Despite the market's lukewarm reception to John Hancock's slimmed-down variable annuity, other insurers continue to introduce competing products aimed at financial advisers who have usually sidestepped such VAs.
Pacific Life Insurance Co. released its simplified product two weeks ago through Edward D. Jones & Co. LP. ING Financial Solutions will release its version in March and end sales of traditional variable annuities.
Although insurers hope that there will be demand for variable annuities with fewer investment options and plain-vanilla benefits, it seems that the products' lower price tags and lower commission rates — coupled with fewer investment choices — are the chief reasons for the lack of broker enthusiasm.
SHORT OF $50 MILLION
Sales of AnnuityNote, the simplified A-share variable annuity introduced in June by John Hancock Life Insurance Co. (USA), haven't yet reached $50 million. The product features an embedded living benefit, eliminating the need for a separate rider.
“Simplified products aren't in the advisers' sweet spot,” said Thomas B. Hamlin, a branch manager at Somerset Wealth Strategies, which manages $435 million in assets and is the largest annuities producer in Raymond James Financial Services Inc.'s system. Last year, he ac-counted for $150 million in VA sales.
Advisers' lackluster response may frustrate insurers, who for years have heard advisers plead for variable annuities that are easier to understand and that have fewer moving parts. In theory, the simplified, less risky products now being rolled out should be more attractive.
“Unfortunately, even though the market is asking for something, a lot of times, it doesn't mean they'll sell it,” said Scott DeMonte, director of VA markets at Financial Research Corp.
Advisers' gripes begin with the investment choices that are being offered inside the no-frills products — mainly low-cost index funds that are easy for carriers to hedge.
Back when the stock market was at its most volatile, the cost of hedging VA holdings skyrocketed. To mitigate that cost, insurers pulled the more generous variable annuities and cut back on living benefits.
The new ING product, for example, allows up to 70% to be invested in stock index funds, up to 10% in international index funds and a minimum of 30% in bonds. There are only 10 subaccounts from which to choose.
Hancock's AnnuityNote product offers a balanced fund based on five indexes. It added a bond fund in November to allow clients to adjust their equity exposure through allocation among the funds.
Although the choices are models of simplicity, advisers complain that the limited alternatives dampen their potential performance.
“You have too small a sandbox,” Mr. Hamlin said.
“These companies are trying to get the investments to 60% equities and 40% fixed income,” he said. “Equities should be up around 80% or 90% for people who are below a certain age; they have a longer time horizon before they need to take income.”
For advisers, the big downside of the products is their lower commissions. 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.
“We can deny it all we want, but sales are commission-driven. When you slash commissions, you feel the impact,” Mr. DeMonte said.
“Carriers who have simplified by trimming core benefits but not the commission will be fine,” he said. “You can do one or the other, but not both.”
But rather than aiming at traditional sellers of VA 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 to AnnuityNote,” 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.”
Many broker-dealers aren't equipped to process A-share variable annuities, which has hampered sales of the product, Mr. Mullen said.
Bill Lowe, head of distribution at ING Financial Solutions, thinks that low-cost products are the wave of the future.
“If advisers are talking about the benefits of a 2.25%-fee annuity product versus the traditional product, you're going to lose some business if you don't offer a low-cost alternative,” he said.
Although insurers position their trimmed-down products as low-cost alternatives, they haven't trimmed the cost of the insurance portion of the contract. 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.
E-mail Darla Mercado at [email protected].
