Wells Fargo Advisors has added a new tool to its arsenal of investment services by creating a fee-based advisory variable annuity.
The new annuity products are being offered by wealth managers in the firm’s Advisor Asset Program. Wells Fargo’s move comes in response to a growing demand among investors for a more guaranteed form of tax-deferred retirement income and reflects the increasing popularity of such products. In fact, according to data from both Lincoln Financial and Morningstar, sales of fee-based variable annuities have jumped 36% between 2011 and 2008.
“We, as a firm, have a retirement initiative going on right now and this is one part of that,” Bernie Gacona, director of annuities at Wells Fargo, said in a phone interview. “In terms of what’s happened over the last three or four years with the financial crisis and with clients’ portfolios; being able to offer some kind of guaranteed lifetime income would be beneficial.”
Rather than using a contingent deferred sales charge, this new advisory variable annuity is fee-driven. It is based on the assets in the account as well as the custodial services provided. A standard $125 minimum fee is imposed each quarter to maintain the account.
For an extra charge, the annuity allows for a guaranteed income option for retirement planning. However, that option only covers the minimum income from the annuity and not a full return on the investment or underlying funds.
“We already have [a contingent deferred sales charge] on our retail commission-based product, and we wanted this product to look and feel just like other products in the other advisory platforms, so it was important to have a product that didn’t have [a contingent deferred sales charge] and came at a much lower cost compared to a traditional commission-based annuity,” Gacona said.
Wells Fargo is only the second major financial services provider behind LPL Financial currently offering this type of fee-based advisory variable annuity service, Gacona said. Many companies already host retail or commission-based annuities, but integrating them into the advisory space and connecting with different insurance carriers requires a “massive” commitment of time and resources.
Wells Fargo, Gacona added, had to wait four or five years until the firm had wrapped up a series of mergers and acquisitions before it had enough capital to begin. Then much of the technology and structure had to be built from the ground up, and it took nearly two and a half years before state insurance departments, the Federal Trade Commission, and internal legal and compliance divisions deemed the program consumer-ready.
“AnnuityNet is the standard ordering system for annuities in the industry, but there was no system to go out and take care of fee billing and performance reporting fees,” Gacona explained. “It just takes time to do and you have to do a lot of testing when you’re working with four different carriers.”
Wells Fargo chose to distribute their advisory variable annuity products through Allianz Life, Lincoln Financial Group, Nationwide and Pacific Life. The selection process favored companies with pre-existing relationships and an ability to offer a lower priced options.
“Wells Fargo’s process included [a request for proposal] process, review of specific product pricing and operational capabilities,” John Kennedy, head of retirement solutions distribution for Lincoln Financial, said. “Because of [our] relationship, coupled with Lincoln’s extensive knowledge about fee-based variable annuities, we were able to support them in the launch of their new Advisory Variable Annuity program.”
Wells Fargo Advisors would probably offer the annuity primarily to clients within the $50,000 to $400,000 range of investable assets, but it was essentially designed for those with a minimum of $25,000 investable assets who needed to replace their pension, Gacona said.
“This is not a product we’re aiming at the high-net-worth client,” Gacona said. “This is just an avenue to supplement most clients’ paycheck for when they retire.”
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