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Also available as podcast (Episode #149)
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Can I use variable annuities in the RIA model?
TL;DR – There is a misconception that variable annuities cannot be used in the RIA model. In fact, solutions exist that potentially allow the continued use of both commission variable annuities and fee-based variable annuities going forward, if desired. Furthermore, solutions exist to potentially accommodate your existing legacy variable annuity positions as well.
Host:
Brad Wales founded Transition To RIA in 2020 after nearly 20 years of prior industry experience, including direct RIA related roles in Compliance, Finance and Business Development. He has an MBA and has held the 4, 7, 24, 63 & 65 licenses. He has been quoted or featured in 100+ industry articles including in the Wall Street Journal, Barron’s, and most every other major industry publication. He is well known for his RIA video explanatory series, and Kitces named his podcast as a “Top Podcast for Financial Advisors.”
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Full Transcription Of Video:
Can I use variable annuities in the RIA model? That is today’s question on the Transition To RIA question and answer series. It is episode #149.
I’m Brad Wales with Transition To RIA where we help you understand everything there is to know about why and how to transition your practice to the RIA model.
If you’re not already there, head to TransitionToRIA.com where you’ll find this entire series in video format, podcast format. There are articles, there are whitepapers. A Vendor Profile Series. All kinds of things to help you better understand the model.
Again, TransitionToRIA.com.
On today’s episode, we’re going to address one of the misconceptions about the RIA model that’s often out there. There are a lot of misconceptions at times, and you’ve probably heard me talk on these episodes about those misconceptions. This is one of them I do come across fairly frequently. It is the question of… “can I use variable annuities in the RIA model?
To start with, just a quick reminder on the logistical structure, if you will, of a variable annuity, Which in this case, I’m referring to a commission based variable annuity. You’ll see I’ll talk about fee based variable annuities here in a moment.
Keep in mind, a commission based variable annuity is where the annuity (an investment product) is sold by an advisor, a broker, whatever terminology we want to use, who receives typically an upfront commission for that. And oftentimes there can also be an ongoing trail commission as well going forward.
Which historically, up until ten years ago, and certainly five years ago – it’s changed dramatically since then – but prior to that almost all variable annuities were sold on that commission basis.
A commission variable annuity is technically both an insurance product and a broker-dealer product. To be able to sell new variable annuities on a commission basis requires you to wear both your insurance hat and to be affiliated with a broker-dealer.
And to be able to receive the ongoing trail, which is technically a commission, that requires the same thing, both the insurance hat and the broker-dealer hat.
Now as a quick aside, keep in mind again the distinct difference with some products between insurance and broker-dealer. I just described a commission based variable annuity, which does straddle both of those.
However, if you offer products like life insurance or disability insurance or even a fixed annuity, keep in mind those are solely insurance products. They are not broker-dealer products.
Now, depending on what kind of firm you’re at now, perhaps a wirehouse type firm or an independent broker-dealer firm, you might be accessing those investment products through your broker-dealer. Either because that’s the easiest way to access them, or because your broker-dealer requires you to do it. But that doesn’t mean they are broker-dealer products.
If it’s just a true insurance product, life insurance, disability insurance, a fixed annuity, etc. that’s an insurance product. You’re only wearing your insurance hat at that point. You may happen to get it through your broker-dealer, but that’s not from a regulatory standpoint.
However, as I said, a commission variable annuity does require both of those. So, I just wanted to start with that little backstory on historical context of variable annuities, but we do need to specify in that scenario, I’m talking about a commission-based variable annuity.
So, for the question… can I use variable annuities in the RIA model; there are two macro themes to think about with that and which I’ll address here.
First, do you want to continue to use variable annuities going forward? That’s one scenario which is a common thing I talk advisors through and I’m going to address here.
Second, you might say… “I no longer want to use new variable annuities going forward, but I have a lot of, often referred to as “legacy” positions I need to be able to accommodate.”
So, we’re going to break down those two things.
As far as going forward with variable annuities, two things here.
First, if you’re not aware, and this is what I alluded to, this has only been significant in the past five, maybe 10 years. There are now an abundance of fee-based variable annuity products available.
Go back 10 years and prior, it was either non-existent or the options were so limited, they just essentially weren’t being used. The industry has progressed significantly since then and there are an enormous amount of fee-based variable annuities that you could consider using with your clients. And because they’re fee-based, they do not require a broker-dealer solution. There are some wonderful solution providers that help advisors understand the landscape of available fee-based annuities.
In some instances, it might make sense to convert some positions your clients have that are currently in commission-based variable annuities into fee-based variable annuities. There is a whole ecosystem now that, quite frankly, just did not exist 10 years ago that now is very robust.
So, to the degree you want to continue to use, in the right circumstances with clients, variable annuities going forward, one route to take with that is to use fee-based variable annuities going forward. As again, that doesn’t require a broker-dealer at all.
Now, the other way to possibly map out that going forward stance is it is possible, to the degree you want to, and there’s some mechanics to this which I’ll describe, to continue to use or to sell additional or new commission-based variable annuities going forward.
Back to the misconceptions, there’s often a misconception that to be in the RIA model you must be 100% fee-only. Now, many RIAs are 100% fee-only, and technically the RIA itself is always fee-only, because any business done under an RIA is technically fee-based advisory business.
But the individuals working under an RIA, the investment advisor representatives, the IARs, the financial advisors, while they are under that RIA, which by the way could be your own RIA or maybe you’ve joined an RIA, it’s possible for those individuals to also work with what’s often referred to as an RIA-friendly broker-dealer.
I did a separate episode on what RIA-friendly broker-dealers are if you want to do a deeper dive on it, but in short, these are specialty broker-dealers, and there’s only a few of them in the industry that have this business model, that say… “if you want to start your own RIA, you go do that. We, as the broker-dealer, we’re not going to take an override on any of your business on that front. That’s going be entirely yours. (They consider it an outside business activity.) We, the RIA-friendly broker-dealer, to the degree you want to do additional variable annuity products, or it could be anything broker-dealer commission related, we will be your BD solution for that.”
Again.. “We’re not going to take a scrape on your advisory assets. We’re going to keep that at arm’s length That’s an OBA. But to the degree you have a need or want or desire to continue to do commission based products, we can accommodate that and here’s what that looks like and here’s what the payouts are for that.”
Now one caveat on that, and again I did a whole episode to get into more of the details, because those RIA-friendly broker-dealers are only participating in that part of your revenue, these solutions generally have minimums of how much revenue, or production to use BD terminology, that you would need to do on an annual basis to make it worth their while because they’re only taking a scrape on the BD business.
The devil is in the details, you must look at what your desires are, what you plan to do going forward. But there is a potential way to go into the RIA model and still do commission-based variable annuities to the degree that is something you desire to do.
There are pros and cons to whether you would want to do that, pros and cons to whether you should maybe do fee-based variable annuities instead. But just know there’s some potential pathways to still make that work if that’s important to you.
So again, that’s going forward if you want to continue to use variable annuities with new clients or introduce it to existing clients with a new product that they maybe don’t have currently.
The next pillar, and this is something that comes up in almost every conversation I have with advisors and teams is it’s very common when advisors reach out to me and they say… “Brad, I want to learn more about this RIA model. I want to see if it makes sense for my practice. My practice is increasingly becoming fee based.”
In some instances, by the time folks reach out to me, they’re already 100% fee-only at that point. I’d say that’s more rare. There’s usually still some amount of BD business. We often refer to that BD business as their “legacy” BD business.
There are a lot of advisors that say… “For many years now, my practice has been increasingly shifting more to the advisory side.” (Which is what the industry trends are doing overall.) “I’m increasingly on the advisory side, and perhaps I as the advisor have no interest or desire to do new commission-based variable annuity product. I’m fine if I don’t ever do a new one going forward on a commission basis. But I have these legacy positions.”
Those legacy positions are sometimes from where that advisor themselves sold it to the client years ago, or again, they brought on that client at some point, and that client already had the variable annuity.
And so then the question is… even if you don’t want to do new business, how can you accommodate the existing legacy business?
There are a couple ways to potentially do that. I’ll give the two main examples here.
First, is to use that RIA friendly broker-dealer approach I talked about. So when I just referenced it previously, I was talking about that is a way to enable you to do additional new commission-based variable annuity products, but it’s also a way for you to maintain those existing commission-based variable annuity products that typically are paying a trail.
A very common scenario when folks reach out to me and I say, okay, do you have any remaining broker-dealer business? And they say yes. Generally the top bucket, if you will, of what investment products consist of in that BD bucket is variable annuities.
Advisors will say… “I don’t aspire to do any new variable annuities going forward, but I have all these existing positions.”
Those positions are perhaps generating sometimes hundreds of thousands of dollars collectively in trails and perhaps as the advisor, you don’t want to entertain converting any of those into fee-based variable annuities or maybe it doesn’t make sense for the client to do that so you have these positions.
For the friendly broker-dealers, that’s their typical bread and butter to say… “Not only could you do new business if you want to, but come move your existing variable annuity positions to us. You keep that trail coming in. We’ll take a typically independent broker-dealer style payout off of it, and then remit the rest to you.”
And you can do that indefinitely if you wanted to. Now, as I said before, though, keep in mind these RIA-friendly broker-dealers have minimums. Minimums in the amount of production this needs to equal on an ongoing basis to make it worth their while.
So as an example, if you’re currently generating $10,000 a year in variable annuity trails, and you say, I’d like to keep those, that’s not enough meat on the bone for them because they’re only going to take a scrape off of that $10,000 and it’s just not worth their while.
Every scenario must be dissected and looked at individually. That’s a big part of what I help do in my conversations with advisors. But just know at a macro level, there is a possibility, to the degree that makes sense for you, to the degree there’s enough meat on that bone, to use a friendly broker-dealer and continue the status quo as you are now.
In this case, you’re going to have an RIA on the side, and by the way the broker-dealer is not going to be taking an override on your advisory assets. But continuing trail revenue as-is, is generally doable again with some nuances under that friendly broker-dealer arrangement.
And then finally, there is a new evolution in the space too, that has been dubbed “park and advise.”
There are some solutions, and there is only a few of them, that say…. “advisor, we realize you have these legacy positions. You realize it might not make sense to convert some of those into fee-based annuities, or you just don’t aspire to do it. But you need to protect these positions. If it doesn’t make sense to convert out of those positions, and you as an advisor would prefer to just not be associated with a broker-dealer at all, you’d prefer to not be associated with FINRA at all, you come essentially park those variable annuities with us (and “us” meaning a broker-dealer that offers this service), we will be the broker-dealer of record, we will be the rep of record on there, but we’re going to do a couple things. One, we’re not going to solicit any other part of the client relationship, we’re just going to do maintenance on these existing positions, maybe once a year we confirm with the client that their address is still the same.”
You’re basically just parking them there and you don’t need to worry about someone else coming along and trying to steal the rest of the client relationship from you.
As a result… “you, advisor, are not going to be registered with us as a broker-dealer. There’s going to be essentially a Chinese wall, you’re not going to be registered rep. So the benefit to you as advisor, now you don’t have a BD affiliation. You don’t have any FINRA affiliation. You are essentially 100% fee-only in that case.”
Now because you’re not the registered rep, they can’t pay the trail out to you because again, that requires a broker-dealer affiliation. They keep the trail that comes in for doing this.
What they do though is they turn around and they say… “we have these positions that need to be monitored or need to be managed over time. Maybe the sub accounts need to be adjusted from time to time. So we are going to hire your RIA to advise us (that’s the second half of “park and advise.) We are going to pay you a consulting fee every year to advise us on what to do with these positions, and we’ll work together to make sure that’s a good fit for the client.”
Point being, there’s a way to potentially accommodate those legacy positions and not be with a broker-dealer, but still essentially maintain those variable annuity positions going forward.
The takeaway from this, and I know I’ve given a couple different angles to this, is don’t assume that you can’t do variable annuities. It’s more of a question of, two things.
First, what positions do you have now, and what do you aspire to do with those positions?
Second, do you want to do new business going forward as well?
We look at both of those buckets and we say… “of all these different ways to potentially, as I say, solve for that, what’s the best way to go about doing it?”
I’ve talked about it here at a high macro level. The devil’s always in the details, again, because of whether minimum requirements or what kind of investment products they are. You might also have other BD business. Maybe it’s direct held mutual funds or 529s. There’s a lot that goes into it, but don’t have the assumption that if you have variable annuities now, and or you want to continue to use variable annuities, that the RIA model’s not right for you.
Again, there are generally ways to solve for it. It’s just a matter of working through the details and figuring out which path might be most appealing to you and your clients.
With that, like I said at the top, my name is Brad Wales with Transition To RIA. This is the type of conversation I have with advisors all day long, looking at your existing practice, understanding the different pieces of it.
In this case… “do you have broker-dealer business? What does that consist of? Are there variable annuities involved? How would this look over here in the RIA space? What options would you have? Is that going to be appealing to you? How would that affect your economics?”
I help you see the entire picture, put all these pieces in place. I’m happy to have that conversation with you as well.
First things first though, head to TransitionToRIA.com where you’ll find this entire series in video format, podcast format. There are articles, there are whitepapers. There is a Vendor Profile Series.
At the top of every page is a Contact link. Click on that and you can instantly and easily schedule time to have a one-on-one conversation with me. Whether you want to talk about today’s topic or anything else RIA related, I’m happy to have that conversation with you.
Again, TransitionToRIA.com.
With that, I hope you found value in today’s episode, and I’ll see you on the next one.
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