In the continuing evolution of the investment industry, one consistent trend has been the gradual reduction in fees, expenses–and commissions–that investors pay for most investment products. There are exceptions, for example, hedge funds; and fees and commissions for variable annuities have in general crept up, not down. But that may be about to change.
While many advisors and their clients believe that variable annuities are important investments under the right circumstances, "the perception exists that variable annuities are just too expensive relative to the benefits that are received, and the commissions are too high relative to other investments," says Scott Stolz, president of the insurance and annuity general agency at St. Petersburg, Florida-based Raymond James. "As long as that perception existed, variable annuities (VAs) would always remain under a cloud."
"The industry needed to begin to change the pricing structure of the products," Stolz argues. Raymond James executives wondered if they could reduce costs to clients by requiring all of the VA products sold by the firm's advisors to meet a set of fee and structure criteria. Only those products that met the standards would be available through the Raymond James rep force. Although the firm does much more volume in mutual funds than in insurance products, Stolz says VAs account for about 85% of Raymond James's insurance business. He expects the firms' advisors to sell about $3 billion in VAs in 2006–2.5% to 3% of the overall VA marketplace. That makes Raymond James a significant distributor for a lot of insurance firms. "No company really wants to walk away from $150 to $200 million in sales each year," Stolz asserts, "I think we were just big enough to pull this thing off."
When the broker/dealer first approached its VA vendors with the radical notion of reducing commissions and changing the way VAs are structured, the firm was offering products from 18 insurance companies, and each company offered three or four distinct products–different share classes, fees, and options structures–each with its own prospectus and application–or around a hundred permutations in total. It was nearly impossible for clients to compare all of them. "We don't have a menu of 100 products anymore," and that, it seems, is better for everybody, from compliance to customers. Stolz says the initial reaction from the insurance companies was: "'Hey, this could be a really good thing for us.'" They were struggling to stay competitive and had to keep raising commissions.
Raymond James developed a set of criteria: limit fees and surrender charges to clients, streamline share classes, and limit commissions paid during the first seven years of the contract. Stolz emphasizes that the firm made it very clear that these were not to be proprietary products–the lower-cost VA products should be made available to all broker/dealers.
