There are many different types of variable annuity contracts, but these variable annuity contracts are typically not different in the benefits to the investor, but rather in the compensation to the financial advisor selling the annuity. While all variable annuity contracts offer tax deferral and other guarantees that only annuities can offer, the primary difference between one variable annuity contract and another is the structure of the contract.
The most popular variable annuity contract is the “B” share annuity contract. This contract has an average M&E (mortality and expense plus administration fees) of 1.35%. That is what is called the base charge of the contract. There are additional costs for sub-account expenses and additional rider costs. The total fee for a “B” share variable annuity is about 2.7% a year.
The M&E expense (mortality and expense plus administration fees) generally covers the commission paid to the adviser and other general expenses from administering the variable annuity contract. In general the B share annuity has a seven year surrender schedule and other standard features. The typical commission on a “B” share variable annuity contract is 6.5% all upfront with little or no trailing commissions to the adviser.
Because the annuity industry recognized that they could attract more producers/financial advisors to sell their product by offering a product that had a decent upfront commission and paid out a generous trailing commission they developed a hybrid variable annuity contract called the “L” share. This L share variable annuity contract has a shortened surrender schedule, usually 3 to 5 years, and has a significantly higher M&E (mortality and expense plus administration fees) cost averaging 1.65% a year. Generally an L share variable annuity pays the adviser a 3-5% upfront commission with a .75-1% trailing commission paid out in either the 13th month or after the surrender schedule expires. This is why the M&E cost is much higher with an L share versus a B share variable annuity contract.
Many financial advisors prefer the L share variable annuity option and recommend it to their client because it has a higher trailing commission (which acts as a virtual annuity of income for the financial advisor because of the trail commission). This is reflected in the variable annuity sales data which shows the L share annuity contracts have quickly become as popular with financial advisors as the B share contract.
While an L share variable annuity contract is great for the financial adviser, it is not good for most annuity buyers. If the annuity buyer is seeking a short-term investment within a variable annuity contract than this option is OK, but since variable annuities, or any equity investment, is considered a long-term investment it makes little sense for the annuity buyer.
Since this market is an adviser driven market many consumers do not understand that they may receive a better deal if they look at the B share variable annuity contract instead of the L share.
If you are concerned about investments you have made in L share variable annuities and would like to speak to a securities attorney, please call The White Law Group at 312/238-9650.
The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Boca Raton, Florida.
For more information on The White Law Group, please visit our website at http://www.whitesecuritieslaw.
