Here Come New No-Load Insurance Policies
July 5, 2018 by Ben Mattlin
David Lau, founder and CEO of DPL Financial Partners in Louisville, Ky., describes his mission as a “kind of personal crusade.” He’s talking about no-load and low-load insurance products—annuities and insurance policies that are commission-free and, as such, well suited to fee-only advisors and other fiduciaries. If only they were better understood, he laments.
Before launching DPL earlier this year, Lau was the chief operating officer at Jefferson National, where he spearheaded its introduction of no-load variable annuities (VAs). His new firm works with two types of clients—the insurance carriers he aids in bringing these products to market and fee-only advisors. He helps the latter group better understand the opportunities inherent in these products. Why? “They’re really a game changer in the industry,” he avows.
Lau’s enthusiasm is based on several facts.
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First, the introduction of fiduciary regulations has put pressure on products with commissions—or, to put it another way, it has sparked interest in fee-only products and practices, in which clients know up front exactly how much they’re paying and what they’re paying for.
Second, since other types of financial products are sold without commissions, Lau asks why insurance products shouldn’t follow suit. “Insurance is the last bastion of commission-driven distribution in financial services,” he says. But he thinks that’s about to change.
The problem, he acknowledges, is that RIAs and other fee-based planners can be skittish about recommending insurance. Historically, insurance meant commissions. “Legally, they can’t take them if they don’t have a broker-dealer through which to do that,” explains Lau.
Commissions add to a product’s costs. “Building a commission into the pricing of a product causes the product to become more expensive and complex,” Lau says. “That goes against the fiduciary obligation. [Fee-based advisors] can’t recommend a product that’s expensive and really doesn’t provide good consumer value.”
Lower Expenses
Commission-free products, the argument goes, have fewer built-in expenses, which means that a higher percentage of a client’s premium goes to work for the client right away. The difference can be dramatic. For instance, Lau says, a typical VA as measured by Morningstar costs 135 basis points, whereas the no-load equivalent goes for just 20 to 30 basis points. “That reduces the price of the product by about 85%,” he says.
Some insurers also have tried the same strategy as Lau. “Of course, all insurance policies have charges. But by eliminating much of the up-front expense, fee-based or no-load insurance policies can cost less,” says Thomas Fink Jr., a vice president at Lincoln, Neb.-based Ameritas Life Insurance Corp., a leading provider of no-load and low-load policies. “This allows more of each dollar to go to work right from the start. Plus, if there are no surrender or withdrawal charges, it helps the client maintain liquidity.”
Fink is bullish about the market for these products. “Given the trending growth in the RIA market, the accessibility of no-load or fee-based products is likely to expand, in my opinion, as the demand grows,” he says.
Hurdles Ahead
Others are more circumspect. “At this point, the products are mostly going nowhere,” says Michael Kitces, partner and director of research at Pinnacle Advisory Group, a private wealth management firm in Columbia, Md., and publisher of the financial-planning blog Nerd’s Eye View. “Until the products actually fit into RIA technology systems for managing client assets, the adoption will continue to be slow. Current annuity company systems simply aren’t built to be scalable within an RIA with a large number of clients.”
Such perceptions are a considerable challenge. Part of Lau’s mission is to help insurance carriers better understand the no-load market and, he says, “build product and systems to support the fee-only business.”
But it’s a two-way street. Fee-only advisors also need to “understand the best products for their clients,” says Lau, adding that the biggest problem is simply getting advisors to re-evaluate these products. “Many are convinced that [insurance vehicles are] commission-driven and expensive, just because they have been for so long,” he says. Yet he remains optimistic. “As the fiduciary world awakens to the opportunities of no-load products, they’re going to gain traction quickly. … These products open up a world of possibilities for fiduciaries to expand their practices and keep clients under their roofs, without having to refer them to an insurance broker.”
No-Load Annuities Vs. No-Load Life Insurance
The excitement about annuities being sold for a fee hasn’t spread to regular life insurance yet, Lau acknowledges. “Only a handful of carriers have launched no-load life insurance so far,” he says.
But that may change. Nationwide Advisory Solutions, the Louisville company created when the insurer acquired Lau’s old firm Jefferson National, now sees “a large market opportunity for no-load life insurance products,” says Craig Hawley, head of Nationwide Advisory Solutions.
Hawley asserts that no-load life insurance will gain popularity as more fee-based advisors become comfortable with fee-based annuities, which was already a strong suit for Jefferson. Nationwide’s Monument Advisor variable annuity, a flat-fee investment-only product, accounts for more than $5 billion in assets under management and is represented by more than 5,000 advisors who otherwise don’t deal in VAs. “Our growth really took off last year, topping more than $1 billion in sales in 2017,” says Hawley. “Even with very ambitious goals for 2018, we are already 20% ahead of schedule.”
n addition, Nationwide is increasing its presence in this space. It plans to release a variety of fee-based VAs with living benefits (such as lifetime income guarantees), single premium immediate annuities and other products. “We’re focused on expanding our offerings for all stages of the financial life cycle—from accumulation through income and legacy planning,” says Hawley. “Research indicates strong demand for new, properly structured and properly priced annuity products targeting the RIA and fee-based advisor market. These can help solve guaranteed income and longevity needs, while de-risking the portfolio.”
Not All No-Loads Are The Same
But savvy advisors should realize that not all products billed as “no-load” or “fee-based” are alike. Fink, at Ameritas, cautions advisors to “examine all of the charges applicable to a policy, not just the product expense. For example, these products may include 12b-1 [an annual marketing or distribution fee], fund facilitation or other fees charged on the investment option platform.”
The fiduciary standard, of course, requires full transparency of the fee structure. Within that, there is a degree of latitude. “Compensation methods vary among investment advisor firms,” says Fink. “Advisors may charge a retainer, a flat planning fee, a subscription fee, an asset-based fee or a combination of these.” But, he adds, “the fiduciary responsibilities of the advisor would require the advisor to be vigilant and not accept compensation from any other source.”
There are other factors that may distinguish one purported no-load product from another. “It’s so important for advisors to understand that many companies are taking an existing insurance product, stripping out the commission and calling it fee-based,” says Nationwide’s Hawley. They are not “investing the time and the resources to truly understand the mind set of RIAs and fee-based advisors, to understand their challenges, to understand what matters most, and then re-engineer a solution from the ground up to meet their unique needs. It has to be simple, it has to be transparent, it has to offer more choice, and it has to create real value for their clients.”
In short, a true commission-free product must fit the way fee-based advisors work on every level. “It starts with allowing advisors to maintain control of the client relationship and their assets,” Hawley notes. The product must support the way advisors manage client portfolios, in part by integrating with their technology and operating systems “to provide an end-to-end advisor experience that’s embedded directly into their work stations and the platforms they’re already using,” he says.
The Model Makes Sense
Another leading provider of no-load products is Charlotte, N.C.-based TIAA-CREF Life Insurance Co. Dennis Rupp, director of insurance wholesaling there, explains the carrier’s devotion to this market: “Most advisors are moving to fee-based or fee-only structures. As such, advisors are looking for products to recommend that don’t have the conflicts that might come with commission-based products. Fee-only or fee-based products align with how most financial advisors work with their other lines of business, so the model makes sense.”
Though TIAA’s no-load and low-load insurance products are already available in all 50 states, Rupp expects that business to keep expanding. After all, he points out, these products can be “an important part of a comprehensive financial plan. As fee-based and fee-only advisors continue to expand their offerings, this life [insurance] and annuity business will continue to grow. In order to compete and add value, advisors are moving toward holistic planning, and life insurance and annuities can help address holistic planning needs.”
This may sound like a natural match, an advisory slam dunk. So why isn’t everybody on board yet? “The challenge in the marketplace is twofold,” stresses Lau. “Getting the advisors to recognize and be open to the value of fee-only, no-load products, and getting insurers to understand that there is actually a terrific market out there despite their lack of success in the past, which has been more about approach and delivery than lack of demand.”
Surely, if demand rises so will supply.
