Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
As more advisors break away from broker-dealers and drop their series 6 or 7 registrations, the annuity industry has evolved to support and compensate them through registered investment advisor- (RIA-) friendly solutions.
Annuities come in many shapes and sizes, and advisors are not required to be registered to recommend every type of annuity. Variable annuities require a S6 or S7, but fixed and indexed annuities do not. In addition, the industry now offers various solutions for S65 investment advisors (IAs) to be paid to service annuities for fees rather than to transact annuities for commissions.
Commission payments to S6 or S7 registered representatives (RRs) can take the form of a higher up-front payment or smaller annual payments (trails). Trails-paying annuities (C share or L share) tend to have higher internal expenses to afford the ongoing commission payments to the advisor. Clients are often willing to pay a higher internal expense because advisors and their clients both (wrongly) view the continuing commission payments to be a form of built-in advisory fee. Unfortunately, the higher internal expenses on trails-paying annuities are not an advisory fee, and similarly, no advisory services are due to the client in return for those expenses. Consequently, when advisors drop their S6 or S7, they can no longer be paid trails, even though the client continues to pay the higher internal expense. The advisor may end up providing advice without being paid. AnnuityFix, referenced later in this article, solves for this problem.
In recent years, several solutions have been developed to compensate unregistered advisors for incorporating variable annuities in their client portfolios. Existing and newly purchased annuities require different solutions, but the solutions share the common understanding that advisors may be paid a fee to provide advice and analysis, while broker-dealers and registered representatives may be paid commissions for investment transactions. Each RIA-friendly solution strips advisors of the sales and transactions responsibilities and compensates them exclusively for their advice and analysis. In each of these solutions, the IAs remain safely within the margins of their regulatory authority.
New annuities tailored to RIAs
Several major annuity companies have established lines of variable annuities that allow IAs to be paid for their advice and analysis without being part of the actual sale or transactions.
Jefferson National was a pioneer in this space in the early 2000s, when it introduced the Monument Advisor product line. Nationwide acquired Monument in 2009 and it remains one of the most popular RIA-friendly annuities on the market. Monument, and now other RIA-friendly annuities like it, integrate the RIA’s advisory fee into the annuity contract process. While RIAs have always been able to layer an advisory fee on virtually any investment, many new RIA-friendly annuities allow RIA fees to be deducted directly from the annuities without triggering a tax event. The annuity company serves as, or provides for, the RR and agent for the transaction, and the RIA provides advice and analysis for an integrated advisory fee. In recent years, Pacific Life, Lincoln, AIG, Jackson and others have developed RIA-friendly products that allow advisory fees to be withdrawn from within the annuity, and their products are becoming increasingly competitive.
New annuities through solution partners
Not all annuity companies have solutions tailored for RIAs, so in 2018, David Lau, one of the chief architects of the Monument Advisor annuity at Jefferson National, founded DPL Financial Partners to provide an RIA-friendly platform of low-cost, commission-free annuities from carriers across the industry. Whereas each annuity company is a natural advocate for its own products, DPL sets itself apart through its powerful comparative software that allows RIAs and their clients to find new opportunities and make more informed decisions. Once a product is selected, DPL provides for the transaction to be completed by RRs while the RIA’s advisory fees are integrated into the annuity contract. DPL’s platform provides boundless resources and innovative solutions for RIAs who are taking fresh look at advisory friendly annuities.
Existing annuities and trails
AnnuityFix is an RIA-friendly annuity solution offered by Johnstone Brokerage Services (JBS) for existing trails-paying annuities. The solutions above solve for new business and exchanges, but some clients and RIAs want to retain existing annuities to preserve valuable living and death benefits or to avoid costly surrender charges. Through AnnuityFix, advisors assign their trails-paying annuities to JBS, and JBS becomes both broker-dealer and agent. Of course, assignment must be in the client’s best interest and requires client consent. Once the annuities are assigned, JBS hires the assigning RIA to provide advice and analysis on those assigned assets pursuant to an advisory-fee agreement. JBS maintains the policies and conducts all transactions, while the RIA retains the role of client relationship manager and receives an advisory fee based on assets under management for advice and analysis. The agreement can be canceled at will, allowing RIAs and clients complete freedom to change. Growing RIA firms, custodians, and recruiters are increasingly turning to AnnuityFix to liberate break-away advisors who wish to drop their broker-dealer registrations.
As advisors continue to migrate away from large wirehouses and dual-registration broker-dealers, IAs and RIAs have resources to support the integration of annuities in their practices.
Grant Johnstone, a 25+ year Texas attorney and financial advisor, is the founder & CCO of Johnstone Brokerage Services FINRA & SIPC Member.
Read more articles by Grant Johnstone
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
