A lawsuit filed by one of the largest wealth managers against a variable annuity firm offers a glimpse into one of the industry’s most critical and changing conflicts of interest: payments to get a product in front of advisors who might recommend it to clients.
Advisor Group is seeking at least $900,000 plus interest and legal fees from Venerable Insurance and Annuity Company and an affiliate for allegedly breaching the terms of a marketing agreement enabling access for the issuer’s products on the wealth manager’s platforms, according to the civil lawsuit filed April 8 in Philadelphia federal court. The Phoenix-based wealth manager alleges Venerable reneged on three years of payments.
The money involved represents a tiny fraction of the several billions of dollars in kickbacks of various types among wealth managers, product sponsors and custodians each year. Thanks to SEC disclosure cases that have led to more than
Broker-dealers face tight margins and a need for resources to deploy toward value-added services for advisors, she says. Relationships with product sponsors are shifting slowly over time, away from the IBD business model’s dependence on the arrangements.
“We went from the full-secrecy, full-negotiation environment to one that's fully disclosed,” Armitage says. “Broker-dealers are a lower-margin business than the advisory side, with the exception of those that self-clear. The firms that have gone self-clearing have the ability to make revenue in other places...The broker-dealers right now are trying to figure out other ways to diversify their revenue while keeping advisors with them.”
The lawsuit was first reported by
Advisor Group spokesman Joseph Kuo declined to comment on the case, citing a policy against discussing legal matters publicly.
A spokeswoman for West Chester, Pennsylvania-based Venerable, Allison Proud, said in an email that the firm is aware of the lawsuit but also doesn’t comment on pending litigation. The company buys and manages legacy variable annuity businesses acquired from other firms.
“We value our relationships with our distributors and are committed to honoring our obligations to them,” Proud said.
Even with the heightened disclosure, the agreements are often difficult to track beyond the legally required documentation and a few snippets available in publicly traded firms’ earnings. In its latest
Revenue sharing payments of up to 30 basis points of assets from hundreds of mutual fund and insurance firms are the first in the group, though the total amount received by Advisor Group on an annual basis isn’t disclosed. In its last earnings
The allegations
The lawsuit reveals how the arrangements work and how this particular deal soured. In August 2015, Venerable’s predecessor, the Voya Insurance and Annuity Company, and the affiliated firm, Directed Services, entered into a marketing support agreement with Advisor Group — then under previous ownership as AIG Advisor Group.
In exchange for “enhanced marketing and training opportunities,” Voya would pay at least $300,000 per year for the next five years, according to the agreement, which is included as an exhibit in the lawsuit. Among other services, the distribution agreement required Advisor Group to give Voya access to Advisor Group’s representatives, as well as market data and sales opportunities.
Shortly after Reverence and the other investors
“Because you will no longer be providing marketing services or support to DSL, this letter hereby terminates the marketing allowance Letter Agreement between AIG Advisor Group and DSL,” CEO Ken Brown, Directed Services’ head, wrote in the letter, another exhibit in the litigation.
The following year, in June 2019, Advisor Group wrote back to Brown accusing him of being in an “erroneous position on post-termination marketing agreements” and warning him of potential legal proceedings. The resulting four-count lawsuit seeks the allegedly missing payments for the years 2018 through 2020.
Determining whether there was a breach of contract “should be fairly straightforward,” given that there are precise termination clauses in marketing agreements, according to Armitage. Regardless of whether Advisor Group wins or loses the case, it’s “a warning shot” to other product sponsors and “a good indication that the firms are fighting for their advisors,” she says. The money could go toward offsetting training costs or various fees paid by advisors.
“It's the right move for them to file the suit,” Armitage says. “If they get something, great. If not, at least they tried.”
