Morgan Stanley brokers will keep Ohio National annuity trail commissions

The wirehouse's legal agreements with the insurer apparently precludes the elimination of trail compensation

Oct 25, 2018 @ 2:18 pm

By Greg Iacurci

The elimination of trail commissions on variable annuities underwritten by Ohio National Financial Services Inc. will not apply to Morgan Stanley brokers.

Ohio National stunned the insurance and brokerage industries late last month when it announced that as of Dec. 13, it was eliminating brokers' trail compensation on VA contracts sold with a feature called a guaranteed minimum income benefit.

The move, which several experts view as an unprecedented decision for an insurance company, seemed at the time to affect advisers at all broker-dealers that have selling agreements with Ohio National.

Many advisers affected by Ohio National's decision stand to lose 1% annually on annuity assets. For example, an adviser whose client has $300,000 in an annuity would lose $3,000 in annual compensation.

However, Morgan Stanley brokers will retain the Ohio National product trail commissions, according to a source with knowledge of the situation, thereby avoiding the conundrum in which many other brokerage firms now find themselves.

The anonymous source said this is due to certain language in the legal agreements Morgan Stanley has in place with Ohio National. The source was not able to offer further specifics, so the exact nature of that language is unclear. Morgan Stanley has more than 15,000 financial advisers and brokers.

Morgan Stanley spokeswoman Christine Jockle declined to comment for this story or provide information around contract provisions.

Ohio National spokeswoman Angela Meehan acknowledged that the company's arrangements with various broker-dealers may differ due to "a range of factors," but said the insurer doesn't disclose these specific arrangements.

The only other brokerage aside from Morgan Stanley that has been publicly identified as keeping trail commissions intact on these variable annuities sold with a GMIB is Ohio National's own broker-dealer, the O.N. Equity Sales Co.

Rob Pettman, executive vice president of product and platform management at broker-dealer LPL Financial, said in a recent note to advisers that it is "actively challenging" Ohio National to reverse its compensation decision. He also said LPL executives are reviewing and potentially changing the contracts in place with other insurers to avoid a similar outcome in the future.

In early September, Ohio National announced it would stop writing new annuity business as of Sept. 15. Variable annuities represented the bulk of the firm's assets under management — $23.6 billion, or about 56% of the total, at the end of 2017 — according to the firm's latest annual report to policyholders. It's unclear what portion of those VA assets carry a GMIB.

Several insurers, including Ohio National, have been trying since the financial crisis to get customers to sell out of costly variable annuity guarantees via mechanisms such buyouts. Earlier this year, Ohio National offered a product exchange to certain customers who owned an ONcore variable annuity purchased with a GMIB around 2008-12.

Several advisers view Ohio National's decision to cut trail commissions as another way for it to cut costs associated with these annuities.

"A lot of these variable annuity companies overextended in terms of the guarantees and now they're left with books of business that are undesirable," said Gregory Olsen, a partner at Lenox Advisors Inc., whose clients do not own any Ohio National annuities. "They're looking for any ways to minimize the cost of that book of business."


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