When adviser Mitchell Kauffman tried to re-balance an ING variable annuity for one of his clients recently, he was shocked to discover that several fund options were no longer available.
“I thought it was a system malfunction,” said Mr. Kauffman, principal at Kauffman Wealth Services Inc., an affiliate of
Raymond James Financial Services Inc. that manages $115 million.
“I noticed that there were fewer funds that I wanted to use, so I was moving to my second and third choices,” he said. “We had to go back to the drawing board and do a complete reallocation.”
Although it is common, and perfectly legal, for insurers to prune funds from their VA menus periodically, financial advisers such as Mr. Kauffman said the practice is increasingly thwarting their ability to put clients in the best possible funds. In many cases, the discontinued options were the reason advisers steered clients to them in the first place.
In the past year alone, major providers including ING Groep NV, Nationwide Life Insurance Co. and Jackson National Life Insurance Co. have closed dozens of funds in their variable annuities.
“You went to the client at the beginning and said, "These annuity funds are great' — now you have to change [to a less desirable fund],” said Gregory L. Olsen, a partner at Lenox Advisors Inc., which manages $1.2 billion.
It is particularly vexing for advisers who want to re-balance their clients' variable annuities more actively to endure this extremely volatile market, industry experts said.
For example, Thomas T. Riquier, an adviser with The Retirement/Financial Planning Center, which manages $140 million, this summer went to change some of the investment allocations in a client's Golden Select variably annuity at ING, only to find that the insurer has shuttered 30 funds, about a third of the options for that product. Mr. Riquier has $19 million in ING variable annuities.
Funds that are no longer accepting new money included key inflation hedges, such as the ING Global Resources Portfolio (IGRTX), a natural-resources fund, and the ING JPMorgan Emerging Markets Equity Portfolio (IJPTX).
“Inflation is coming back, so you want to be in natural resources, and international funds will see major growth in the next turn of the cycle,” Mr. Riquier said. “We definitely want to be in both.”
Making matters worse, advisers say that VA providers' often aren't upfront about why they decide to close a fund to new investment.
“The communications I've seen don't go into the reasons why,” Mr. Olsen said. “They're saying, "We're doing this, and these are the other options that you have.'”
Insurance company representatives said closing — and adding — funds is a key part of making sure their VAs always have top choices.
“The biggest reason for [closing a fund] is for performance reasons, and we're regularly reviewing the portfolio of investment options to provide a strong investment variety for the client,” said ING spokesman Phil Margolis.
Mr. Margolis confirmed that there will be more fund closings for the Golden Select VA, but he said that the insurer will also introduce offerings.
Nationwide, which closed 14 VA funds over the past two years, pointed out that some funds have had key management changes that have lowered their outlook. Others were found to be redundant.
The insurer allows only certain investment options to be used with its living benefits — and choices involving real estate or commodities were never permitted as selections for variable annuities with those guaranteed features, said Hutch Schafer, associate vice president for product development for Nationwide's individual-investments group.
One of the changes that the insurer made last year was to pull back on the equity allocations for its living benefits so that clients couldn't have more than 70% of their allocation in equities and 30% in fixed income. Previously, clients were allowed to have up to 80% of their allocation in equities.
“We don't get a lot of push-back when we close funds, but when we get questions, we explain why,” Mr. Schafer said. “Advisers tend to look at one feature of the living benefit; we encourage them to look at the whole thing.”
Even insurers that had given investors an array of funds to choose from have pulled some of their selections over the past two years. Ten funds offered for Jackson National's flagship variable annuity have either been merged or shut down, but the insurer had also added 11 funds, bringing its total to 98.
The lineup includes emerging markets, fixed income, natural resources and regional emerging markets, including China and India.
“The funds we've merged away and closed were for the most part repetitive funds and asset classes where we had extra coverage,” said Eric Palumbo, vice president for investment management at Jackson National Life Distributors. “Advisers tell us they don't like being told what to do with their money.”
Some advisers said that the regular closing of funds protects the insurer — and clients — from too-frequent trading in and out of funds.
“My feeling has always been that the insurance companies aren't going to allow market timing on actively managed funds,” said Thomas B. Hamlin, president of Somerset Wealth Strategies, a
Raymond James affiliate that manages $386 million. “It upsets the balance of the funds, and where benefits are involved, you're upsetting the hedging when you move in and out of them.”
E-mail Darla Mercado at [email protected].
