A check on the ‘love ’em and leave ’em’ tack

NEW YORK — Insurers increasingly are using trail commissions for fixed annuities to give finan-cial advisers an additional incentive to cultivate long-term client relationships.
“Insurers are starting to take the concept of trail compensation — which is widespread as a method of paying brokers in the securities world — and are bringing it to the insurance world,” said Jeremy Alexander, president of Beacon Research Publications Inc. in Evanston, Ill., which tracks annuity data. For instance, certain types of variable annuities have back-end trail fees, he added.
Fixed annuities — which include equity index annuities — are regulated by the states as insur-ance products, while variable annuities are securities regulated by Washington-based NASD and the Securities and Exchange Commission.
ING U.S. Financial Services in Atlanta last week became the first insurer to pay “automatic” trail commissions for all its indexed-annuity products. Effective last Monday, the insurer pays an
“automatic trail” of 0.25% annually for as long as the annuity is in force, starting in the second year.

Advisers will continue to receive their usual upfront commission — which is in the 4% to 8% range — said Chad Tope, senior vice president of ING’s fixed annuities distribution unit in Des Moines, Iowa. The insurer’s upfront commissions for indexed products are about 0.5 to 1.5 percentage points lower than its competitors, and the trail compensation will boost adviser income for those products, he added.
ING’s fixed-annuity sales were $2.85 billion last year, up from $2.79 billion in 2005.
Making inroads
Mr. Tope and his team have embarked on a five-month, 30-city roadshow to introduce agents and advisers to ING’s new compensation system and other aspects of its fixed-annuity offerings.
Meanwhile, several other insurers have implemented trail options for specific products but don’t have automatic payments over an entire product line. They include Allianz Life Insurance Company of North America in Minneapolis, Aviva Life Insurance Co. in Quincy, Mass., and Old Mutual Financial Network in Baltimore.
“Allianz Life does offer both upfront and trail commissions, and we leave the choice up to each individual agent,” said spokesman Jim McManus.

“We strongly support the industry migration to offer trail commission options,” said John Currier, senior vice president of Aviva.
“We have offered trail commission options on our products for quite some time and are pleased to see other companies promoting the approach, as well,” he said. “Trail commission options effectively align the producer and consumer interests.”
No Old Mutual executive was available to comment, said spokeswoman Diane Green.
Trail commissions encourage continuity of service as clients live longer, noted Kim O’Brien, executive director of the National Association for Fixed Annuities in Milwaukee. “NAFA sees first-year commission with trailers as another good option for distributors whose business strategies are based on the commission structure,” she added.
Few advisers are likely to turn down additional compensation, but some may question why they need an insurance company to tell them they should provide better service to their clients and over a longer period of time.
But so far, advisers haven’t resented being told by an insurer they should continue to service their clients after the sale, Mr. Tope said. He expected some push-back, but reactions have been “nothing but positive,” he added.
“Once clients start taking money out of the annuity for income every year, advisers are prevented from moving that money and become locked into that contract,” Mr. Alexander said. So the trail commissions become an effective way of continuing to compensate advisers and keep them happy, he said.
Trail commissions are being welcomed in the bank distribution channel, which wants to move away from transaction-oriented, one-time product sales and develop continuing financial planning relationships with clients.
Banks favor trail income, because it gives advisers the incentive to work with and service customers over time, said Lynne Ford, senior vice president and director of the retail-retirement-income group for Wachovia Corp. in Charlotte, N.C. Trail commissions support “long-term financial planning and client retention,” she said.
But not all advisers are convinced.
“Trail commissions are just another incentive to sell EIAs,” said Thomas McGuigan, a principal of Burns Advisory Group in Old Lyme, Conn., which manages $300 million in assets. “The commissions are an additional loading-on of fees to EIAs — which are already heavily laden with administrative expenses — that will ultimately come out of clients’ pockets,” he said.
Because of those high fees and the products’ complexity, some state and federal regulators have taken a dim view of EIAs. NASD and the SEC are in the process of determining whether EIAs are insurance and should continue to be subject to state insurance department regulation or are securities subject to federal oversight.
Regulatory concerns didn’t motivate ING’s action, according to Mr. Tope. But increased adviser attention to servicing client needs and less emphasis on front-end compensation indirectly may make index annuity products more palatable to their critics, he noted.