Annuity, fund sales flat at banks, notes study

Apr 9, 2007 @ 8:49 am

By Gary S. Mogel

NEW YORK — Fee income from variable and fixed annuities, and mutual funds, sold by banks declined by 0.6% last year to $19.33 billion, from $19.46 billion in 2005, according to a recent study. The report was based on a survey of about 1,000 banks, released last week by Michael White Associates LLC, a Radnor, Pa., firm that tracks bank data. The stagnant annuity and mutual fund fee income may be a temporary side effect of banks’ willingness to forgo high upfront commissions in favor of trail income that supports long-term financial planning and client retention, said Lynne Ford, senior vice president and director of the retail-retirement-income group for Charlotte, N.C.-based Wachovia Corp.
“Paying less upfront gives advisers the incentive to work with and service the customer over time,” she said. Banks are transitioning from a transactional “sell products” approach to managing client assets as part of a long-range financial plan, Ms. Ford added. Broker-dealers also are caught up in the commission cutting trend, especially for variable annuities (InvestmentNews, March 26). Banks blaze trail “Several major banks have been pressuring their insurance company partners to reduce fees and commissions on variable annuities, and we are starting to see the impact of that in the market,” said Ken Kehrer, a director of Kehrer-LIMRA Inc. in Windsor, Conn. But some insurance executives say that VA fees and commissions are at appropriate levels and that there is no need to reduce them (see Page 28). Regarding mutual funds, Mr. Kehrer noted that as bank advisers become “more sophisticated,” they tend to work with more-affluent clients and are “digging deeper” with existing clients, resulting in bigger dollar sales. “Mutual fund commissions are priced so that the larger the sale, the lower the commission rate. So banks are earning less commission per dollar of mutual fund sales,” Mr. Kehrer said.

Banks’ average mutual fund commissions have decreased to 3.72% from last year’s 3.85%, noted Lynn Niedermeier, chief executive of INVEST Financial Corp. in Tampa, Fla.

Annuity commissions have gone down even more — to 6%, from the prior average of 7% for variable annuities, and to 4.8%, from the previous 5.5% for fixed annuities, she said. A few years ago, 8% was the average VA commission, Ms. Niedermeier added.

Increased “pressures” from Washington-based NASD and state regulators are helping drive down commissions, she said, as is the shift among vendors and clients to lower-commission, simpler products that have fewer riders.

Wraps cut fees

Behind the move to lower mutual fund commissions is an increase in the sale of funds in asset allocation wrap accounts, Mr. Kehrer said.

“The commissions and fees on those accounts are only 1.5% per year, compared to 3.25% to 4% for mutual funds,” he said. “So in the short run, the shift from mutual funds to mutual fund wrap accounts reduces the fees per dollar of sale.”

More-uniform upfront commissions across product offerings encourages desired long-term planning and client relationship building and discourages the sale of products based on payout, Ms. Ford said. “We have capped upfront commissions at 6%,” she said, adding that Wachovia has asked insurers to change their compensation structures to emphasize trail income.

Lower fixed-annuity yields also are playing a role in the receding fees.

“As the yield on fixed annuities has fallen below short-term certificate of deposit rates, banks and their insurance company partners have reduced commissions in order to boost the first-year bonus rates,” Mr. Kehrer said. “As a result, banks are earning lower commissions per dollar of premium.”

Fixed-annuity sales were the “bread and butter” for banks and drove a lot of the sales of platform advisers, Ms. Ford said. “But with the flat yield curve, fixed annuities are not particularly competitive right now, and that’s lightening commissions.”

“The bottom line of all this [commission reductions] is lower prices for the clients,” Ms. Niedermeier said. This can increase sales and assets under management, which raises adviser compensation, she noted.

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