Edward Jones is teeing up cheaper share class for VAs

Brokerage firm says its new O shares won't have front-end charges

Feb 13, 2011 @ 12:01 am

By Darla Mercado

Edward Jones' recent announcement that it will roll out a cheaper variable annuity share class has rival brokerage firm executives intrigued but uncertain about whether the innovation will spread.

“There are a lot of questions to work out, and without more product information, we have no idea whether it will be well-received,” said Ethan Young, annuity research manager at Commonwealth Financial Network.”

Edward Jones announced the creation of the share class last week at a conference of the Insured Retirement Institute, an annuity business trade group.

The so-called O share class is free of upfront charges. Instead, mortality and expense charges are assessed over the surrender period and decline until they reach the level of similar fees on front-loaded A-share variable annuities, according to Tim Burke, a principal of insurance solutions at Edward Jones.

Edward Jones expects to make the share class its standard offering.

Although other broker-dealers think that the lower cost of O-share-like variable annuities may make them attractive to potential buyers, they fear that the new share class could lead to compliance troubles, variable annuities with leaner features and difficulties in collecting commissions.

They also worry about the competitive effect of pitting cheaper O-class shares against other share classes and moving investors in O-class-like shares to other variable annuities.

“The potential dilemma for broker-dealers that want to offer O shares side by side with B or L shares is that if the features are the same, how do you justify selling anything but the O share to that client?” asked Scott Stolz, president of Raymond James Insurance Group.

Broker-dealers typically offer an array of share class options, including B shares, which have no upfront charge but carry a surrender fee; C shares, in which the client pays no upfront or surrender charges; and L shares, which have a shorter surrender period but higher mortality and expense costs.

“We wouldn't take a stance on mandating a certain share class,” said Zach Parker, a senior annuities and insurance consultant at Securities America Inc. “There are different share classes for a reason.”

Brokerage firm executives also wonder about the effect of O shares on VA exchanges, which could become less attractive. Because O shares' declining mortality and expense fees save investors a lot of money when they hold their annuity beyond the surrender period, transfers and swaps likely would mean the imposition of new sales charges and the establishment of a new surrender period.

“Having a pricing structure that discourages exchanges at the end of the surrender period is an interesting concept,” said Joan Boros, who is of counsel at Jorden Burt LLP. “How can you tell a client that they're free to move when that would mean giving up a cheaper product to go to another one where they may pay a sales load?”

Broker-dealer executives contend that if O shares are going to be cheaper and pose greater difficulty when moving from one VA to another, their features may not be as rich as those available through existing share classes.

But the product seems to be on its way. Prudential Financial Inc. and SunAmerica Financial Group have posted new VA filings with the Securities and Exchange Commission for the share class, and Prudential signed a selling agreement with Edward Jones in October, posting its new VA form Nov. 8.

SunAmerica, which returned to Edward Jones' platform, filed its offering Feb. 3.

Neither insurer would confirm whether these filings are for Edward Jones, but Mr. Burke has said that the broker-dealer is in talks with all its insurer partners to roll out the share class.

Executives at other broker-dealers questioned whether insurers are trimming the benefits and investment choices available on their new products to meet cost requirements. The filings from Prudential and SunAmerica are light on product details.

“We're in favor of any product design that drives down the overall cost to the client, so we'll definitely take a look at it,” Mr. Stolz said.

Finally, O-share products may raise speed bumps in the way representatives collect commissions.

An adviser's trailing commissions on VA sales are based on the product's mortality-and-expense charge. If these fees drop to zero, as they appear to do in the SunAmerica product filing, the issue of how an adviser will collect a trail in the later years of the VA becomes important, said Tamiko Toland, managing director of retirement income consulting at Strategic Insight.

Officials at Edward Jones declined to provide details about the O shares' commission structure or other aspects of the their VA plans.

E-mail Darla Mercado at dmercado@investmentnews.com.


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