In a new article for Think Advisor, William H. Byrnes and Robert Bloink discussed the expected 180 in the variable annuity industry. “After the DOL Fiduciary Rule, Enter the Fee-Based Variable Annuity,” says that many insurance companies are already working on fee-based VAs and scrapping the commission-based variety. The DOL rule says that variable annuity products can only be sold when they are in the best interest of the client purchasing them. It also says that any commissions earned on these products must be “reasonable”. Unfortunately for advisors, it isn’t easy to determine what the DOL considers reasonable, so many advisors and insurance companies are veering away from commission-based variable annuities altogether.
This change in the variable annuity industry may end up being the pick me up that the industry needed after a few years of lackluster sales. There has been concern in the past that advisors recommended variable annuity products because of the high commissions they would receive, rather than the product being in the best interest of the client. As long as advisors can prove that the products are in the client’s best interest and that their commissions are reasonable, they can still sell these products. But the increased work associated with filing a Best Interest Contract Exemption coupled with the fiduciary responsibility that the insurance companies and broker-dealers have to contend with are making many advisors look into fee-based variable annuities. Instead of charging a commission, a fee-based variable annuity charges clients an asset-based fee that is level and ongoing.
New fee-based variable annuities offer benefits like shorter surrender periods, lower overall fees and fewer penalties. This makes fee-based variable annuities more valuable to clients as well as advisors and advisory firms. Clients appreciate lower surrender periods because they are not locked into their annuity for as long of a time frame. Fees have to be better disclosed due to the fiduciary rule, which is also beneficial to consumers. One of the most recently introduced fee-based variable annuities has surrender charges of 2% the first two years and 1% during the third and final year that surrender charges are included. The charges are applied only to 10% of the purchase payments or to the contract’s earnings. Clients can also benefit from different death benefit and living benefit options included with new fee-based variable annuities.
The trend of fee-based variable annuities is probably going to stay around for awhile. There are also going to be many fee-based VAs with low surrender charges and even no surrender charges at all. As these products become more desirable to consumers, variable annuity sales might start to increase again and regain some of their past dominance. Thanks to the new DOL fiduciary guidelines, fee-based variable annuities with low or no surrender charges will be the future of the variable annuity industry. This benefits consumers and will also be good for insurance companies, advisory firms, and advisors in the long run.
Written by Rachel Summit