Effective annuity STP capabilities play a key role in supporting the growth of carriers' annuity businesses but, ultimately, it is the extent to which annuity products can meet investors' most important retirement income needs that will drive growth. (See Figure 1 at the beginning of this report.) Mass-market and affluent investors want guarantees that help them ensure at least a floor level of retirement income in old age. Their past behavior in not annuitizing annuity products also indicates that they want to maintain control of their investment assets. Combining low-cost variable annuities to provide tax-sheltered accumulation with deferred income
annuities for a floor level of income in old age meets this need at an acceptable cost to investors (Table H).
Table H: Low-Cost Variable Annuity and Deferred Income Annuity for Income Floor
Fees (% of assets) Combine deferred income annuity and low-cost variable annuity Actively managed equity mutual funds Actively managed bond mutual funds Index mutual funds Guarantee fee* 0.00% -- -- -- Insurer administration** 0.20% -- -- -- Underlying funds*** 0.13% to 0.92% 0.92% 0.65% 0.13% Total ~0.33% to 1.12% 0.92% 0.65% 0.13%
Source: Morningstar Q1 2013 for variable annuities, Investment Company Institute 2012 for the mutual funds types in the table * No guarantee cost for investor for the deferred income annuity, but the investor does not have access to the money supplied to the annuity carrier to provide the income floor that activates decades in the future. Excludes mortality protection.
** Assume US$500 per year in administration fees and an average US$250,000 account size less—twice what Jefferson National charges. No commission to adviser, so no surrender charges for investor. Also no 12b-1 trailer fees.
***The underlying fund fees depend on the type of underlying mutual fund, ETF, or other investments used.
K E Y PR O D UC T D IS R UPT I O N S M A XI M IZ E F L E X I B I LI T Y,
M I N I MI Z E R IS K
Disruptive product innovations by new and existing carriers have already started to address investors' most important retirement income needs. With significant venture capital and private equity focused on this opportunity area, the innovation will continue to accelerate and then cause disruptive changes to the processes by which financial advisors deliver advice and ongoing services to investors that use annuity products (or the guarantee and tax-deferral elements within annuity products).
A L O W - C O S T , F L E X I B L E , M A N A G E D A C C O U N T P R O D U C T
The first key product disruption relates to the unbundling of the key tax-deferral features of variable annuity products from the underlying assets being managed. With private equity backing, Jefferson National has built a technology platform that provides an open architecture variable annuity. It allows advisors to choose from more than 400 different investment options, alternative and non-alternative, and to tailor investment portfolios to their customers' particular retirement income and overall needs.
Adopting the product are 2,000 advisors, two-thirds of which are RIAs and one-third of which are fee-based, registered representatives. Direct marketing to advisors, instead of expensive
wholesaling, keeps costs down, and a robust asset management platform for the advisor provides the necessary integration with custody providers, turnkey asset management
platforms, and critical functions like rebalancing and performance reporting. Jefferson National will grow from US$170 million in 2010 revenue to US$270 million in 2012, US$400 million in 2012, and US$700 million in 2013—a 60% compound growth rate. As broker-dealer firms move to fee-based business models, expect approaches like Jefferson National's to go mainstream. C A R R I E R - E F F I C I E N T L O N G - T E R M R E T I R E M E N T I N C O M E G U A R A N T E E S The second key product disruption relates to providing long-term, lifetime income guarantees that investors can activate as early as 13 months from initial funding and up to 40 years in the future. Carriers can manage risk by explicitly matching the level of income with the level of funding and amount of time to invest the funds received from the investor. By providing the long-term income floor to the investor, the investor and his or her advisor can then focus on accumulation and take more risk. The fact that some of the most creditworthy carriers, such as New York Life Insurance Company and Lincoln Financial Group, provide this product makes it a sustainable, high-growth market. With the product being introduced only within the past three years, sales grew from US$210 million in Q2 2012 to US$540 million in Q2 2013—a 157% growth rate.
Aria, with significant venture capital funding and in partnership with Transamerica, has unbundled the tax deferral and the lifetime income guarantee from any particular variable annuity product chassis and wrapped the deferred tax and guarantee around a large menu of investment fund options for RIAs or other fee-based advisors. Aria has formally unbundled the tax deferral and the income guarantee and offers these as a stand-alone product. Aite Group expects innovation like the above to accelerate so that the income-guarantee and tax-deferral advantages of annuities can expand to a wide range of asset classes and retirement plan types and to a much larger percentage of the overall US$20.9 trillion in U.S. retirement assets (Figure 15).
Figure 15: Annuity Carriers Well Positioned to Provide the Tax and Guarantee Overlay for a Wide Range of Investment Products
Source: Moshe A. Milevsky, "Life Annuities: An Optimal Product for Retirement Income"
F RO M PR O D UC T I N N OVAT IO N TO P RO C E S S I N N OVAT IO N
As RIAs and independent broker-dealers with sophisticated retirement income capabilities take advantage of products like the above, they will also optimize the processes that they use to advise investors in this area and provide ongoing services to the investors that use highly tailored retirement income solutions. Successful advisors will be trained to take a very scientific approach to retirement income, dynamically balancing investment approaches over time with their
investors' lifetime income needs and doing so in the most tax-efficient way possible. This will be disruptive to an industry in which only 33% of 58- to 65-year-old people and 39% of 47- to 57- year-old investors even have written retirement plans (Figure 3). Advisors, carriers, and other financial services providers must artfully communicate retirement income needs as well as provide a scientific, integrated approach to implementation (Figure 16).