Study: Variable annuity providers show some gains in tackling RIA market

Variable annuity has always been something of a four-letter word to RIAs.

But some recent research points to the idea that RIAs may have softened toward variable annuities – though whether RIAs were merely desperately seeking investment alternatives in the recession or will have a better relationship with this product category over time is up for debate.

“We’ve seen positive momentum. The interest is certainly up in the RIA space,” says John Danahy, senior vice president of sales for Fidelity Investments Life Insurance Co. But “I think this is going to be a long-term evolution.”

According to a survey of 1,569 financial advisors published last week by Cogent Research of Cambridge, Mass., the proportion of registered investment advisors selling VAs rose to 32% in 2008, up from 27% in 2007.

The rise in the use of VAs may reflect the market conditions in those times. Markets and major financial institutions [like Lehman and Bear Stearns] were blowing up in 2008 but after March of 2009, markets mostly stayed on the rise. In 2009, according to the study, the proportion of RIAs using variable annuities fell back to 27%.

Temporary tactical need?

“They fulfilled a temporary tactical need in 2008 with all the volatility,” says John Meunier, principal of Cogent Research. Its survey, called Advisor Brandscape, included both RIAs and registered reps.

The proportion of FAs overall using VAs was about 80% in 2009, according to the researchers.

Consistent with these findings, assets under management in variable annuities sold through RIAs was 1% of their total assets in 2007 but jumped to 6% in 2008. In 2009 the amount slid back down to 2%, according to the Cogent study.

The RIAs also project that VAs will fall back to 1% of their total assets in 2011. Advisors in general kept 7% of their client assets invested in variable annuities in 2007, 10% in 2008 and 8% in 2009, according to Cogent.

Overall, sales of annuities are rising, says Danielle Holland, spokeswoman for the Insured Retirement Institute in an e-mailed response [formerly the National Association for Variable Annuities].

“On a macro level, all of our data has shown that VA sales are increasing across the board, with year-to-year sales up by 3% as of the first quarter.”

Hard, actual dollars

She adds: “IRI data regarding sales is in hard, actual dollars. It appears from the below [in the e-mail] that this [Cogent] survey while of course credible, is subjective as it is measuring individual RIA attitudes toward VAs.”

The RIAs that show the greatest interest in variable annuities tend to be ones that emphasize wealth management – seeking tax deferrals and income guarantees, says Fidelity’s Danehy. [Interestingly, Danehy took the interview with RIAbiz in an ATM booth in downtown Boston on Friday afternoon as he made his way to an RIA’s office for a sales presentation].

The free market seems to be making some concessions to RIA’s long-time concerns about the variable annuities: high asset-based fees, steep commissions, complex insurance guarantees and a limited number of investment options.

Last year one big RIA even created an annuity-like firm. See: “Big RIA cuts annuity companies out of the deal with new retiree program”

Jefferson National’s Monument Advisor has been the number-one RIA sold VA for three consecutive years according to Morningstar. Sales of Jefferson National’s Flat-Fee VA are approximately $750 million to date, according to the company.

RIA-friendly annuities?

Deborah Newman, a spokeswoman for Jefferson National, says her company has experienced success by selling VAs with a flat-insurance fee of $20 per month, no matter how much clients invest, no commissions and no surrender fees, and a choice of 250 tax-deferred funds
— The most Five-Star and Four-Star Morningstar rated funds of any VA for the second consecutive year.

John Ritter, principal of Ritter Daniher Financial Advisory, which manages $195 million from Cincinnati, says that his firm generally steers clear of annuities for its clients. The exception is when a new client arrives with one and it doesn’t make sense economically to cash it in.

“We do a 1035 conversion and put them in a more cost-effective annuity,” he says. “We’ve been pretty happy with Jefferson National.”

A 1035 refers to a provision in the tax code, which allows for the direct transfer of accumulated funds in an annuity policy, without creating a taxable event.

Certain insurance companies appear to have gotten a disproportionate amount of the RIA business, according to Meredith Rice, Cogent senior research director

“RIAs leaned toward PacificLife, Prudential and Fidelity,” she says.

Spokespeople for PacificLife and John Hancock declined to comment for this article.

Blame the actuaries

Meunier says that some annuities have become less desirable since 2008 because life insurers realized that they were being too generous in what they were promising.

“A lot of products were dialed back,” he says. “It was driven by the actuaries.”