After Ohio National decision, the fine print of annuity trails is now a must-read

It’s still a fresh sting, hearing that Ohio National Financial Services Inc. plans to terminate servicing agreements and cut off trail commissions to broker-dealers that sell some of its variable annuities. Can they really do this, some B-Ds wonder? Until and unless the Ohio Department of Insurance or other regulators say otherwise, and as long as the contracts were written for such an allowance: Yes.

B-Ds are still trying to make sense of the move, and planning their response.

“This kind of behavior is unprofessional and disrespectful to business partners and clients,” Rob Pettman, an executive at LPL Financial, wrote in a memo to brokers that reporter Greg Iacurci noted in his InvestmentNews story about the sudden change.

But the insurer announced in September it was no longer accepting applications for annuities — the bulk of its business — so playing nice became less critical than when a firm is wholesaling products. Ohio National also announced a layoff of 300 employees last month, so there’s more to the story than pinching pennies.

As Mr. Iacurci notes in his story, insurers have been trying since the financial crisis to get customers to sell out of costly variable annuity guarantees with product exchanges or buyouts. Earlier this year, Ohio National offered customers exchanges for ONcore VAs purchased with a guaranteed minimum income benefit around 2008-12. Perhaps extracting the adviser from the relationship will make it easier to sell this idea to contract holders. Ohio National indicated to Mr. Iacurci that brokers will continue to service the policies regardless of pay. No doubt some will, but some won’t. Is it fair to assume brokers will work without compensation? Is that what the brokers signed up for? And where does that leave the customer?

(More: How Ohio National’s move may lead to ‘unscrupulous’ broker behavior with annuities)

If nothing else comes from this surprising development, brokers and their firms will certainly scrutinize contracts more closely going forward, and many will consider taking commissions upfront to avoid any possible cutoff of trails when a company falls on hard times down the road.

Is that the best result for clients, when some of these complex contracts require continuing guidance like on the timing of withdrawals and the underlying investments?

No doubt there is more to come on this story. Will other insurers swept up in the perfect storm of low interest rates and tighter regulations decide to follow suit?

If so, they can be assured that broker-dealers will not take this lying down. They will challenge any insurer who makes this move, demand new business be written to protect future compensation, and amend current contracts to make sure advisers are fairly compensated for the work they continue to perform throughout the life of an annuity.