Questions abound as Ohio National stops commission payments this week

Advisers are grappling with how to proceed, with their clients and their businesses, as the insurer's new annuity trail policy takes effect

Dec 11, 2018 @ 5:12 pm

By Greg Iacurci

Ohio National Financial Services Inc. is ceasing payment of advisers' variable annuity trail commissions Thursday, and advisers are left wondering how they're going to deal with the fallout.

The insurer stunned the brokerage and insurance industries in late September when it announced the policy, which applies to variable annuities with a certain income feature called a guaranteed minimum income benefit rider. Thousands of affected advisers are still trying to make sense of what the policy — which appears to be the first of its kind among annuity providers — will mean for them and their clients.

"There are just a lot of question marks," said Timothy Holsworth, president of AHP Financial Services Inc.

For some advisers, the loss of annual trail compensation is substantial. Mr. Holsworth, whose clients have roughly $5 million in the affected Ohio National variable annuities, stands to lose $50,000 in annual revenue.

Lance Browning, an adviser with LPL Financial, filed class-action litigation against Ohio National; he stands to lose $89,000, according to the lawsuit. One of his lawyers, Dennis Concilla of Carlile Patchen & Murphy, said he's spoken with other advisers with much more money at stake — some in excess of $400,000.

"That's a pretty bitter pill to swallow," Mr. Concilla said. "It's life-changing, really."

David Berman, co-founder and CEO of Berman McAleer, said the firm has had to adjust its 2019 budget, including curtailing payroll raises and spending initiatives. The firm is considering ways to try to preserve some revenue, such as partnering with other advisers at broker-dealers who continue to receive trail commissions from Ohio National. A handful of firms, such as Morgan Stanley Wealth Management, appear able to keep their annuity trail commissions intact due to certain contractual language in their selling agreements with Ohio National.

However, Mr. Berman believes his firm is ultimately "just going to bite the bullet" and continue advising clients despite the lost revenue.

"This is a test," Mr. Berman said. "We pride ourselves on acting in the best interest of our clients. That's easy to do when your interests and theirs coincide. It's perhaps more important to do when they don't."

Ohio National last month began offering buyouts to variable annuity clients with GMIBs, giving them a monetary incentive for cashing in their annuities. Many will require sound advice in weighing their options.

Mr. Holsworth is analyzing client contracts to determine if some clients should take the deal, which is being offered through mid-February.

One factor he's considering in his reasoning — aside from annuity income, fees and the buyout amount, for example — is his erosion in confidence in Ohio National. If the firm can turn off annuity trail commissions for advisers, will the insurer renege on annuity guarantees in the future, he said.

"I think it'd be naive to think everything will just be as it was," he said. "To not acknowledge the fact that things have changed is crazy."

One adviser, who wished to remain anonymous, said most of his clients have moved out of their Ohio National variable annuities by taking buyout offers or exchanging them for other insurers' annuity products.

The adviser, who's 60 years old, said this is especially true for some younger clients. Since the adviser is planning to retire in about three years, he's afraid they will be stuck with a complicated annuity product and won't be able to get another adviser to provide guidance on it, since those advisers wouldn't be paid for their advice.

Some investor advocates are concerned about conflicts of interest for advisers put in the position Ohio National has configured, such as those who recommend taking the buyout on a product they'll no longer be paid on to free up that money to be invested elsewhere that does pay — whether it's the best option for the client or not. Or those who take commissions upfront — out of fear of more insurers cutting trails — possibly having less incentive to advise clients on the product over its long life.

Angela Meehan, a spokeswoman for Ohio National, said all advisers will continue to have access to client information and transactional data, and will be able to continue to service them.

Some advisers are hoping regulators will intervene or judges will rule against Ohio National and restore the commissions. In addition to Mr. Browning's case, two independent broker-dealers have class-action lawsuits in federal court and two have filed Finra arbitrations.

Michelle Ong, a spokeswoman for the Financial Industry Regulatory Authority Inc., declined to comment. Robert Denhard, a spokesman for the Ohio Department of Insurance, said the regulator is aware of the changes Ohio National is implementing and will continue to monitor the firm to ensure compliance with Ohio insurance laws.

"Most [advisers] are just wringing their hands waiting for someone to fix it," Mr. Concilla said.


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