Originally, IOVA’s 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 allowed 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, it 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 is different. For example, on average the IOVA’s cost (ME&A) can range from .95% to 1.30% (plus investments) depending on the carrier you use and if you use a 5-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% to .5% for their platform (plus investments), and then the advisor is charging a fee to manage the accounts. Typically, I see around a 1% charge on fee-based accounts so that would take the total cost to the client to 1.4%-1.5% (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 may be able to get investments at a lower cost than they are available within the IOVA account. So, the IOVA could be a little less expensive or a little more expensive than the managed account. It all depends on how each is designed.
Although the costs have stayed pretty similar for IOVA’s 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 IOVA’s 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.
In addition to this “standard death benefit” feature, Equitable has made some updates to their Investment Edge contract that makes them unique when comparing them to the competition.
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 annuity account. Rather than their distribution being pulled from earnings first, and then from principle, you get a proportionate amount pulled from each, which in turn lowers your tax liability on your distribution and puts more money in the client’s pocket. Another thing that they have done is add “RILA like” investment options. Many of you 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.
Below are some marketing brochures from Equitable for further review of their Investment Edge contract and current state availability. If you would like to talk in more detail about this contract, please give me a call.