The other day I wrote about how the impending DOL fiduciary rule would likely change the face of the variable annuity industry. According to Investment News, independent broker-dealer LPL Financial expects to grow their fee-based variable annuity platform if the rule goes through. In Greg Iacurci’s article, “LPL eyes more fee-based variable annuities as fiduciary rule looms,” he says that the company expects more advisory based variable annuity distribution in the future. LPL already has a strong fee-based variable annuity platform, but expects that it will increase significantly if/when the DOL fiduciary rule makes it much harder for advisors to offer commission-based variable annuities. The chairman and chief executive of LPL Financial said that the company was an innovator in the fee-based variable annuity business years ago and that they will go back to running more of that business if the rule passes.
Traditional variable annuity products compensate advisors with commission, but the DOL rule is going to make it harder for advisors to defend the amount of commission they plan to receive. Fee-based variable annuities pay advisors a fee based upon the assets of the product. Research from Morningstar found that only $4 billion of the $99 billion in variable annuity sales during the first three quarters of last year were for fee-based products. Fee-based variable annuities accounted for 3.8% of total variable annuity sales in 2014. The Investment News article includes an eye-opening visual of the difference between fee-based and commission-based variable annuity product sales.
LPL Financial and many others in the annuity industry believe that fee-based variable annuities will skyrocket in popularity if the DOL fiduciary rule goes through. This rule raises the standards that brokers and advisors have to adhere to when offering investment advice. Commission-based variable annuities aren’t banned, but those selling them have to comply with new best interest contract exemption (BICE) standards. Advisors charging level fees for their variable annuities rather than commission are exempt from this BICE compliance. Some people in the industry say that the BICE compliance is unworkable and predict that there will be a shift to advisory non-commissionable variable annuity products. LPL Financial does a lot of annuity business, something that won’t change even if the DOL fiduciary rule takes effect. We should know the final rule by sometime in April. LPL’s variable annuity commissions were flat from the third quarter to the fourth quarter last year, but were down 3.6% when compared with the fourth quarter of 2014. There has already been some impact from advisors switching to advisory variable annuities from commissionable products. Once the DOL releases their final fiduciary rule in the next month or two, companies like LPL Financial might be offering many more fee-based variable annuities to avoid following the BICE compliance necessary for commissioned products.