Can the folks who market variable annuities — and have gotten slammed by regulators for how they line their pockets in the process — force the industry that “manufactures” the products to roll back prices and simplify mind-boggling fee schedules? Can they, in fact, kick-start the industry reforms that regulators and consumer groups have been demanding for years?
Raymond James is quietly trying to do just that. In an internal memo to advisors in August, which was forwarded to Registered Rep., the firm outlined plans to cut fees and commissions, and remove some conflicts of interest in VA marketing.
But it can't do it alone. So the St. Petersburg, Fla.-based broker/dealer has notified insurers that if they wish to sell on its platform they must adhere to new design requirements. Come May, they must provide a single core product with one or two commission schedules (regardless of additional benefits and riders) and to cap upfront commissions, now as high as 8 percent, at 5 percent. Trails must be capped at 50 basis points. Surrender charge schedules have to be limited to seven years or less and total commissions paid over the first seven years need to be capped at 7 percent.
“We think the variable annuity is a valuable investment choice that is uniquely appropriate for some people,” explains Dick Averitt, CEO and chairman of Raymond James Financial Services, which runs a network of 3,680 insurance-licensed financial advisors. “But it was developing a black cloud.”
| Average fees for VA funds invested in US equities: | Average Policy Expenses: | ||||
|---|---|---|---|---|---|
| Fund Expense | 0.97% | Annual Contract Charge | $36 | ||
| Insurance Expense | 1.38 | Max Surrender Charge | 6.59% | ||
| * M&E Risk | 1.23 | Typical Surrender Period | 5 to 7 years (Dalbar) | ||
| * Administrative | 0.15 | ||||
| Total Expense Ratio | 2.35 | Upfront Load | 5% | ||
| Source: Morningstar | |||||
In the short run, it will cost Raymond James and reps millions of dollars in commissions, says Averitt. “But in the long run, we believe we may get more business,” he says. In addition to cutting costs for investors, the new program is intended to reduce incentives for brokers to put clients into one variable annuity product over another, or to add particular riders based solely on the commission rates the broker earns. (Raymond James still collects revenue-sharing payments from 15 insurance carriers, something it discloses on its Web site.)
What's in It for Me?
While the reforms may win Raymond James points with consumers and ease regulators' concerns, all brokers have not, for obvious reasons, embraced them. In an unsigned note sent to Registered Rep.'s offices, one disgruntled Raymond James advisor wrote: “RJFS is making a move that flies in the face of independence.” The writer said the measure will cut his compensation by around 40 percent.
“We'll be at a disadvantage to other brokers who don't have these restrictions,” says another advisor.
But not everyone is unhappy with the VA plan. Tom Hamlin, a big VA producer for Raymond James in Portland, Ore., says he already uses the leanest VAs. “I believe it's going to be a win-win,” he says.
In any case, Raymond James is merely capping its VA commissions at the industry average, according to Morningstar: 5 percent upfront. That still makes VAs among the most expensive investment products on the market. The commissions (paid upfront by the insurance company, not the client) are wrapped up in outsized expense ratios — typically around 2.35 percent for a VA using domestic equity funds. On top of that, there's the annual contract charge, a surrender charge of up to 15 percent and fees for death and living benefit riders. (See table.)
All of the major carriers have agreed to give the firm's plan a shot, says Averitt. But none has yet submitted a design proposal. Insurance carriers on the firm's revenue-sharing list declined to comment or didn't return calls seeking comment.
It's a bit of a gamble for Raymond James. The company does about $3 billion in VA business a year, making it a small player in the market. It's asking insurers to design a product that other b/ds may not want. Averitt says one carrier complained it would cost $1 million to design the new product.
Still, industry analysts say that other b/ds will ultimately follow Raymond James' lead. “I don't think there's a firm that has not been discussing it,” says Louis Harvey, president of Boston-based consulting firm Dalbar.
Indeed, there are signs that VA marketing fees may come down across the industry. In September, Fidelity Investments introduced two VAs with reduced fees and suspended surrender charges. And Merrill Lynch has capped upfront commissions at 5.25 percent, according to a notice on its Web site. Unlike Raymond James, though, Merrill hasn't limited surrender periods or total commissions. Nor does it require benefits and riders to be commission-free. Merrill did not return calls seeking additional comment.
The SEC also declined to discuss Raymond James' initiative. But Dalbar's Harvey says that he doubts measures like Raymond James' will be enough to make the VA marketing probe go away entirely. “Fortunately or unfortunately, there is a stigma around variable annuities in the regulatory community and that's not new,” he says.
