“The insurance industry is ripe fordisruption in terms of pricing and transparency—two things RIAsvalue,” says DPL Financial Partners CEO David Lau. (Photo:Shutterstock)

Annuities have long been the whipping boy of the financialservices industry, and for good reason, thinks David Lau, founderand CEO of DPL Financial Partners.

“Insurance products have forever had a very bad reputation,” hesaid.

Lau is not a plant or acolyte of Ken Fisher's, the head ofFisher Asset Management who in advertisements claims he would “dieand go to hell” before recommending an annuity product to retirement investors.

In fact, Lau spent a decade as chief operating officer forJefferson National Life Insurance Company.

In that role, he set out in 2004 to explore distribution inroadsto fee-only fiduciary RIAs, who by law are prohibited fromaccepting the commissions affixed to the vast majority of insuranceproducts.

What he found when he led that seminal effort were intransigentbarriers to the RIA market and its investors, which account for$2.5 trillion in assets nationwide.

“I got to understand the problem that insurance is for RIAs,”Lau told BenefitsPRO. “Every other investment product is availableto fiduciary advisors on a no-load basis. This was an insuranceindustry problem that clearly needed to be addressed.”

Ken Fisher may not have to go to hell after all

As the Labor Department spent years crafting a fiduciary rulethat put sales of commission-based variable and fixed indexedannuities squarely in its crosshairs, more carriers rolled outfee-based alternatives in an effort to shield incumbent brokerdistribution channels from liability under the rule.

Fee-based products' market share grew, but nonetheless remainedfractional compared to commission-based products.

The most recent data from LIMRA Secure Retirement Instituteshows that FIAs enjoyed a record-setting second quarter in 2018.But fee-based FIAs represented less than one-half of one percent ofthe total FIA market.

Those numbers reflect how most fiduciaries regard annuities.Fisher's views on the products are shared by the vast majority ofRIAs, says Lau.

“No one will argue against the value of guaranteed lifetimeincome or principal protection—those insurance benefits areinarguable, and certainly valuable for the right RIA client,” saysLau.

But those indisputable values come with a “pricing problem” forRIAs, who are legally beholden to place their client's interestsfirst. The costly, complex, and often opaque product features ofannuities inherently challenge fiduciaries' obligation of prudenceto investors, said Lau.

Addressing the pricing problem was the primary motivation behindDPL Financial Partners, which officially launched a platform forfee-based insurance products– specifically for fiduciary RIAs–lastFebruary.

“The insurance industry is ripe for disruption in terms ofpricing and transparency—two things RIAs value,” explained Lau. “Ithought the better way of handling this problem and working withfiduciary advisors would be to do it from an independent point ofview, and to work with carriers across the industry to help thembetter understand the RIA market. And then go to the RIAs with aproduct-agnostic point of view, one that aligns with theirfiduciary values.”

Beyond access to commission-free insurance products, DPL'snetwork serves as an outsourced insurance department for RIAs. Theplatform vets existing fee-based products, and Lau's team workswith carriers to create new offerings or enhance existingoptions.

DPL also audits insurance products when they do exist in RIAclient portfolios, and works with RIAs that don't offer insuranceto identify clients that could benefit from income streams andother protections.

RIAs pay an annual fee to access the platform and services.Insurance companies do not pay for space on the platform, as theydo on broker and wirehouse platforms, but they are charged anadministrative fee, which Lau said is a fraction of traditionalcommission expenses.

In seven months, DPL has signed 125 RIA firms, which range insize from $50 million in AUM to $20 billion.

Allianz, TIAA, Great West, AXA, Great American, SecurityBenefit, Columbus Life, CBLife, and Integrity Life are the carrierslisting products on the platform, which include investment-onlyvariable annuities, FIAs, fixed annuities, and life insuranceproducts.

Under one analysis provided by DPL, an unnamed fee-based productcomes with annual costs that are about one-third of a traditionalcommission-based counterpart.

The largest savings are on mortality and expense fees, whichrange from 50 to 150 basis points in commission-based products thatguarantee income. Morningstar says the average M&E charge onvariable annuities is 135 basis points. DPL's platform has productswith charges as low as 20 basis points.

KISS for RIAs

Along with pricing, product complexity has been the primaryhurdle for RIAs.

“You want to design products that are more straightforward,”said Lau. “A lot of annuities come with bells and whistles designedto sell the product, but RIAs are not selling products—they arebuying them.”

Lau sees insurance investments as another product in the RIAtoolkit. They would not change an RIA's annual fee on AUM. Fees oninsurance products would be paid by investors, just as they paymanagement fee costs on mutual funds.

According to Lau, the investor wins with access to productsthrough their RIA that could better secure retirement income,protect principal, and create tax advantages. The RIA wins by nothaving to move clients out the door to access insurance. Andcarriers win by detaching large commissions from their products,and in turn reducing liability that comes with incentivizing salesforces with commissions.

“This is an industry evolution that I think has to happen,” saidLau, who predicts an ongoing fiduciary movement even though Labor'srule is off the books.

“The fiduciary world is coming because of a lot of stimuli—notjust regulations. Transparency is a societal and consumerevolution. That's the permeating point of view throughout thefinancial services industry,” said Lau. “We just want to be part ofthe stimulus.”