NEW YORK — Bank sales of variable annuities that invest in mutual funds continue to grow but are outpaced consistently by those of mutual funds. That’s a function of periodic adverse publicity combined with compliance hassles, observers say.
When sellers of VAs are accused of making inappropriate sales to seniors, the pendulum naturally swings toward mutual fund sales, said Ken Kehrer, a director of Kehrer-LIMRA, a Windsor, Conn., insurance and financial data firm.
He also believes that many bank advisers have become gun-shy about recommending VAs, because bank management has placed so many layers of checks and balances on the suitability process.
Banks sold $3.13 in mutual funds for every $1 of VA sales in the fourth quarter of 2006, compared with $1.89 for every VA dollar in the year-earlier quarter, according to a study of 24 large banks which was released last week by Kehrer-LIMRA.
In all of 2006, banks sold $2.82 in mutual funds for every dollar of VAs, compared with $2.30 per VA dollar in 2005, according to the study, the “Kehrer-Accessor Survey of Bank Mutual Fund Sales.”
Path of least resistance Banks are more concerned about compliance than are other distribution channels, Mr. Kehrer noted, so advisers tend to “take the path of least resistance” and don’t even mention VAs to the client, he said. But VAs may be poised for a comeback, given their potential attractiveness to boomer retirees. When things “calm down in the press and on the regulatory front,” VAs may gain strength, Mr. Kehrer said. In 2006, VA sales increased 22% to $21.6 billion. Mutual fund flows, meanwhile, rose 50% to $61 billion. “Four-fifths of the advisers are prejudiced against VAs and refuse to sell them,” said David Macchia, chief executive of Wealth2k Inc., a Hingham, Mass., strategic-marketing firm for annuities. That’s the case even though VA guarantees would be especially attractive to bank clients, who have a “traditional need and desire for such products,” he said. “The advisers compare fees instead of showcasing the guarantees and other VA benefits,” Mr. Macchia said. Those guarantees assure a minimum income level during retirement. The VA wrapper adds layers of costs to buying mutual funds, including mortality-and-expense charges,” said Daniel Yeung, senior investment officer of Accessor Capital Management in Seattle, which sponsored the Kehrer-LIMRA study. “Those charges add about [1 to 1.2 percentage] points,” he said. Still, Mr. Yeung said, the client receives value for the additional fees, such as insurance and guaranteed benefits. Bank management often is unhappy with the adviser preference for mutual funds, because banks earn about twice as much from variable annuities than from mutual funds, Mr. Kehrer said. A typical VA commission is 6% to 7%, while a mutual fund commission is about 3.5%, he said. “A lot of the regulatory concern would go away if the commissions were equal,” Mr. Kehrer said. However, bank managers are reluctant to prod advisers to push variable annuities due to compliance concerns, as they don’t want to appear to be influencing the advisers’ independent judgment, Mr. Macchia said. Adviser push-back Some companies offering mutual funds and variable annuities through banks believe that funds’ outselling variable annuities has more to do with demographics than adviser push-back. “An annuity may not be the best solution for a walk-in bank client with a few thousand dollars to invest,” said Peter Green, director of business development for Wealth Management Solutions, part of Newark, N.J.-based Prudential Financial Inc. Mutual funds are the dominant solution for such investors, he added.
“It’s a time horizon issue. Many bank customers are looking for shorter-term investment vehicles, and annuities don’t fit into their plans,”said Peter Sims, head of investment sales for Lincoln Financial Group in Philadelphia.
“Mutual funds have appeal to a broader age group, while VAs are mainly for those age 55-plus and approaching retirement,” said Peter Stahl, vice president and national sales manager of the bank division for Wayne, Pa.-based PLANCO, an affiliate of The Hartford (Conn.) Financial Services Group Inc.
“The fund universe is a lot bigger than the VA marketplace,” he added.
Bank clients historically have been older and more conservative than clients who use brokers and other channels, but that’s changing, those executives noted.
There is resistance by those company executives to the idea that many bank advisers shun variable annuities.
“I think that bank advisers are more open to VAs than other advisers,” said Scott McIntyre, vice president of marketing for Principal Funds, part of the Des Moines, Iowa-based Principal Financial Group Inc. “That’s because the reputation of variable annuities has changed, and they are now providing meaningful benefits.”
Clients might come into the bank looking for mutual funds, but they don’t usually come in looking for a variable annuity, Mr. McIntyre noted.
“But if a client comes in who needs the insurance features of a VA and is concerned about market volatility, then the bank adviser should present the VA and its guarantees as an option,” he said.