Independent broker-dealers are closely watching a decision by Ohio National Financial Services to shutter its $1-billion annuity business and end advisor commission trails for some variable products.
The Cincinnati-based insurance firm and IBD
The move on commissions affects only variable contracts with a guaranteed minimum income benefit rider, but Ohio National has a major reach in the industry as one of the top 20 issuer of VAs.
The firm
LPL Financial, the No. 1 IBD by overall revenue, and Cambridge Investment Research, the No. 7 firm, have both said the decision will pose an impact on their advisors. Rob Pettman, LPL’s executive vice president for product and platform management, called the move “unprofessional and disrespectful” in a memo to advisors.
Most advisors take commissions of about 6% upfront at the time of the sale rather than the smaller percentages from trails, according to Michael Robinson, co-founder of The Blueprint Insurance Services. Others opt to receive the revenue over the life of the contract.
“They’re building their book of business based off the trail commissions,” Robinson says. “That’s going to be lost revenue for the broker-dealer and lost revenue for the advisor, but, importantly, the advisor’s book of business is not worth what it once was.”
He adds that ending the trails is “something that you rarely see,” describing as unprecedented the related decision by Ohio National to keep the trails in place for advisors with the firm’s IBD, O.N. Equity Sales. Robinson also notes that none of the moves will affect clients who purchased the VA products.
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Reg BI would boost sales because the products fill a pressing need for income over long lifespans, the executives say.
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The deal with the family-run independent insurance firm followed record sales in fixed-index annuities.
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Revenue from FIAs surged to well over the existing mark in the second quarter, while VAs stabilized after 17 straight quarterly declines.
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The largest firms’ combined VA and FA revenues hit a three-year low in 2017, but the products still make up a significant portion of their businesses.
In a statement, Ohio National President Christopher Carlson acknowledged that the issuer’s relationship with individual BDs or categories of BDs may now differ due to “a range of factors.” The firm will maintain services and support for all existing annuity and retirement plan contract owners.
“While the majority of our selling agreements are being replaced with a service agreement or service letter as a result of our new strategy, the steps we are taking allow for advisors to continue to service their clients’ needs as they do today,” Carlson said. “All advisors continue to have access to their client information and can continue to service them.”
The firm’s selling agreement with LPL will change to the service agreement at the end of the year, meaning Ohio National will stop paying the trails on Dec. 13, according to Pettman’s memo to advisors, which was obtained by Financial Planning. Ohio National may also modify its other contracts.
LPL is “disappointed by the carve-out of this specific block of business, as we know it will negatively impact you and your business,” Pettman said, informing advisors that LPL is “actively challenging” the issuer to reverse their decision.
“We will make it clear to all of our other annuity partners that the Ohio National decision regarding future compensation is unacceptable,” he said. “We are currently evaluating all annuity sponsor contracts and seeking to identify anything we can legally change or amend in order to protect your commissions in the future.”
At Cambridge, Ohio National’s move poses a more limited impact, since only about 3% of the firm’s roughly 3,200 advisors will be affected, according to spokeswoman Cindy Schaus.
“However, because we recognize a larger impact is possible with the approximately 100 advisors directly impacted with this Ohio National change, we are in the process of communicating directly with these advisors,” Schaus said in an email.
Representatives for fellow major IBDs Kestra Financial and Advisor Group declined to comment, and the remaining largest 10 IBDs without an insurance company parent or an affiliated annuity issuer did not respond to requests for comment. IBD advocacy group FSI also had no comment last week.
Combined annuity sales disclosed by the largest IBDs fell 10% last year to $4.4 billion, a three-year low,
“We believe Ohio National’s poor decision is one that represents only their individual business, but NOT the annuity industry as a whole,” LPL’s Pettman said in the memo to advisors.
