk of fee-based products in connection with the DOL Rule, but we have not seen demand for it,” Athene USA CEO Grant Kvalheim said.