Even as insurers recalibrate product and compensation design to accommodate fiduciaries, and more clients become interested in such products, barriers remain. (Photo: Shutterstock)

Ten years ago, when Craig Hawley, general counsel of Jefferson National at the time, picked up the phone to discuss what was then the insurance industry's seminal insurance product pipeline to fee-based advisors, he often met a tepid response from fiduciaries.

“The question was how fast they could hang up on us,” said Hawley, who now heads Nationwide Advisory Solutions after Nationwide finalized its acquisition of Jefferson national in 2017.

Selling annuities to fiduciaries has traditionally been a circle hard to square for insurance companies.

When Nationwide bought Jefferson National, it did so with an eye to grow its business with fiduciaries. The latter's Monument Advisor program was launched over a decade ago. It offered the first investment-only variable annuity that extended tax-deferral options for savers that were maxing out 401(k)s and IRA investments, while giving advisers a fee-based option and recurring income stream.

Monument Advisor evolved to an integrated wealth management platform, says Hawley, with more than $1 billion in assets coming into the channel annually.

Nonetheless, fee-based annuities remained a lonely space. Product manufactures struggled to structure products that could channel asset-based annual fees. And advisors were leery of products that were perceived as expensive and unnecessary, given many advisors' claimed value add of managing money, and distributions, themselves.

In 2017, sales of fee-based variable annuities hit $2.2 billion, and while the fee-structured products have seen considerable growth of late, they still only account for about 2.7 percent of all variable annuity sales, according to LIMRA.

That was poised to change under the Labor Department's fiduciary rule, which favored asset-based management fees over the commissions typically charged on sales of variable and fixed-indexed annuities. Nationwide cited the rule as one impetus behind the acquisition of Jefferson National.

But even after the rule was vacated last year, Hawley says the migration to the fee-based advisory model continues.

And as more Americans head to retirement, predictable income streams and asset preservation are concepts seeing increased demand.

“Income guarantees are resonating with more Americans,” said Hawley. “And a lot of investors are just not interested in taking on unlimited market risk in retirement.”

The secular trend to fee-based models has motivated the Nationwide Advisory Solutions launch of Nationwide Advisory Retirement Income Annuity, or NARIA, a variable annuity with an optional income guarantee that's targeted specifically for fiduciary advisors wanting to integrate income products within a holistic investment plan.

“NARIA allows advisors to bridge the gap for their clients,” said Hawley. “Advisors can say, 'we're still looking to grow your nest egg, but if things don't go right, there is a guaranteed level of future income.”

Fiduciaries fall across a continuum and are hard to put in a box, says Hawley. Some market themselves as money managers, and some outsource those responsibilities; some are buy-and-hold managers, and some more actively manage savings.

NARIA includes 130 different mutual funds from which advisors can build a strategy. Annual advisory fees can be up to 1.5 percent, but Hawley expects they will fall closer to 100 basis points. Investment principal is protected, and a death benefit can be purchased at the time of application for a charge of 15 basis points on its value, according to annuity's prospectus.

Adviser fees are withdrawn from the contract, which do reduce the gross value of the annuity, but do not reduce the benefit base that determines income streams, the prospectus also says.

That feature distinguishes NARIA, said Hawley. “The fee an RIA would pull doesn't take away from the benefit base guarantee. In the past, products haven't done that.”

As registered advisers, many RIAs have strayed from annuity options because they're not licensed to sell insurance. To settle that obstacle, Nationwide Advisory Services offers an in-house agency desk that can transact the sales. Advisers who worry their clients would be cherry-picked shouldn't—Hawley says that would amount to Nationwide shooting itself in the foot. Nationwide does not charge a fee for brokering the sale.

“We have an established track record of trust,” he said, noting Nationwide's existing relationships with more than 5,500 RIAs. “We're empowering a portion of advisers' businesses, not trying to build relationships with their clients.”

Other insurers are looking to grow distribution through the RIA channel, which manages $2.5 trillion in assets. Jackson National, the largest annuity provider, recently rolled out its first fee-based products through DPL Financial Partners, a third-party platform for fee-based annuities launched last year.

Even as insurers re-calibrate product and compensation design to accommodate fiduciaries, barriers remain. Hawley cites research showing two-thirds of advisory clients are interested in retirement income products, while only one-third of advisers say they will use variable annuities in the future.

Some of that dissonance falls at the feet of carriers, says Hawley.

“In the past, the insurance industry has missed the target on retirement income,” he said. “We have home owners insurance we hope we never have to use, but if a tornado comes around, we're glad we have it. Running out of money in retirement is even scarier. Industry hasn't done a good job of painting the annuity picture in that way.”