Convinced that variable annuity growth is being stymied by high costs, Raymond James Financial Inc. says it will cut its commissions to address the problem.
Starting in August, the St. Petersburg, Fla., brokerage company will charge lower commissions on variable annuity sales and pass on the savings to customers, an executive said. In addition, he said, it is simplifying its product offerings and adopting a commission structure that will not change regardless of the annuity features clients choose.
Scott Stolz, the president of Raymond James’ insurance and annuity general agency, said the company calculates that investors will save at least 0.25% a year on fees.
“We believe it is important for the industry overall to begin to bring down the fees within variable annuities,” he said. “We’re just trying to nudge the industry a bit.”
Indeed, other distributors are considering adopting similar tactics, and the implications are “potentially far-reaching,” said Kenneth Kehrer, the president of Kenneth Kehrer Associates, a Princeton, N.J., consulting firm that tracks annuity sales through banks.
“If some companies are selling what they’re positioning as a more consumer-friendly variable annuity than others,” Mr. Kehrer said, “you’d expect business to go in that direction. Just like when Japanese cars came to America, they changed everything because people started buying them instead of American cars.”
Mr. Stolz said industrywide variable annuity sales through all channels have been stuck at around $130 billion annually for several years, prompting his company’s changes to achieve growth at a higher rate. What’s more, he said, Raymond James believes commissions should be more in line with those for mutual fund sales in order to discourage advisers from pushing one product over another just because of the higher payout.
Leading a cut in variable annuity commissions has its drawbacks, however. The company expects to see at least a 15% to 20% revenue decline and also a drop in sales as financial advisers get used to the changes, Mr. Stolz said.
The brokerage could also lose some advisers who are unhappy with the lower commissions. About two-thirds of the company’s roughly 4,800 advisers sell annuities, and those who do most of their business in this area stand to be hurt the most — at least temporarily.
“Nobody likes to get paid less,” Mr. Stolz said. “But our belief is, over the long term, bringing the commissions down will make the products more acceptable and easier to sell and that, while they’re getting paid less on each sale, [advisers] will eventually … be able to sell more.”
Raymond James is the fifth-largest third-party seller of variable annuities through banks. Last year, it sold $596 million, ranking behind Independent Financial Marketing Group, with $1.8 billion; LPL Financial, $975 million; PrimeVest, $671 million; and Fimco, $640 million, Mr. Kehrer said.
As for the impact on insurance companies, Deborah Tucker, a vice president of the National Association for Variable Annuities, an industry trade group, said she does not think it will be an issue because carriers have shown in the past that they are willing to develop product features at the request of their most valued distribution partners.
Indeed, Mr. Stolz said 18 insurance companies — including Hartford, John Hancock, MetLife Inc., Lincoln National Corp., and AIG SunAmerica Inc. — had agreed to meet his company’s new requirements. Two providers the company has worked with in the past declined to change, he said, because Raymond James is not a big enough distribution partner for them.
