Solutions, Not Products

Advisors who think all insurance products (especially including annuities) are a scam might want to take a look at how the industry is trying to meet their standards.

By now you know that the SECURE Act requires 401(k) and other retirement plans to offer a calculation to plan participants, translating their retirement plan balances into an annual income stream.  The Act also makes it less risky for these plans to offer annuity products (providing that income stream) to plan participants. 

The likely upshot is that virtually every retirement plan participant will at least be aware of the chance to turn their assets into income, as an alternative to your recommendation that they roll the money over into an IRA.  Fiduciary planners will not only be asked about this option, but also may find themselves analyzing the annuity product offered by the plan and explaining why it is or is not a superior option to the rollover.

And then, inevitably, clients will be asking a more disruptive question:  If something like this is being offered in my 401(k), is there a way I can get tax-deferral in my taxable account, and get an income guarantee that I cannot outlive?

Is it possible for advisors to participate in the insurance options their clients are asking about, instead of fighting them?  Would they be able to find guaranteed income products that they can embrace, rather than warn against?

Michelle Richter, managing director of retirement solutions at the Milliman actuarial and insurance consulting organization (, thinks that it’s time for the insurance industry to step out from its traditional sales distribution model and build creative solutions that financial planners can use with surgical precision for their clients.  “What interests me about insurance in the context of wealth planning,” she says, “is how the value that insurance products provide can be deconstructed into its component parts.” 

She lists tax deferral and risk pooling as individual parts, and then suggests that they can be woven into systematic solution sets at an affordable price—“customized,” she says, “for each consumer’s needs.” 

Meaning?  Imagine an investment that functions like a mutual fund, but provides tax deferral, that can be used to supplement retirement plan contributions at an affordable price. 

Or imagine income annuities that include investment components that the advisor could manage and bill fees out of for planning and asset management services.

Finally, imagine customized deferred annuities that fit with a client’s financial plan, so that projected living expenses are covered at the precise moment when the financial plan suggests that, under adverse market conditions, the client’s retirement portfolios will be exhausted—with the payments indexed to inflation thereafter. 

Imagine being able to custom-order product designs that you can’t currently imagine.

“Because of technology advancements,” says Richter, “this kind of programmatic construction is possible to scale in a way that wasn’t easy 10 years ago.” 

This is the sort of thinking that our profession is not accustomed to hearing from a senior executive at one of the world’s largest insurance consultancies, and it suggests that the insurance marketplace may be turning a corner from sales to fiduciary solutions.  Richter, a former senior executive at New York Life working in a career agency model, has been talking not only with executives at the major life insurance organizations about fiduciary life and annuity products, but also with the leadership at NAPFA, the AICPA and the CFP Board.  The goal is to create a coalition between fiduciary advisors and insurance companies who have lived in a sales model for more than a century, to build creative new solutions for advisors and clients who rely on the advice of a fiduciary planner. 

Step one, of course, is to reduce costs to levels that start to interest fee-only planners.  “If you look at the typical variable annuity with a lifetime guarantee attached to it,” Richter explains, “the average fee structure associated with that might be in the 2-3 percent range.  Most of the cost is associated with the guarantee, and for many middle-market consumers, those guarantees are extremely important.  But there are others who choose not to buy annuities because they experience those guarantees as expensive.”

For wealthier clients, Richter’s actuaries are exploring product designs for people who want risk pooling without guaranteeing the investment outcome—who simply want to address the longevity risk by having people who happen to die earlier in retirement forfeit funds that would go to the people who happen to live longer.  This hypothetical product would keep the risk pooling and ditch the expensive guarantee—but it would also, unlike the fixed income annuities that are common on the market, come with investment options and provide investment returns—and potentially also tax deferral.

“On a quarterly basis, it calculates the difference between expected mortality and actual experienced mortality,” Richter adds.  “The mechanism is built off of Milliman’s proprietary thinking regarding both what we expect potential investment outcomes to be as well as our thinking with respect to likely mortality movements.”

The result is a retirement product that is less expensive than an immediate annuity.  The insurance company issuing the single-premium immediate annuity (SPIA) might project that the 65-year-old male would live, on average, 20 years, but to provide the guarantee and be comfortable with living up to it, the company has to make an assumption closer to 25-26 years of life expectancy.  “If you’re looking at a non-guaranteed program,” Richter explains, “you can start with best estimate pricing and then shift payments up or down based on what actually happens with mortality, and get a 15-20% pricing lift just from that.”

Bigger picture, the insurance industry is considering a shift from a product-oriented approach to a solution-based approach.  “When I came to Milliman three years ago,” says Richter, “The response was more of: Gee, you’re talking about competing with the products that we offer, and we don’t necessarily want to talk to you any further because of that.  Now,” she says, “I’m seeing much more buy-in that we, as an industry, need to help Americans address the significant gap between retirement assets and retirement liabilities, and work with advisors outside of the traditional distribution channels.  There’s less of an assumption that the pie is fixed, to more like, if we helped more people, the pie would get larger.”

Of course, advisors would need new tools in order to properly vet these products for their clients.  One is a way to compare, side-by-side, the income received per client dollars committed to a retirement product.  Another is a way to put those annuity assets on the client’s balance sheet—to address the problem where, from an advisor’s perspective, the minute an annuity is purchased those assets vanish from the traditional AUM platform.

As one solution, Richter points to the CANNEX system (, which purchased the consulting and calculation systems developed by insurance consultant and professor Moshe Milevsky.  Advisors can go to the CANNEX website and find premium to income calculators, and also translations of annual income into a putative value of the asset for people of different ages. 

Richter is also talking with several large ETF providers about sponsoring some of the products mentioned here.  This would also allow advisors to track assets and bill client portfolios through custodians and software providers they have learned to trust, as they gradually acclimate to the idea of working with insurance carriers.  “It should not be the case that annuities are relegated to the domain of registered reps and agents,” says Richter.  “It should be just as possible to connect fiduciaries with annuities.”

Mainstreaming annuities

Advisors who think Richter’s predictions are a bit on the wild side might be surprised to learn how far the insurance industry has come in the past five years toward building fiduciary products—and the allies it has collected in the fiduciary space.  A relatively new company called FIDx ( has built the widgets and APIs that allow the Envestnet platform to offer a new life insurance and annuity buying tool to mainstream advisors.  “We’re enabling custodians and broker-dealers to let advisors open up new accounts, do in-force illustrations, client reporting and billing,” says FIDx CEO Dan MacKinnon.  So far, Jackson National, Prudential, Global Atlantic, Allianz and Nationwide have created product lines for licensed advisors.  In December the platform was expanded with products that are more appropriate for unlicensed (fee-only) fiduciaries.

There are several breakthroughs here.  One is the ability to compare different annuity solutions side-by-side, feature-by-feature.  FIDx allows an advisor to look for products most appropriate for guaranteed income, or for estate planning, and see a list of annuities with basic statistics like minimums and commission levels.  The key cost and fee disclosures that are spread out across an annuity’s 200-page prospectus are pulled together into a one-page evaluation.

Another breakthrough is integration of the insurance product with a client’s investment holdings.  “In the previous world, says Rich Romano, FIDx chief technology officer, “if an advisor had $500,000 to invest on behalf of a client, and wanted to put $300,000 into an SMA and $200,000 into an annuity, the annuity would no longer show up as a client asset on the platform.” 

What FIDx does, for Envestnet and other custodial platforms, is include not only the annuity in the asset reporting system, but also the underlying investments in the annuity.  That makes it possible to rebalance across all the assets, and to bill AUM on the total client asset pool including the annuity, and to see the total household allocation to different asset classes.  FIDx also provides a risk assessment score for the asset allocation within the variable annuity contracts, which can shift as the markets take the equity allocation up or down.

“We believe that this gives the advisor, for the first time, an integrated way to incorporate guaranteed income products and downside protection in holistic managed portfolios for clients,” says MacKinnon.  “It’s great for the client, great for the advisor, and it’s also good for the insurance industry.  They can,” he says, echoing Richter, “get their products in a solution mindset.  What is the solution we are trying to offer from a product design standpoint?”

Fiduciary consulting

Interestingly, when the Envestnet annuity platform was announced, the profession already had an integrated insurance solution, which has also, for the past two years, been providing consulting services to insurance companies that are trying to figure out how to attract the attention of fiduciary advisors. 

Advisors—particularly at larger firms—have noticed.  “In the two years that we’ve been fully on the market,” says David Lau, founder of DPL Financial Partners in Louisville, KY (, “We’ve collected $400 million in premium.  But,” he adds, “that has been ramping up.  In the fourth quarter of 2019, we did around $140 million.” 

During the same period, the number of fiduciary products that the insurance industry was willing to offer has risen from 18 to 40, including some creative new solutions from Jackson National.  “I’ve done a lot of consulting for them,” says Lau.  “We see that as a breakthrough, since they’ve been the annual leader in variable annuities for more than a decade, and they have never before outsourced distribution of any sort.”

DPL is a platform for fiduciary, commission-free insurance solutions of all stripes and sizes.  Advisory firms pay an annual subscription fee for access to a suite of immediate and variable annuities, life and health and disability and long-term care products.  The investment-related products are integrated into the leading investment management software programs (the current list includes Orion, Morningstar Office, Black Diamond and Tamarac), so advisors can report on them as assets to be tracked and managed.  And, if they want, they can bill their fees out of them.

Lau, formerly chief operating officer of Jefferson National Life during the time when it came out with its no-load Monument annuity, created the DPL platform and then realized that insurance companies needed advice on how to strip out their sales commissions and create transparency about their fee structures.  It was slow going at first.  “We started to get a lot of interest when the DOL Rule was enacted,” he says.  “Now, with Reg BI, the momentum has picked up again.”

But Lau argues that even absent government regulation, internal pressures in the insurance world are are starting to drive it into the arms of fiduciary advisors.  “That New York Life agent isn’t just an insurance agent any more,” he says.  “Now, suddenly, he has the CFP.  State Farm is turning 15,000 agents into RIAs.  Everywhere your clients are going to go, they’re running into people who want to provide them with a financial plan on a fee basis.”

Recent private letter rulings (201945001, 201945002, 201945003, 201945004, 201945005, 201945006, 201945007, 201945008 and 201945009; see, allow advisors to bill fees out of any insurance product with a cash value, and Lau has made fee billing a non-negotiable component of any product he allows on the DPL platform.  “And,” he adds, “we require them to integrate with the portfolio management systems.  Insurance and annuities have to fit into the business model for a fee-only advisor.”

Like FIDx, DPL offers side-by-side fee disclosures; transparency is probably the biggest requirement to get on the platform, aside perhaps from zero commissions.  Lau says that this creates pricing competition which is further driving down costs on products that were already leaner than anything else on the market.  Once an insurance company sees that a competitor’s cost structure has gone down, it has to meet that challenge or lose sales to the competition.

The side-by-side disclosures are augmented by a tool on the DPL website, similar to the one that CANNEX offers—which tells advisors which products offer the best return, all-in.  (One can also envision these two solutions allowing advisors to compare the income disclosures offered by their client’s 401(k) plan with better pricing options that might be available.)

“If an advisor has a lump sum dollar amount they want to invest,” Lau explains, “we have a tool which will tell them which product, given their client specifics, will generate the most income from that lump sum.  Or,” he adds, “if the client is looking for a flat dollar amount, say $5,000 a month in guaranteed income, we’ll tell them the product that will do that with the least amount of premium.”  This is what fuels pricing competition.  “Our carriers are always interested in what products are getting used on our platform and why,” Lau adds.  “When they don’t offer price-competitive products, they don’t see the results they want.” 

Most of the cash value products now, sometimes for the first time, include Vanguard, DFA and low-cost ETF options, but Lau says he still sees carriers—like Jefferson National did—subsidizing their disclosed fees with fund revenue-sharing arrangements on more expensive fund products.  The normal revenue sharing has the fund company rebating 35-50 basis points back to the carrier—which has to be considered payment for shelf space. 

“Our advice, if this is part of the structure, is to make it clear and transparent,” says Lau.  “Instead of forcing people to figure out how much of a 12(b)-1 charge is in this fund or annuity, just put it into the M&E where it’s visibly a part of the product cost.”

Now that the fiduciary barriers are coming down in the insurance marketplace, Lau says that the primary barriers to a rapprochement between fiduciary advisors and the insurance industry is on the other side of the fence.  “You still hear advisors say: I don’t like annuities because they’re expensive and complex,” he says.  “But that generalization no longer applies to every solution,” he adds.  “People say, if I give client assets to annuities, I lose control, or I can no longer bill on those assets, or include them in a performance statement. It’s no longer the reality,” Lau says.  “But those perceptions don’t die easily.”

Guarantees without annuities

One of the most interesting solutions to the SECURE Act requirement that qualified plans offer income guarantee options comes from San Francisco-based RetireOne (  Like FIDx, RetireOne offers a mix of fee-only annuity products (22 and counting), which can be integrated with a client’s other assets.  The list of carriers includes Transamerica, Ameritas and Jackson National. 

Like Envestnet and DPL, the advisor can use the platform to manage the subaccount assets, and bill from the cash value.  A new integration with Covr Technologies has added a variety of commissionable and commission-free life insurance products on the platform, including cash value universal and variable universal.  Long-term care and disability insurance will be added soon. 

RetireOne also purchased Edelman Financial Engines’ broker-dealer, so that advisors who are transitioning from commission to fee-only can “park” their trail commission-generating insurance products and continue to receive the trails during the transition period.  The company currently works with 900 advisory entities and has about $1.2 billion in cash values among products that it has distributed.

RetireOne’s core product is a guaranteed income feature that advisors can apply to any portfolio balance, wherever it might be located.  “Clients are hearing about guaranteed income on their 401(k) balances,” says David Stone, RetireOne’s founder, formerly chief counsel of Schwab’s insurance and risk management initiatives.  “RetireOne allows advisors to put a guarantee on money in a Schwab or Fidelity or TDAI account, but they don’t have to have the assets in an annuity.  The RIA can manage the assets as before.”

The guarantee costs 1% a year for as long as the client wants to have it in place—ideal for those difficult pre-retirement and immediate post-retirement years when the sequence of return risk is greatest.  “For as long as you’re paying for the guarantee, you get a 5% income guarantee as long as the client lives, based on the high watermark,” says Stone.  “If the account goes to zero, the insurance company keeps paying the high watermark income payment as long as the client is alive.  If the client is 82 years old and the markets haven’t gone down, and there is now no chance of outliving the assets, you can cancel it and walk away, and they never cut a check to the insurance company, except for the premiums.”

The guarantee is provided by Transamerica, through a somewhat complicated arrangement that RetireOne had to figure out.  “No insurance company would offer a guarantee without knowing where the assets are and what the advisor is doing with them,” says Stone.  (Imagine suddenly discovering that you are guaranteeing future income returns on portfolio fully-invested in double-inverse ETFs.)   RetireOne provides Transamerica with daily feeds of all the portfolio positions.  “If the advisor deviates from the contract terms, our system flags it and we manage it for the insurance company,” Stone explains. 

RetireOne collects a fee on the insurance guarantee, and charges platform fees from the insurance companies that distribute their products on its system.  “Our administration fees are just 10 percent of what a traditional annuity might pay for distribution,” says Stone.  The RetireOne solution is also on Envestnet’s FIDx platform.  “The whole goal is making it easy for advisors to integrate these solutions,” says Stone.  But he admits that integration with the asset management platforms (other than Envestnet) is still a few quarters away.  “We should have these programs support our network directly sometime in the first couple of quarters of 2020,” he says.

Product creativity

Initially, DPL and RetireOne got a lot of annuity rescue business—1035 exchanges from high-cost products into the lower-cost ones that they offer.  But as more consumers begin to hear about a guaranteed income alternative to the traditional IRA Rollover—in my mind, the most consequential part of the SECURE Act—then advisors are going to need to have answers about the best annuity options on the marketplace.  They may still recommend rollovers, but if they can bill out of annuity assets, and continue to manage annuity portfolios, the pain of losing assets to an annuity is lessened somewhat.

If Richter is right, the insurance world is poised to enter a new era of product creativity, similar to the early 1980s that saw product lines expand from traditional whole life into universal, variable and variable-universal product options.  Those were responses to demand from their distribution channels.  Now the distribution winds are shifting from traditional commission-compensated agents to fiduciary advisors, who are going to be making very different requests.

The insurance industry appears to be willing to meet fiduciary advisors where they live, and the public is about to discover options they were unfamiliar with before.  The question now is: will the fiduciary advisor profession rethink its relationship with the insurance industry?  As new and more creative products come onto the market, and new platforms evolve, that remains the biggest question still to be answered.