Remaining annuity features are retained (e.g. tax deferral and access to annuitization and other guarantees)

Transcription

1 5/16/2017

2 Key difference is the advisor compensation model Commission-based Annuity Advisor Compensation is paid by the product provider (insurer). Compensation structures may vary (upfront/hybrid/level) Product design and fee align to recoup cost of commissions to the insurer Fee-based Annuity Contract holder pays advisor compensation directly Advisor assesses fees for services: no advisor sales commission Level asset-based fee Remaining annuity features are retained (e.g. tax deferral and access to annuitization and other guarantees) 2

3 Fee-based annuities are not new Fee-based sales have centered on low cost, accumulation in non-qualified accounts Most VA sales have included income riders in qualified accounts Fee-Based VA sales = ~ 4% of total VA sales over the past few years Over 20 insurers sell these through an I-share class 3

4 If you look at markets globally, you're fundamentally seeing a shift to low-cost investments, to fee-based advice (and) to goal-based portfolios, and that s not going away. Kunal Kapoor, CEO, Morningstar Fee-Based Advisers manage over $18 Trillion in AUM: Continued fee-based growth into foreseeable future Significant under penetration of insurance products Firms offering insurance services have increased due to: Client demand for broader services Downward pressure on investment advisory fees Influx of advisers gravitating towards fee-based models 4

5 Moving from Commission-Based model to Fee-Based model may entail: Reducing client base down to the most affluent clients Deepening these relationships Moving from a sales-based to a service- or time-based business model Gaining confidence in communicating a holistic, advice based value proposition Source: New Game, New Rules, New Reality: The Economics of Growing Distribution, LIMRA International, MOSS-ADAMS LLP 5

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7 More than $18 trillion in assets across existing channels 7

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9 Carriers have reported positive feedback on product, fund-line-up, tools Advisor preference to provide clients more investment choices and flexibility Despite this, sales remain low Advisors haven't traditionally focused on insurance solutions Advice cycle for fee-based advisers needs to be ongoing instead of just upfront (helping asset mix on daily / quarterly basis) DOL pushes some distributors in that direction Objections historically include: Complexity Too costly Lack of investment optionality Lack of integration with technology platforms Billing difficulties where fee cannot be taken from the contract 9

10 Most Fee-Based VA contracts include optional living benefit riders Fewer Fee-Based VA contracts include optional death benefit riders Minimum Purchase: Non-Qualified: $5k to $50k Qualified: $1k to $50k Maximum Issue Age Details: Typically range from age 75 to 95 Base Contract Expense has historically hovered from 25bps to 75bps Fee-Based VA Carriers include: Allianz Ameritas AXA Brighthouse (MetLife) Fidelity Global Atlantic Great-West Jackson National Jefferson National Lincoln Financial Minnesota Life Mutual of America Nationwide Northwestern Mutual Ohio National Pacific Life Prudential Security Benefit Symetra TIAA-CREF Transamerica 10

11 Carriers built/building the placeholder product portfolio to respond positively Insurers usually file between fee-based variable annuities in any given year. But as of February 2017, there were 17 product contracts filed Nationwide completed acquisition of Jefferson National in March 2017 Fee-Based FIAs launched since 2016 Allianz, Great American, Lincoln, Midland National, Pacific Life, Symetra, Voya 11

12 What does the channel/advisor require? Differentiate from current products or a fee-based analog? Considerations: VA Surrender Charges (occasionally) Subaccounts M&E&A charges Fund Fees (Expense/12b-1) Optional Riders Minimum Premiums FIA Surrender Charges (standard) / MVA Indices 12

13 How do assumptions change from comparable commissionable products? VA FIA Average Size Lapses Expenses Income Activation GLWB Cost / Fee Drag 13

14 The annual fee is determined through the Broker Dealer and the Registered Representative. Sources ACH/Non-Annuity Advisory Accounts/Brokerage Cash Account/Contract VA Outside the Annuity with some exceptions FIA Currently Outside the Annuity Fee Source Qualified Non-Qualified Pros Cons Inside Product Generally Not Taxable Treated as normal distribution Fee Directly from Annuity; Does Not Impact Other Investments Outside Product Not a Taxable Event No Taxable Event Tax Complexity; Impact Product? Need to deplete / rebalance other accounts Level Commission Implicitly in Product No Taxable Event Impact on value? 14

15 Fees generally taken from the product. Observations from International Fee-Based Products Impact of Fees on the Product Advisor Charge Types Paid As Payee Fees reduce investments Fees reduce benefits proportionately (if greater than protected amount) Initial Ad hoc Ongoing Transaction Initiated % of AUM Dollar-based % of contributions Tiered % fee across investments Capacity to index dollar-based charges (up to 7% or using CPI) Drawdown sequence across investments Option to put x% of contributions in a cash sleeve where adviser fees can be deducted from Option to pay one or multiple advisers Can change adviser and/or modify adviser charge 15

16 VA? FIA? Payout? Fixed? 16

17 Can experience be leveraged from similar existing products? Increasing importance of expert judgement on policyholder behavior Understand customer/advisor needs and behavior Governance Leverage cross-functional governance processes to ensure adequate controls and accuracy of modeling and analysis Models in compliance with control standards and built with oversight Assumptions, modeling framework, and outputs vetted and approved by appropriate committees Need to develop internal support for central estimate and tail assumptions, along with related correlations. Sensitivities Historic, imperfect data is even less of an indicator of the future (central estimate or in the tail) 17

18 Profitability: Fee-based annuity has less investment upfront (lower capital strain) and lower DAC. Returns may be priced roughly equivalent to commissionable product Risk: No commission recovery risk If leaner benefits, less guarantee risk Risk drivers are very similar Perhaps no credible direct experience for setting assumptions Should assumptions be more efficient? 18

19 Understanding of advisory platform and workflow is necessary Proprietary vs. Vendor Integration of annuities within platforms is not fully developed Area of improvement Data feeds leverage existing models Billing and Performance 3 rd party, BD proprietary, in-house New Data Requirements (new channels, indicators, etc.)? Differentiation from commissionable product on admin systems, reports and processes 19

20 Understand the advisory platform and workflow (proposal and submission) for each distribution partner Understand how servicing (e.g. transfers and withdrawals) interacts with the advisory platform reporting Know the limitations of advisory platform reporting Train salesforce on advisory platform reporting and how the RIA executes its business (not just product training) IAR Licensing Additional licensing may be needed. Consider state variations 20

21 Legal New contracts with 3 rd parties Review of selling agreements Knowledge of distribution models External Communications Varied audiences and purpose Other areas requiring consideration? 21

22 Low fees, greater accumulation potential Maximize value of tax deferral Investment flexibility Liquidity Simple product design allows for build out of value add tools Variable Annuity Calculator, Tax-Deferral Calculator, Retirement Income Comparison Calculator, and Application Wizard Jefferson National website has an extensive Knowledge Bank that contains 22 Advisor Insights pieces, 18 Marketing videos, 5 whitepapers, 35 external in the news documents and 32 additional case studies and articles 22

23 Overcome Negative Advisor Bias Justify The Cost Structure Enable Advisor Compensation Adjust for Dual Registration Refine Segmentation 23

24 New Markets Legislation Investment at Retail Firms Reporting Drive design to meet advisory needs Investment at 3 rd Party Firms Integration of annuity into existing reporting of other asset classes Inclusion of annuities and guaranteed income within financial planning software Annuity Value vs Advisor Perception (Cost/Benefits) Related Impact to Commissionable Annuity Designs 24