Banks and credit unions are likely to set commission rates on fixed-rate annuities in the neighborhood of 3% once the fiduciary rule kicks in, according to a new report from Kehrer Bielan & Consulting.
The report surveyed 18 bank and third-party broker dealers to ascertain how financial institutions plan to adjust their product and pricing menus to comply with the new regulation.
Not all were unanimous in their expectations for future fixed-rate annuity commissions, with responses ranging from 2.5% to 5%. Most responses, however, hovered between 3% and 3.4%.
Commission rates averaged 3.77% in 2015, and historically have been much higher, according to Kehrer Bielan.
As the firms scramble to make adjustments, they are taking one of two general approaches. The majority, 55%, are planning to offer uniform product menus for both retirement and retail investment accounts. A significant 40%, however, will develop separate product menus.
The firms that plan to offer distinct menus for retirement accounts have somewhat lower sales commission expectations for fixed-rate annuities in those accounts, with commissions ranging from 2.5% to 4.3%, compared to 3% to 5% for the firms with a "one-size-fits-all" product menu, according to the report.
Firms with a unified product menu for all clients were fairly clear as to what their fixed-rate annuity products would look like. The overwhelming majority (73%) said they expect to receive the same sales commission for each fixed-rate annuity and 55% would allow advisers to choose among different up-front and trail commission options.
Unlike firms with a single product menu, those with separate menus were still unclear about the makeup of their fixed annuities, with 13% undecided about whether to even offer them in their retirement accounts. They were more uncertain about whether to offer fixed annuities with sales commissions that varied by consumer benefits and whether to allow advisers to choose among commission options.
"If you're going the separate product menu route, there's a lot more to figure out, and so it's taking these firms a little more time to work through the process," said Tim Kehrer, senior research analyst at Kehrer Bielan.
Kehrer was surprised by the significant number of firms planning to have separate product menus, saying that such a move is risky. "It's potentially awkward for a firm to tell a client that the adviser is operating in your best interest within this one account but not in this other account," he said.
Firms deciding to go with separate product menus may have opted to do so to minimize the amount of disruption to the business, Kehrer explained. They wanted to spare the retail investment accounts from the disruption that retirement accounts would experience from changes to adviser compensation and tightened disclosure requirements.
By leaving the retail investment accounts alone, "life would go on as it did pre-DOL," a plus for firms that are concerned about losing advisers who are unhappy about pay plan changes, Kehrer said.
"Firms are looking to minimize how much they have to change," Kehrer said.
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