After the market carnage of 2008-2009, a number of advisors shared stories with me about clients who would literally kiss them in adoration, so grateful for the fact that their nest egg suffered no losses during this market turbulence because they were invested in variable annuities with living benefits.
Clients like to make money. More importantly, they don't want to lose money. Advisors who market principal protection often fulfill these objectives with variable annuities and fixed indexed annuities, which provide underlying guarantees.
During the last two years, however, the regulatory environment has become increasingly hostile toward advisors that largely focus on variable annuities and fixed indexed annuities, as broker-dealers urge advisors to do more fee-based business.
From the representatives' perspective, many would love to do advisory work, but it lacks guarantees from losses. They frequently feel that their broker-dealer is pushing advisory platforms on them in order to boost the firm's own profit center. This results in an underlying mistrust when it comes to broker-dealer recommendations, which some advisors see as self-serving rather than benefiting the client.
The Heart of the Matter
Issues affecting variable annuity sales are quite complex and entail a variety of concerns, according to securities attorney Michelle Atlas, J.D., a managing associate with AdvisorLaw. Atlas believes that, although there are multiple reasons that variable annuities are not in favor today, the primary reason is pricing.
Atlas explains, "In the early 2000s, a variable annuity could cost 2.75% all in [for mortality, expense fees and administrative charges], plus a guaranteed minimum income benefit (GMIB) rider and the underlying management cost. Now, 3.5%-4.5% is standard.
"It's unrealistic to expect sub-account performance to keep up that cost and perform well. Also, most compliance departments are exhausted with FINRA's deep dive into variable annuities at every single cycle exam," she adds. "It was 'L' shares with living benefits, now it's exchange rates that are stirring the FINRA scrutiny pot."
According to Atlas, the result is that compliance teams have put bumpers around the recommendations. Examples of bumpers include no more than a specific percentage of liquid net worth in variable annuities, and no variable annuities for clients under age 50 or over 75.
"At this point the scrutiny is so high, and the restrictions are so tight that advisors have no choice but to diversify the tools they use to help their clients to meet their goals," explains Atlas.
Broker-dealers also have been applying bumpers to representatives' overall business mix in variable annuities. Numerous BDs have implemented percentages of 50%, for instance, as the maximum level of a representative's total client assets that can be held in variable annuities. And some broker-dealers are going as low as a 30%.
Are Investors Wrong?
Looking at both sides of the debate on variable annuities, industry insider and attorney Ace Forsythe gives his take on the landscape for variable annuities as follows: "There's no question that VAs require a lot of thought before and after purchase, and there are numerous examples in the industry of sales practice issues associated with them."
The attorney adds that, having said that, "there are millions of satisfied investors willing to pay for assurances not available in other investments, especially as we see fewer people with substantive pension income in retirement."
