LPL Financial, the country's largest independent broker-dealer, has renegotiated its contracts with all of its variable annuity partners in the wake of Ohio National Financial Services Inc.'s surprise announcement that it would no longer pay trail commissions to some advisers.
LPL executives sent a memo to its 16,000-plus advisers Thursday morning affirming that the brokerage amended contracts with the 15 insurance companies whose variable annuity products LPL brokers can currently sell to clients.
The letter, signed by Rob Pettman, EVP of products and platform management, said LPL engaged the insurers following Ohio National's "recent unfortunate business decisions" in order to ensure advisers' trail commissions are contractually protected.
The move, Mr. Pettman told InvestmentNews, is also meant to set nervous advisers at ease about selling variable annuities in the future.
"This was a serious violation of trust and one that has the potential to impact the industry as a whole," Mr. Pettman said of Ohio National's decision around trail commissions.
"We need to make sure this doesn't happen again," he added. "There's a lot of nervousness about this being precedent-setting, and we thought it was important to ease advisers' concerns."
Some advisers stand to lose a lot of money because of Ohio National's policy, which took effect in mid-December and affected advisers who'd sold ONcore variable annuities with a guaranteed minimum income benefit rider. One LPL broker, Lance Browning — who filed a class-action lawsuit against Ohio National — stands to lose $89,000 a year, for example.
Lisa Doxsee, a spokeswoman for Ohio National, declined comment for this story, citing pending litigation.
Broker-dealers, which keep a portion of advisers' commissions, also stand to lose some money. LPL generated $144 million in revenue from variable annuity trailing commissions in the third quarter, 49% of the firm's total revenue from trailing commissions. It's unclear what portion comes from Ohio National products.
Tamiko Toland, head of annuity research at Cannex Financial Exchanges, said she expects other brokerage firms to try going through similar negotiations with insurers as LPL.
"They're just covering themselves," Ms. Toland said. "Now they realize there's a potential gap."
Since early November, several independent broker-dealers have sued Ohio National as well, the most recent being RBC Capital Markets on Jan. 9.
LPL didn't file a lawsuit, Mr. Pettman said, because the firm's advisers have a "material" amount of trail commissions unaffected by Ohio National's decision that could be put at risk by legal action. LPL will also try to renegotiate contracts with former variable annuity partners, as well as with insurers that sell other types of annuities, Mr. Pettman said.
The Ohio National move around trails isn't completely without precedent. MetLife Inc. drastically cut annuity pay for some advisers following the 2016 sale of its Premier Client Group to Massachusetts Mutual Life Insurance Co., for example.
However, Ohio National's decision to cut 100% of annuity trails is unprecedented, according to industry executives. Not all brokerage firms were affected, though.
Morgan Stanley brokers, for example, will retain their Ohio National annuity trails because of certain contract language in place with the insurer before the decision. Brokers at Ohio National's own broker-dealer, the O.N. Equity Sales Co., are also unaffected.