David A. Rains, Managing Director and Healthcare and Life Specialty Leader and Michael R. Parker, Managing Director, Senior Business Development Broker Contact In the meantime, this complexity and the difficulty in explaining variable annuities to consumers has heavily slanted sales toward expensive, commission-based channels more comfortable with products that are “sold, not bought.” Yet, as has been the historic trend for other financial products and services, demand for simpler, more transparent annuity products that encourage value shopping will be essential in driving future growth. This should favor easy-to-understand, fee-based product designs that investors buy rather than commission-based products agents must sell. By comparison, investing in the stock market once required a broker with steep commission-based fees. But with widespread demand and advances in technology, today’s investors can independently access an enormous array of stocks, index funds and derivatives at highly competitive fees. To compete, annuity writers will need to use technology and innovation to achieve similar efficiencies. The U.S. Department of Labor’s recently passed fiduciary rule accelerates this trend. New disclosure requirements impose higher administrative costs on variable annuity products and will create increased scrutiny of marketing materials and sales practices by regulators. Annuity agents must also now enter into a formal contract with the investor that explicitly acknowledges a fiduciary responsibility and ensures they will receive reasonable compensation. These factors make commission-based distribution channels — traditionally annuity writers’ most profitable product — less competitive. This may also lead to commission compression, impacting the ability of agents to customize unique or bespoke solutions for clients. These factors will push annuity providers to leverage distribution channels that already practice fiduciary responsibility and agents who are comfortable with fee-based compensation. Insurers are already responding. Despite the fact that fee-based annuities have been available for over a decade, the past several months have witnessed a torrent of fee-based product launches by annuity writers. These are largely extensions of traditional variable annuities with guaranteed minimum withdrawal benefits and, therefore, still fairly complex. The real opportunity will be realized when writers find a way to offer consumers the benefits they need in a simpler, more transparent framework. This piece first appeared on BRINK. Link to Part III >> Link to Part IV >> Link to Part I >> Click here to register to receive e-mail updates >>