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Digitization of Fee-Based Annuities for RIAs

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10 December 2021
Jean Sullivan

The digitization of fee-based annuities via fintech marketplace platforms is a crucial step in unlocking a multibillion-dollar sales opportunity for insurers and fintech platform providers. The longer-term vision for registered investment advisors (RIAs) is the creation of an ecosystem in which advisors can open an annuity account and incorporate it into a portfolio within minutes, transforming the client experience and driving marketplace adoption.

RIAs have historically shunned annuities due to product complexities, reputation, licensing requirements, and commission-based structures. However, recent changes to annuity fee structures combined with digitized new account opening processes via marketplace exchanges have opened the door for insurance companies to sell simplified, fee-based annuities to RIAs—with no brokerage or insurance licenses and no commissions—at scale.

The allure for insurers, wealth managers, and insurtech providers is the potential size of the sales opportunity. The RIA channel is estimated to have over $6.0 trillion in assets, of which annuities represent a negligible portion. Capturing even a small percentage (0.5%–1.0%) of the overall assets under management (AUM) results in a significant upside ($30 billion–$60 billion in sales) for those firms that can create RIA-centric annuity exchanges and ecosystems. The idea is appealing. Below, Celent discusses early stage technology platform efforts and identifies the challenges that stand in the way of RIA adoption.

Changes to the Fee Structure

Insurers’ newfound interest in fee-based annuities for the RIA market was triggered by IRS private letter rulings that eliminated the tax consequences associated with the distribution of advisory fees from the cash value of nonqualified annuities. RIAs (and fee-based advisors) are now free to receive fees from nonqualified annuities without triggering a taxable event for their clients. This change prompted insurers to create RIA-friendly annuities that can now be included as part of an investor’s fee-based portfolio. It also led to the building out of annuity marketplace exchanges.

Building the Pipeline

To connect RIAs with annuity product providers, technology exchanges, such as FIDx, Luma (CANNEX), and Halo, have emerged across the industry.

  • FIDx is privately owned, but Envestnet has an equity stake in it. FIDx was founded in 2017 and focuses solely on annuities. The platform connects the largest insurers with broker dealers and RIAs.
  • Halo began in 2015 as a structured notes marketplace, competing with Simon, Luma, and others. Halo then added market-linked CDs, buffered ETFs, and other products to the marketplace. Annuities were added to the platform in April 2021.
  • Luma was formed in 2011. The firm has its roots in delivering structured products to the market. Access to annuities has been added recently to cross-sell to existing clients. Luma partners with CANNEX to deliver annuity data and analytics rather than build out integrations with individual insurers.

These tech-enabled marketplaces focus on operationalizing the front end of the annuity workflow, including need demonstration, insurance company and annuity selection, suitability, advisor licensing, and new account opening (NAO). The exchanges also use application programming interfaces (APIs) and bidirectional integrations to embed annuity products into wealth platforms such as Orion, Envestnet, and Black Diamond. But, even with these advancements, there has been minimal uptake by RIAs, indicating that further technology and operational improvements are needed to attract RIAs.

Below we offer a high-level assessment of industry capabilities and gaps. The matrix describes industrywide functionality rather than focusing on one specific platform.

Operational Component

Capability

Gap

Integration with Financial Planning

Some platforms integrate with financial planning (FP) tools. The advisor can demonstrate the need, such as filling an income gap or fixed income replacement, select an annuity type, and then single sign on (SSO) the annuity platform or exchange.

Financial planning integrations are limited. An advisor would need to use a designated FP tool to access this capability. For example, FIDx leverages MoneyGuide but does not integrate with eMoney. There is significant upside for insurers and platform providers that are able to integrate products within multiple financial planning tools.

Digitized Account Opening

All platforms support the NAO process.

Current NAO capabilities simply automate the existing, burdensome process of opening an annuity. There is no ability to open accounts en masse.

Licensing

Some platforms provide licensing checks by state. Only a very small proportion (< 15%) of RIAs are licensed to conduct annuity business.

Transactions conducted by nonlicensed RIAs are outsourced to a third party. These third-party agents are also developing broader integrations and capabilities.

Suitability and Best Interest

Platforms are configured to provide illustrations, and suitability tests are done at the product level.

There is no institutionalized process for determining best interest within a client’s portfolio. For example, risk tools only address investments.

Integrations

Depending on the platform: FP applications, insurance carriers, data providers such as CANNEX, SS&C Technologies, third party licensing, Depository Trust & Clearing Corporation (DTCC), turnkey asset management programs (TAMPs), and portfolio management tools.

There are myriad integration models across the industry. The challenge is to simplify the workflow, reduce complexity, and embed annuities into the portfolio management systems and processes.

Portfolio Management

Some platforms allow fee-based annuities to be categorized as held-away assets.

Fee-based annuities are not integrated into risk, investment model creation, portfolio construction, and rebalancing processes. They are simply posted to the client’s accounts.

Trading

No “trading” functionality exists, and while most annuity holders do not surrender annuities advisors may recommend a 1035 exchange.

Celent believes that as retail clients continue to demand more holistic solutions, the ability to blend insurance and investment products into comprehensive portfolio solutions will become more important for advisors, leading to increased demand for annuities. However, for insurers and platforms providers to capture this opportunity, marketplace exchanges and ecosystems will need to evolve beyond early-stage models by closing operational and technological gaps. Look for players to leverage technologies such as AI, open API networks, low-code/no-code, and data management tools as they continue to create new and improved marketplace solutions. Stay tuned for our ongoing coverage of this important market segment.