In what is believed to be a first-of-its-kind move among insurers, Ohio National Financial Services Inc. has informed broker-dealers that sell its variable annuities that it will terminate servicing agreements and cut off trail commissions by mid-December, setting the stage for a showdown with some of the largest brokerage firms in the country.
Ohio National sent a letter to its broker-dealer partners on Sept. 28 to "provide notice of termination of any and all servicing agreements" in place between the two entities and their affiliates. The termination, which takes effect Dec. 12, means that "all individual annuity sales compensation will cease at that time," according to the letter, which was obtained by
InvestmentNews.
Since the termination essentially means the accounts are no longer connected to the brokerage firms, the action effectively cuts advisers out of the client relationship and severely restricts or even bars them from giving advice on VA contracts, experts said.
The action would affect Ohio National variable annuity contracts purchased with a guaranteed minimum income benefit rider, which offers clients a guaranteed level of income in retirement. Ohio National
has $24.9 billion in VA assets on its books, about 59% of its total assets under management. It's unclear how much of that total is invested in a GMIB product.
The insurer
announced last month it would no longer write new annuity business and laid off 300 employees.
Insurers have been trying since the financial crisis to
get customers to sell out of costly variable annuity guarantees via product exchanges and buyouts. Ohio National earlier this year
tried to get customers to exchange their ONcore variable annuities purchased with a GMIB around 2008-12 for a different annuity. But advisers said they don't remember a company ever taking what they consider such a drastic step before.
"I'm shocked. I've never seen anything like it," said Kevin VanDyke, president and founder of Bloomfield Hills Financial, a hybrid firm affiliated with First Allied Securities Inc. "It's a terrible precedent to set."
"It's driven by greed," Mr. VanDyke added. "I think it's a sneaky way to get clients to pull their money out, or make a mistake that could be really detrimental to the contract."
Rob Pettman, the executive vice president of product and platform management at
LPL Financial, the largest independent broker-dealer in the country, sent a memo to its brokers on Monday addressing Ohio National's action.
In it, he said LPL is "disappointed" by the decision, and that it will "negatively impact" advisers and their businesses.
"LPL strongly believes this kind of behavior is unprofessional and disrespectful to business partners and clients," Mr. Pettman said in the memo, obtained by
InvestmentNews.
Mark Cortazzo, senior partner at the advisory firm of MACRO Consulting Group, said Ohio National, as a mutual insurance company, has a responsibility to put its policyholders' interests first. That doesn't appear to be the case here, he said.
"There is an investor conflict," Mr. Cortazzo said. "There's now a disincentive to continue to service the contracts, and an unguided consumer won't realize the full value of the policy."
Mr. Cortazzo, who has several clients with these products, some in their 70s and 80s, said he usually gets a daily download of client account information, but it appears Ohio National stopped sending that information as of yesterday.
Financial advisers said ending the brokerage service agreement leaves investors vulnerable to making mistakes such as taking excess withdrawals or moving money to a restricted investment, which could severely dilute the VA benefit. Further, if Ohio National were to offer consumers a buyout offer in the future, they may not be able to get advice on that offer, advisers said.
Angela Meehan, an Ohio National spokeswoman, said the firm "will continue to service and support our existing contract owners" and that the firm's new strategy of focusing on its life insurance and disability income insurance is "consistent with our fiduciary duty to policyholder members."
"The steps we are taking allow for advisers to continue to serve our contract owners," she added.
Advisers, however, questioned what those steps are, and called on regulators to look into Ohio National's move to terminate servicing agreements and adviser compensation. If regulators don't take action, they said, it could set a bad precedent for other insurers.
A spokeswoman for the
Financial Industry Regulatory Authority Inc., the brokerage regulator, wasn't immediately available to comment.
One source familiar with Ohio National's business who did not want to be identified, said the Ohio Department of Insurance had been advised of the steps the firm is taking but made no objections.
Chris Brock, assistant director of public affairs at the Ohio Department of Insurance, said the department is aware of the recent announcement by Ohio National related to its annuity business.
"As Ohio National goes through the process of implementing these changes, we will continue to monitor to ensure compliance with Ohio insurance laws," Mr. Brock said. He said if someone has specific allegations of violations of Ohio insurance law, they should contact the department.
Brokerage firms appear poised to fight Ohio National's business decision.
"We are actively challenging Ohio National to reverse their decision regarding compensation," Mr. Pettman of LPL said in the adviser memo. "We will make it clear to all of our other annuity partners that the Ohio National decision regarding future compensation is unacceptable."
"We are currently evaluating all annuity sponsor contracts and seeking to identify anything we can legally change or amend in order to protect your commissions in the future," he added.
