NEW YORK — Worried about giving clients a fair deal and keeping regulators at bay, some brokerage firms are tamping down the commissions on variable annuities that registered representatives and financial advisers sell.
The cutbacks and caps in commissions take different forms, but Wachovia Securities LLC of Richmond, Va., is making changes, and
Bank of America Corp.’s brokerage group is said to be making changes.
Raymond James Financial Inc. of St. Petersburg, Fla., made changes last year.
The moves affect potentially thousands of brokers.
Wachovia has 10,600 reps in its various channels, while
Raymond James has 4,600. Charlotte, N.C.-based
Bank of America has 2,000 reps and advisers with Banc of America Investment Services Inc., its retail-brokerage arm in New York.
Awaiting a rule
The changes in brokers’ pay comes at a time when executives and compliance officers are waiting for a new rule on variable annuities from NASD, the brokerage industry’s self-regulatory organization.
Some in the industry think that variable annuities, which are known for their complexity, lately have been unfairly demonized as an overpriced, high-commission product. NASD has circulated a draft of a ruling — called 2821 — to some broker-dealer members, and it focuses on variable annuities and suitability issues, industry executives said.
“We wanted to take any conflict out of the product for the financial advisers,” said Bernie Galona, Charlotte-based director of annuities at Wachovia Securities, which announced the move to its brokers at the start of the year.
“Bank broker-dealers are trying to make sure … an adviser doesn’t sell one share class [of variable annuity more] than another,” said a brokerage executive, who asked not to be identified.
“There’s growing concern in the industry about [VA] L shares,” which has a shorter surrender period than a more typical variable annuity and could be regarded as a “high-commission product,” the executive said.
Most typical annuity share classes have surrender periods of seven years and upfront commissions of between 6% and 8%, observers say.
VA L shares have shorter surrender periods of three to four years and commissions of 5% to 5.25%, industry sources said. But clients pay a trailing fee of 1%.
“Over the long term, it’s more,” said the executive who asked not to be identified.
Bank of America is “getting ready to announce” its changes, said the executive, who works for a competitor.
L shares are new
Bank of America spokesman Jon Goldstein declined to comment on any potential caps on VA commissions for its reps and advisers.
However, Bank of America is
“constantly evaluating how to further enhance value for our clients, including the development of highly competitive pricing structures which also seek to provide fair compensation to our advisers,” he said.
VA L shares are relatively new products, according to industry observers. And NASD of Washington has a track record of questioning broker-dealers about reps’ sales of such hot-ticket items.
Wachovia recognizes the potential for problems with VA L shares, Mr. Galona said. “The [VA] L shares is the business most firms are concerned with,” he said, adding that some firms have stopped allowing advisers to sell them.
“Some firms have pulled them from the shelf,” Mr. Galona added.
Under the new Wachovia plan, the firm is simply adjusting the schedule for brokers’ upfront and trailing commissions, he said. Instead of the full upfront commission, a broker gets paid the same dollar amount over a period of time in “trails,” or annual following commissions.
VA L shares, however, will be different. Wachovia reps are taking a “haircut” on commissions of those shares, meaning they lose the difference between the new commission’s ceiling and the old commission.
“When we capped the L shares, we did not put the extra amount into the trails,” Mr. Galona said.
“The commissions [for L shares] are quite high because the expenses are quite high.”
Last year, Raymond James made its changes, negotiated with insurance companies, and cut and capped commissions on all variable annuities at 5% (InvestmentNews, Aug. 7). Raymond James completely overhauled its contracts with annuity providers as part of its change.
Wachovia, however, didn’t renegotiate its contracts with insurance carriers, Mr. Galona said.
But Wachovia is asking the insurance carriers to reduce their expenses on L shares so the firm doesn’t have to give a haircut on the reps’ commission, he said.
The move at Raymond James caused some brokers from its independent-contractor broker-dealer, Raymond James Financial Services Inc., to leave, sources inside and outside the firm said. One company source, who asked not to be identified, said that a half dozen advisers left as a result of the capping in VA commissions, while sources outside the company, including recruiters and executives at competing firms, gave no specific numbers for advisers who left over the issue.
Similarly, the recent change at Wachovia could give some reps motivation to leave, one recruiter noted.
