Why Do They Sell Variable Annuities? – It’s the Commissions Silly

 

Financial advisors’ unenthusiastic reception of recently-offered lower-cost variable annuities confirms what most observers took for granted ? that variable annuity sales are driven primarily by commissions. See “Slimmer variable annuities attract thin following,” InvestmentNews, Jan. 10, 2010, by Darla Mercado.

For years, insurers have heard financial advisers plead for variable annuities that are easier to understand and that have fewer moving parts. In theory, the purportedly simplified, less risky products now being rolled out by John Hancock, Pacific Life, and ING should be more attractive. Right? Wrong.

Financial advisors aren’t selling them, and lower commissions are the chief reason why. “We can deny it all we want, but sales are commission-driven. When you slash commissions, you feel the impact,” said Scott DeMonte, director of variable annuity markets at Financial Research Corp.” Financial Research Corp. assists more than 200 financial services firms, including the world’s leading asset managers and distributors, in marketing financial products. “Carriers who have simplified by trimming core benefits but not the commission will be fine,” DeMonte added.

“Unfortunately, even though the market is asking for something, a lot of times, it doesn’t mean they’ll sell it,” said DeMonte. Put another way: “Simplified products aren’t in the advisers’ sweet spot,” said one top-producer who last year accounted for $150 million in variable annuity sales.

Where a typical variable annuity might pay about 6.5% in commissions, a slimmed-down VA might pay out about 5%, Mr. DeMonte said. The new ING product pays an annual trailing commission of 0.75%, which is below the 1% trail on traditional variable annuities; the A-share John Hancock product has a 3% commission and a 0.25% trail, according to the article.

But rather than aiming at traditional sellers of variable annuity policies, insurers that offer the revamped products see their market as the large pool of representatives who rarely sell or recommend annuities. “It wasn’t our goal to convert the traditional-annuity aficionado,” said Tom Mullen, vice president of marketing at John Hancock Annuities. “It’s for the adviser who prefers to operate and be paid in terms of assets managed, and not commissions.”

Although insurers position their trimmed-down products as low-cost alternatives, they haven’t trimmed the cost of the insurance portion of the contract, according to the article. The cost of the insurance itself is virtually the same in the “slimmed-down” products as it is in traditional variable annuities, said one broker-dealer executive, who asked not to be identified.

Page Perry has represented numerous variable annuity investors in making claims to recover losses resulting from fraudulent sales or unsuitable recommendations of variable annuities.