LPL eyes more fee-based variable annuities as fiduciary rule looms

LPL Financial anticipates more variable-annuity distribution on an advisory basis as one potential outcome of the Labor Department's proposed fiduciary rule. The independent broker-dealer has had a fee-based VA platform for several years, but could look to grow that aspect of its variable-annuity distribution if the DOL rule makes commission VA business more difficult, according to Mark Casady, LPL's chairman and chief executive. “We actually were an innovator … several years ago of creating VAs without commissions in our advisory platform. We raised several hundred million dollars' worth of assets that way. And so we would basically dust off those capabilities and get them going again if that's the outcome,” Mr. Casady said during LPL's fourth-quarter earnings call, which took place Feb. 11 after market close. LPL's stock (LPLA) was down 37% as of 1:04 p.m. Eastern Time on Feb. 12, trading at $15.85 per share compared to a previous close of $25.26. Its price-to-earnings (P/E) ratio was 8.21. The Dow Jones Industrial Average was up 238 points at the same time, up 1.5% from the previous close. LPL reported net income of 37 cents per share for the fourth quarter. That was a drop of 44% when compared to the same period in 2014, when LPL reported earnings of 66 cents per share. FEE-BASED VAs Fee-based variable annuities compensate advisers differently than traditional VAs, providing an ongoing asset-based fee rather than a commission. Broker-dealers have historically done much more VA business on a commission rather than advisory basis, according to Jack Marrion, chief executive at Advantage Compendium, a research and consulting firm specializing in annuities. Fee-based variable-annuity sales only accounted for $4 billion of the $99 billion in total VA sales through the third quarter of 2015, a 4% market share, according to Morningstar data. In full-year 2014, their share was 3.8% of a total $137.9 billion. However, LPL and others in the industry think fee-based VAs could become much more popular due to the pending Labor Department rule, which would raise investment-advice standards for brokers working with retirement accounts. “If the DOL thing happens, they'll definitely gain traction,” Mr. Marrion said. Under the current proposal, the fiduciary rule would still allow for commission VA business, but brokers would have to comply with something called the best interest contract exemption, or BICE, in order to do so, due to the variable nature of commission compensation. Advisory VAs charge level fees, and would be exempt from BICE compliance. Critics of the rule have called the BICE “unworkable,” and said it would expose brokers to more compliance and litigation risk. “One [outcome of the rule] is that the best interest contract isn't workable and, therefore, we switch over to advisory as a primary way of solving for retirement assets,” Mr. Casady said. “Variable annuities are a commissionable brokerage product, and therefore for a retirement account you'd want to use a non-commissionable VA.” Requests for further comment from LPL were not returned by press time. “It sounds like [LPL] is taking stock of their assets, and perhaps [fee-based VAs] could be a way forward for annuities if the DOL rule shakes out the way they think it's going to,” according to Bill Butterfield, a senior analyst in Aite Group's wealth management practice. “Clearly, annuity sales are a big part of LPL's business, and whatever form the DOL rule takes, I don't see that going away.” Mr. Casady noted in the earnings call that the firm is anticipating a “pretty wide range of outcomes” from the final fiduciary rule. The Labor Department will likely release a final version of its rule to the public in March or April. LPL earned $189.3 million in commission revenue from variable annuities in the fourth quarter, which was flat when compared to the previous quarter. VA commission revenue was down 3.6% compared to $196.3 million in fourth-quarter 2014. LPL's overall commission revenue was down 4% versus the third quarter. “I certainly think we're seeing the impact of advisers changing to advisory, and so that's why you're seeing brokerage sales down across the board, whether it's mutual funds, VAs or alternatives,” Mr. Casady said. “And so that condition will still hold true. But I do think that there's a way of imagining how the market continues to satisfy what consumers need in terms of their long-term retirement needs.” Correction: This article was updated to reflect that LPL's commission revenue from variable annuities is in millions, not billions.