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RetireOne Persuaded an Insurer to Invest in CDAs. Can It Convince RIAs the Policies Are Worthwhile?

Contingent deferred annuities are ready for their moment, according to RetireOne CEO David Stone.

RetireOne, an insurance marketplace for RIAs, has persuaded an insurance carrier to invest in a lesser-known product. Now, RetireOne is trying to convince financial advisors that it’s time to purchase it.

Contingent deferred annuities (CDAs) have been around since 2009 but they remain relatively unknown. Like annuities, CDA policyholders pay fees and get guaranteed income payments if the insured portfolio depletes below an agreed-upon level due to a market downturn or a longer-than-expected retirement. But unlike traditional annuities, CDAs don’t have to be in a separate taxable account held at an insurance company. CDAs are “wrapped” around a separate taxable account that is still managed by a financial advisor (who can charge a fee on those assets like they normally would.) 

For more than a decade, rising equity markets have lessened investors’ fears that they might not have enough saved for retirement. But low interest rates, inflation, the ever-present risk of a market correction, and many retirement savings shortfalls, are encouraging more wealth managers to consider annuities and some will turn to CDAs, according to RetireOne, the insurance marketplace founded in 2010.

RetireOne was so confident in the need for CDAs, it developed one specifically for RIAs with Midland National Life Insurance Company, a firm founded in 1906 with more than one million life insurance and annuity policies in place and over $67 billion assets. Called Constance, it is the first new CDA in more than seven years and could “dominate the marketplace,” David Stone, CEO at RetireOne, told RIA Intel.

The exact size of the CDA market is unclear, but Stone expects it to grow significantly.

Through the first nine months of 2021, total annuities sales were more than $191.4 billion, according to a November 2021 survey by LIMRA, a financial services research company. During the same period, fee-based annuities sales accounted for only $3.6 billion, but that was 60 percent higher compared to last year. Stone said RetireOne could do more than $3 billion in sales in the next two to three years given the continued growth of fee-based annuities sales, including CDAs. 

Still, CDAs remain unpopular. Out of 55 insurers surveyed by LIMRA this year (representing 91 percent of the total annuities market) only two companies, Sammons Financial Group (the parent company of Midland) and Merit Life, offered CDAs, LIMRA told RIA Intel. The Texas Department of Insurance told RIA Intel that only two CDA filings have ever been approved in Texas, both for PHL Variable Insurance Company, in 2009.

“There's nothing wrong with the product, or the concept of the CDA. The problem has always been how carriers have developed [CDAs] in the past,” Stone said.

Additionally, CDAs of the past were created and tied to one distribution partner or platform, usually a broker-dealer. That meant if an advisor left an employer, or a company they were affiliated with, and their clients followed, CDAs couldn’t be taken with them. Nicholas Ross, chief distribution officer at Financial Independence Group (FIG), a competitor to RetireOne that doesn’t offer CDAs, said most CDAs are still confined to the organization that offered them in the first place. 

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RetireOne says it has solved that problem. “One of the things we do with the CDA, which others have never done, is its fully open architecture is fully portable. So, if the RIA moves from Fidelity to Schwab, there's no problem,” Stone said.

Dennis Gallant, a consultant at Aite Novarica, said weak demand for CDAs over the past decade was partly due to the appreciation of equity markets. The U.S. is currently in its longest-running bull market in history, he said, and there hasn’t been a driving need for downside protection.

Another challenge RetireOne faces is educating insurance companies and advisors about CDAs. Many RIAs don’t know much or anything about them, according to Stone, so RetireOne has hired academics to help demystify the products.

“The biggest challenge is getting advisors, and their chief investment officers, and the leadership of the firm, to get behind it because we think it helps them tremendously and their clients in a way that hasn't been available before,” Stone said.

Wade Pfau, a professor of retirement income at the American College of Financial Services in King of Prussia, Pennsylvania, is a consultant for RetireOne. In a recent white paper commissioned by the marketplace, he argued Constance is a good solution for investors trying to manage sequence risk and protect savings during the first decade of retirement. Pfau, an acclaimed researcher, described those years as the “fragile decade,” when market downturns have a greater impact on retirement portfolios because retirees have begun tapping their savings to cover costs.

“If the market does really well and your portfolio earns 40 percent, the insurance means you're going to get between 38 and 39 percent return net of fees,” Pfau said. “If the market dropped 40 percent, that's the fragile decade. You're likely to run out of money in that type of scenario if you end up having a reasonably long [life].”

Convincing more insurance companies to offer CDAs for the $5 trillion RIA market might be easier. “There's less risk for the insurance company if the advisors are managing ETFs and low-cost investments. And the advisor, the RIA, is motivated not to lose AUM, not to lose assets, right?” Stone said. 

For the Constance CDA, investors pay Midland a premium (in quarterly installments) that is typically 1.1 to 2.3 percent of the initial value of the assets placed in a separate account. Constance premiums are fixed for the life of the policy, even as the underlying assets become more valuable. “What's great about this is it really motivates the advisor, the better they do with the portfolio, ultimately, the cheaper it gets for the client as a percentage of their assets,” Stone said.

Advisors do not need an insurance license to offer Constance to their clients. RetireOne serves as the broker and manages the policy. Investors have one year to contribute to the assets that will have a CDA risk wrapper, which can't be changed afterward. Assets carved out in a policy must be worth a minimum of $50,000 when an account is opened. The underlying assets must be invested in an approved list of 200 ETFs and mutual funds (there are plans to add more). 

There is no maximum allocation, but Stone generally recommends investors insure about a third of their portfolio, to protect against market downturns. Although, he said that can change depending on an investor’s lifestyle and income needs.  

The guarantee only kicks in if the insured account goes to zero. The policy can be canceled at any time. “Cancel if you don’t need it. But if the markets do drop, you've got this guarantee as long as you live. So, my question to the advisor is, why wouldn’t you do it?” Stone said.

Stone believes the policies will also incentivize investors to stay invested during downturns.

“That's a key thing, keep people invested,” Gallant said. People tend to overreact to a down-market and underact to an up-market and during the 2008 economic crisis, advisors had a hard time coaching people out and they sat on cash when the market eventually did respond, Gallant recalled.

“That was sort of the first-time traditional RIAs and non-annuity-oriented advisors started using annuities,” he said. 

FIG, the independent marketing organization that sells annuities, remains skeptical. Ross said there is not a lot of demand at FIG for CDAs, partly because other RIA-friendly ways to guarantee clients retirement income have emerged in recent years. Structured notes, debt security with a specific maturity date, and indexed variability annuities (IVAs), or registered indexed linked annuities (RILA), which limit the rise or fall of an index fund’s performance, are other products that provide downside protection. 

RetireOne had a soft launch in October of this year, and it has about 50 RIA firms at various stages of implementing Constance for their clients, Stone said. The company is midway through the state regulatory approval process. Currently, Constance is approved in about two-thirds of the states and the company expects it will be approved in all the others sometime next year.

“Right now, Midland is the only [open architecture] solution in the marketplace. We also know, probably within two years, there'll be another one and others,” Stone said. “Ultimately, in the next 10 years, there could be multiple carriers in this space.”

Holly Deaton (@HollyLDeaton) is a staff writer at RIA Intel and based in New York City.

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