Merrill Lynch takes two avenues with annuity commissions

Policy effectively creates a dual approach for Merrill's 17,000-plus advisers.

When Merrill Lynch recently decided to reverse its ban on commissions in individual retirement accounts, it did so for all products with one exception: annuities.

The policy effectively creates a dual approach for Merrill’s 17,000-plus advisers — they can only sell fee-based annuities in IRAs, but they can sell both commission and fee-based annuity products in non-retirement accounts. In other words, the same annuity product could be treated differently depending on the type of account.

This, of course, begs the question of why.

Merrill Lynch can no longer point to the Department of Labor fiduciary rule as a driver of its strategy. The firm put its initial IRA commission ban in place in response to the regulation, but the rule has since been struck down in court and taken off the books. That led the wirehouse brokerage to reverse its ban for all non-annuity products.

Merrill appears to be one of the few broker-dealers — if not the only one — with this policy in place.

Merrill Lynch officials say the firm is only allowing annuities to be sold in an advisory relationship, in which advisers receive an annual asset-based fee instead of a commission, because it offers more transparency and clients get “ongoing advice for a complex product.”

“While the regulatory landscape has changed, we see important advantages to serving our IRA annuity clients through our fiduciary platform, which provides a higher standard of care and ensures an annual client review,” according to a spokeswoman.

Some experts say the explanation appears sound, based on how annuity products are structured and often purchased.

Annuities in IRAs are frequently purchased with add-on features known as “income riders,” which add complex layers to the product analysis and therefore warrant ongoing advice, said Tamiko Toland, head of annuity research at Cannex Financial Exchanges.

“It makes sense to me that there would be a difference,” Ms. Toland said, referring to Merrill’s policy.

Income riders such as a guaranteed living benefit are similar to standard annuitization in that they offer a guaranteed level of income in retirement; however, consumers pay extra for liquidity in the event they no longer want or need the income stream and would rather walk away with their cash.

These riders come with complex rules that, if broken, could reduce or completely eliminate a consumer’s income benefit — thereby ruining a financial plan. For example, withdrawing too much money from an annuity or changing the asset allocation could inadvertently cause a client to reduce their future income stream, Ms. Toland said. And the product provisions differ from company to company.

“Those riders have rules, and you don’t want to break them,” she said. “You want an adviser saying, 'You may like these other investments better [in the asset allocation], but that’s going to ruin our plan.’”

A greater percentage of variable and indexed annuities are bought in IRAs as opposed to nonqualified (or non-retirement) accounts — 57% and 63%, respectively, when looking at overall product premiums in 2017, according to the Limra Secure Retirement Institute.

The majority of variable and indexed products sold in IRAs have an income rider attached — 67% of variable products sold in IRAs have one, as do 73% of indexed annuities, according to Limra.

Jamie Hopkins, an insurance expert at The American College of Financial Services, also sees a practical reason for Merrill Lynch not to extend the fee-only annuity policy to nonqualified accounts — advisers wouldn’t have much product choice remaining if they did so.

“If you didn’t allow commissions [in nonqualified accounts], you’d really be cutting out a huge array of annuity products that really could be beneficial to the client,” Mr. Hopkins said. “You can’t get all the same products.”

However, not everyone is convinced by Merrill’s logic.

“It doesn’t hold water with me,” said Sheryl Moore, owner of Moore Market Intelligence, a consulting firm.

“If you’re saying annuities are more complex products, you have to apply that same standard to all annuities,” Ms. Moore continued, adding that nonqualified annuities can be purchased with the income riders that make the products more complex.