Play In The Same Sandbox As Investment Advisors, Even If You Don’t Have Your Series 65/66

Three bucket with sand and a spade on tropical sand beach

Originally, IOVAs, or Investment Only Variable Annuities, were developed to help financial professionals play in the same sandbox as advisors with a Series 65/66, or a designation that allows them to conduct investment advisory business. The insurance companies wanted a platform that looked, walked, talked, and acted like an investment advisory platform without having the need for an investment advisory license to sell it. This is when the Investment Only Variable Annuity was born and, due to the nature of the product, not only did it compete with the investment advisory platforms that money managers out there had to offer but it also had the added advantage of tax deferred growth when conducting non-qualified business. The reason there is this advantage with the IOVA is because it is an insurance product and, although we are playing in the same sandbox as advisors, our sand is different.

When looking at the IOVA and Managed Money options in terms of total cost to the client, the cost is similar but who the client pays it to is different. For example, on average the IOVAs cost (ME&A) can range from .95 percent to 1.30 percent (plus investments) depending on the carrier you use, and if you use a five-year surrender or completely liquid contract. This total cost is paid to the insurance company and the insurance company pays the financial professional. With a managed account, I would say on average the client is paying a third-party money manager around .4 percent to .5 percent for their platform (plus investments), and then the advisor is charging a fee to manage the accounts. Typically, I see around a one percent charge on fee-based accounts, so that would take the total cost to the client to 1.4 to 1.5 percent (plus investments) depending on the size of the account. At first glance this is more expensive than the IOVA account, but the advisor can lower the fee he/she charges the client on the fee-based account, and they may be able to get investments at a lower cost than the investment options available within the IOVA account. So, the IOVA could be a little less expensive or a little more expensive than the managed account depending on the moving parts listed previously. It all depends on how each is designed.

Although the costs have stayed pretty similar for IOVAs and managed accounts, over recent years the IOVA contracts have added additional features that give them more advantages over managed-money accounts depending on the particular circumstances of the client. One example could be if death benefit protection was a concern at all and the client would like more of a guarantee than just an account value death benefit. Many of these IOVAs have the feature of a standard death benefit (the greater of premiums less distributions or contract value) included in their product, and many others allow you to add it on as an additional feature.

Although there are many IOVA products on the market, there are two that I think are worth mentioning here: Jackson’s Elite Access and Equitable’s Investment Edge contracts.

Jackson pioneered the IOVA in the broker-dealer channel launching Elite Access in 2012 and has led the way in terms of production in this space for most of its life. This is due to a very robust investment platform consisting of 130 investment options that provide the opportunity to grow your client’s money in any market cycle or economic condition. What do I mean by that statement? There are generally four phases of the economic cycle to consider when investing and building portfolios. They are a rising market, falling interest rates, falling or choppy market, and inclining interest rates. Under the Elite Access investment platform, you not only have your traditional way of investing client assets (stocks, bonds, cash) available, you also have access to alternative strategies and alternative asset classes that can help you create better risk-adjusted returns as well as the ability to grow your client’s money in any market cycle or economic condition. Elite Access accomplishes this by incorporating alternative assets such as absolute return strategies, infrastructure, global real estate, and hard assets in declining or choppy markets as well as alternative strategy investments such as long/short strategies, floating rate, arbitrage, and managed futures that are designed to work well in a rising interest rate environment. The biggest issue we have when doing this is that it is hard to predict when the economy is going to slow down or speed up. That is why it is important to have access to an investment platform that is equipped to navigate through each of these economic cycles. With Elite Access, we can build portfolios that address each of the market conditions, thus creating better risk-adjusted returns, or we could build portfolios that address the current market conditions and pivot at any time if those conditions change.

The second contract is Equitable’s Investment Edge contract. In my opinion, one of the top things that Equitable has done is provide a way for your clients to take tax advantaged distributions from their non-qualified annuity account. Rather than their distribution being pulled from earnings first, and then from principal, you get a proportionate amount pulled from each, which in turn lowers your client’s tax liability on their distribution and puts more money in the client’s pocket. Another thing that Equitable has done is add “RILA like” investment options. Many of us have recently become familiar with the RILA market and how you can choose a level of protection on your investment that provides a “buffer” against losses. Equitable has brought that world into the Investment Only Variable Annuity space by providing investments within the annuity that allow you to invest in a specific index or indexes with a “buffer/protection” against losses.

I have talked a bit about how the IOVA space gives financial professionals the ability to “play in the same sandbox as investment advisors,” but in closing I would like to also mention why IOVAs could be a great alternative to direct mutual fund business. Many financial professionals utilize a select group of fund families they favor for most of their client portfolios. When looking at mutual fund business versus IOVAs, think of creating an “all-star” investment lineup with the IOVA. What I mean by this is that typically mutual fund families are known for being really good at one thing, so you use them for that one thing and are forced to build the rest of the portfolio around that “star player.” For example, when you think about bonds, you may think about PIMCO or Franklin Templeton. When you think about equities, you may think about American Funds or T-Rowe Price. When you think about tactical strategies, you may think about BlackRock or Ivy. These are your mutual fund family “teams” that excel in a specific area, so you use that specific fund family for that specific need or “star player” and are forced to use their other investment options (equity or tactical) to build the rest of that client’s portfolio. What IOVAs do is put all these teams (fund families) together under one roof so you can pick the best players from each team in order to create your “all-star” investment lineup.

So, whether you are competing against managed money or mutual funds, IOVAs can provide a competitive investment platform especially when dealing with non-qualified money. However, when dealing with non-qualified money, since IOVAs are an insurance product you will want to consider if the client will need this money before 59 ½. Since these contracts are filed as annuity contracts, they would carry the premature distribution penalty of 10 percent for non-qualified distributions prior to 59 ½. This is where our sand is a little different.

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Micah Hesting joined The Leaders Group in July, 2015, as an advisor liaison and currently serves as relationships and business development strategist. Previous to his employment at The Leaders Group, Hesting spent more than seven years at Jackson National as an internal wholesaler for their variable annuity product line with just under $1 billion in sales. Hesting holds his series 6, 63, CFS, as well as Colorado Resident Producer License for Life and Variable Products.

Hesting can be reached by phone at 303-797-9080 x113. Email: