Ep. 115: Advisors Hate Annuity Fees with David Stone, RetireOne

“Advisors don’t like the fee structure of annuities, that’s one of the things they always say to us. They know they have to insure against sequence of return risk. They love the idea of guaranteed income, but at some point they don’t want their clients paying the benefit-based fee, which is always increasing. And they can never cancel the annuity because of the tax impact. With our [Constance] product that issue goes away since clients can cancel whenever they want. The product is not a tax deferred vehicle, so there’s no tax penalty or no surrender charge, which makes it an optimal solution optimally for the client.”

— David Stone, Co-Founder & CEO, RetireOne

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The WealthTech Today podcast features interviews, news, and analysis on the trends and best practices in wealth and technology for wealth management, asset management, and related areas. This episode is part of our October focus on annuities. We’re talking to influential industry leaders who can provide technology solutions that help advisors build stronger relationships, improve outcomes, and enrich their clients’ lives. A quick shoutout to our sponsor, the Invest in Others Foundation, please go to InvestInOthers.org, and be sure to subscribe to our show wherever you listen to podcasts so you don’t miss future episodes.

Companies Mentioned

Topics Mentioned

  • Constance the Annuity
  • Annuities in Managed Accounts
  • Advisors Hate Annuity Fees
  • How to Pension-ize Client Accounts
  • The Future is Unbundled
  • Why RIAs Can No Longer Ignore Annuities

Episode Transcript

Craig: I’m excited to introduce my next guest, David Stone, co-founder and CEO of RetireOne. David, how you doing man?

David: Craig, doing great. Thank you.

Craig: Where are you calling in from?

David: I’m in the San Francisco Bay Area, that’s where our executive team is located.

Craig: I miss San Francisco I haven’t been there since like December 2019, back in the prehistoric days.

David: Yeah, it’s still here despite the fires and everything else going on here. It’s a beautiful place to live.

Craig: But despite the mudslides and the fires and the earthquakes and it’s okay, we still like it here.

David: Yeah, outside of that it’s not so bad.

Craig: But the weather’s so nice. And the wine country, and even better, you just came off a vacation, I don’t even want to ask you about it but just tell us where you were for vacation.

David: Yes, I was on the Big Island of Hawaii with my kids.

Craig: I’m so jealous.

David: Unfortunately this is an audio podcast you can’t see the flaking skin from the sunburn I have in my face, which is a good thing for everybody.

Craig: No, we’ll do a little video on YouTube so we can see that, maybe we’ll do a little touch up. But, hey, let’s jump into this. So, David, give us the 30-second elevator pitch for RetireOne.

David: Sure, so RetireOne was formed by myself and my co founders, both Schwab alumni, to really change the industry in terms of how advisors utilize our annuities and retirement income, they really bring in technology to figure out a better mousetrap for combining what the advisor does best, managing assets, with insurance companies do best, which is manage risk. And so our platform was a couple of key things, what we have just a whole range of fee based, traditional types of annuity products which has gotten tremendously good over the years. But the core of what we do is we develop technology to allow for the unbundling of the insurance from the investment accounts which is in our mind the holy grail for pretty sure wealth managers. You manage the assets, where do you want to manage them, our technology makes it all happen, the insurance companies providing this valuable retirement income guarantee which you could formally only purchase through expensive and complex annuities, which we don’t have to do anymore.

Craig: I love how you put that, a better mousetrap where advisors manage the assets, the insurance companies manage the risk.

David: Yeah, simple as that.

Constance the Annuity

Craig: It makes a lot of sense. We were talking earlier, we’re getting so many inbound calls from fintechs and broker dealers and our is about annuities and how they use annuities and this tech and that tech for annuities so I’m really excited to have you on the program, interested to hear about your latest product called Constance, can you talk about Constance, what it is, zero commission unbundled annuity, what does that mean?

David: Yeah so if everybody’s gonna be hearing a lot more about this, we just literally launched it earlier this week with our partner, Midland National Life which is a member of the Sammons Financial Group, A plus rated insurance company. But we’ve designed this product with them because we know all the hot points or touch points for advisors and why they historically have not wanted to use annuities. And so as we design this solution we want to make sure we address each one of those,. We wanted to get to the point where we feel like every fiduciary wealth manager should say yes I need this for my client and the client will want to do it as well. So that’s what we put together with the Constance solution.

In a nutshell, what Constance does it allows advisors to manage portfolios typically a BTS, institutional price ETFs, publicly traded funds, custody anywhere they want to typically Schwab or Fidelity will be the custodian, and for a nominal fee, which never increases, the client can instantly pension-ize that account and get a guaranteed income stream for their life. And the beauty of Constance is unlike traditional annuities if you decide 10 years down the road, or 8 years, or 15 years, you don’t need any more because your account has tripled in value. You’re not going to outlive your assets, you can cancel it, walk away without tax impact or surrender charge. So really, if you think about it, what it really is it’s kind of like term insurance for your future decumulation in retirement and it protects the assets you’ve grown throughout the years during this incredibly long bull market, you can lock that in and keep invested, without having to move the assets to insurance companies. That’s why we think it’s an exciting offering for the industry and we’d love to help advisors check it out.

Annuities in Managed Accounts

Craig: We’ve been hearing a lot about, as I mentioned, annuities, how do you put annuities into a managed account, how do you use them again for income solutions, for retirement, how to use them as a replacement for fixed income assets, and it’s very complicated because exactly what you mentioned, where they custody it, how do you manage it, how do you get the insurance company involved, how do you report it. And it sounds like that this Constance product takes care of a lot of those logistical issues.

David: Absolutely. We’re basically saying to advisors is if you have your model portfolio which you’ve had success with over the years, holding it let’s say at Schwab, just essentially put a wrapper over it so all you have to do is say I want this for my client, and for a nominal fee which is paid quarterly in arrears so you actually buy without paying any fee at all until the end of the first calendar quarter, you can pension-ize that account. What we’re talking about here are individuals or investors who typically de-risk their portfolio as they approach retirement or in retirement. You don’t have to do it with this.So if you’re an advisor, instead of put your client to a 40/60 portfolio you can go 70/30 for example, or 80/20 and reap the benefit of that for 20, 30 years knowing the income is locked in no matter what happens in the marketplace, they’re going to get the high watermark of that account. AIf the account, God forbid, goes to zero at some point the insurance company will keep making that high water payment, as long as they live.

So, from the advisor standpoint, they’re able to assess their AUM fee on it, it’s advisory fee friendly, hopefully it’s a very strong bull market continuing and it’s a rising pool of assets the advisor can charge on. But the client is reaping the benefit of the protection, they can sleep at night, and as a fiduciary have done your job in terms of introducing them to the solution, which provides them the security they’re looking for.

Craig: So are they getting double charged because normally, when you buy an insurance product you pay the commission, but then the insurance is managed away from the advisor, he may get a commission if he’s also a licensed insurance agent. But that, if it’s a variable annuity or some sort of annuity that’s wrapped around mutual funds, that’s not under the advisor’s charge, how is that fee adjusted?

David: Yes. So, in this case we’re working with fiduciary wealth managers who will charge their client presumably an asset management advisory fee right, typically 1% could be more, that’ll continue. There’s no commission on this. And so we also have a dedicated desk. We also understand most advisors don’t have a broker dealer affiliation or insurance license, so no problem, you can just work directly with our desk. We will transact it for you. We don’t get paid a commission, we get paid an administrative services fee as the technology vendor for the insurance company. So there’s no other fee so if the cost for the this guarantee is, you know 1.4%, your fee is 1% if you’re the advisor that fee for the guarantee is 1.4%, there’s no other fee involved in this.

Craig: Right, so there, that’s the difference. Normally when you buy an annuity or other insurance product you’re paying a high commission upfront that goes away.

David: You’re doing a lot of things, you’re paying a high commission upfront, you’re paying for variable annuity and a rider fee, the actual underlying funds are probably 100 basis points here, you can actually use ETFs that, in some cases have no cost, right they’re free. So the cost is literally a third of what you’d find with traditional annuities.

Not only that, and this is an important feature of this product which I feel very strongly about, the fee is locked in day one when you buy on a contribution amount whenever you’re wrapping and never increase, so your fee is $2,000 a year. If your account doubles in value, your fee is still $2,000 a year. With the traditional variable annuity, with benefit based pricing that fee, always goes up, which is really weird to me because as the client gets older, 10 years older and your accunt value has doubled, the risk to the insurance company is theoretically much less, because the odds of that account going to zero are almost reduced to zero. So they charge double the amount so that’s I always thought crazy. We develop this product so that the fee stays the same, much like term insurance, and hopefully the advisor does a great job managing the portfolio, it doubles in value whatever that fee is a proportion of the assets will be cut in half at that point so might be instead of being 140 basis points could be 70 basis points, and never increases from there.

Advisors Hate Annuity Fees

Craig: I didn’t realize that, that these traditional annuities are are increasing the fee over time.

David: Yeah, you talk about advisors not liking annuities, that’s one of the things they always say to us at least, I hate the fee structure. I know we have to insure against sequence of return risk. I love the idea of guaranteed income, but at some point I don’t want my client paying this benefit based fee, which is always increasing if the account value goes up and never goes away. And I can never cancel the annuity because of the tax impact of canceling a variable annuity or most traditional annuities. So here that issue goes completely away you can cancel wherever you want. This product is not a tax deferred vehicle there’s no tax penalty, no surrender charge, so the advisor can really use this solution optimally for their client, depending on the client’s situation.

How to Pension-ize Client Accounts

Craig: That’s cool. You mentioned something else I thought was a good way to describe this. That advisors can pension-ize their clients accounts. What do you mean by that?

David: I think we’re calling this Personal Pension Plus because you get the guaranteed income. All you have to do basically, so let’s say you have this million dollar account and you say want to pension-ize it, we handle the transaction. The first quarterly premium won’t probably happen for 2-3 months but day one you pension-ized your account, which means your client can be getting, let’s say 5% a year the rest of their life. Plus, the opportunity to step up the income, if the portfolio grows, right, every year. So to me, it’s a way for anybody to get a personal pension on their existing assets could be a non qualified account, it could be an IRA account or Roth or traditional IRA, but for a nominal premium you all of a sudden had this catch nice pool of assets with complete liquidity or control over it so to me it’s much better than a pension as we typically think about it.

Craig: But what’s the downside? So your pension-izing it, so it definitely reduces the risk of outliving your assets is there a cap on age like it runs out when you’re 90 or something?

David: No. So, if you live to 110 and your money runs out at age 83 you’re gonna get, 27 years at that point and payments from insurance, there’s no cap on the age. I think for most people looking to insure retirement, I think they understand that their reality exists that in a married couples situation, one of the two of them can live to age 95 there’s a 47% chance one of the two of them living to age 95, and so the, the odds of money lasting 30 years through any market environment is pretty slim if you’re investing relatively aggressively. So this way, it provides protection you need to make sure you can last as long as you live maybe you live to 100. This is a way for clients to sleep at night knowing that there’s no cap on the age.

Craig: One of my grandmothers lived to 100.

David: It happened more than we think.

Craig: I think I’m in better shape than she was. But that’s debatable. But so what if what if the person passes early, what happens to the account?

David: Here’s the beauty of this, the investment assets, let’s say it’s a million dollars at Schwab they’re covered by this. If the client or the annuitant dies in this case, all that money goes to their heirs in stepped up, unlike a variable annuity where the appreciation in the annuity would be taxable as ordinary income. In a non qualified account, the cost basis and stepped up at death. So that is kind of like a built in death benefit so what is the downside there really isn’t a downside, other than the fact you’re paying a fee or a premium for it. But once that fee and premium is locked in, it’s incredibly low compared to other solutions in the marketplace.

The Future is Unbundled

Craig: So you wrote an article called The Future is Unbundled, which I think is what this Constance product is all about right, so you’re unbundling the annuity, the risk from the underlying assets, is correct?

David: It is correct. If you think about it, clients advisors, they want to use publicly traded funds, ETFs models, they’re familiar with. And also, if you’re thinking about buying a traditional annuity that typically means you have to sell out of your investment account and presumably pay tax on the appreciated value of those assets to move money to the traditional annuity so day one, you’re really getting a text of 20, 30, 40%. No one wants to do that. So, a much better solution is to just take what you currently have and just wrap it, don’t get hit with that tax hit, day one, and then be able to control the assets and get the performance of your portfolio, which you’re used to and also integrate into your performance reporting tools and everything else you currently do, which is just easier for the advisor to navigate the client’s portfolio.

Craig: So on a million dollar portfolio for example, what’s the fee going to be? So the insurance company’s got to get something to take on this risk, how much would I be paying the insurance company to take on this risk the sequence of longevity risks, sorry, and then sequence seven sequence of return risk so how does that work?

David: The fee ranges from about 1.1% annually to about 2.3% annually, and what determines the actual fee is the amount of equity exposure in different tiers of benefits. So the core benefit being on the lower end so if you want to go 40/60 that’s the lowest equity tier. If you want up to 75% equity, some are actually some models are 8% or more. But I think, a typical client, getting into a 60/40 or even a 70/30 or 75/25 portfolio, we’re looking at about 165 or so basis points on the account, and the contribution amount, day one, and hopefully over the course of several years, that company grows and that percentage will go way below 1%.

Craig: Because it’s a fixed amount, which translates into 165.

David: Right, so you’re basically paying $3,000 a year for insurance on my portfolio. In the advisor, the client benefit if the performance is very positive for the account.

Craig: Right so the insurance company is only paying, if the money runs out, so if your advisor is brilliant, and he manages your money so well that you never run out of money, the insurance company never pays.

David: You probably know that in about 10-12 years, if your client, was age 60 now they’re 75, and the account value is triple the odds of them running out of money are zero, so that’s when you cancel this. It’s like when you buy term insurance and you sell your house, your kids go off to college, you cancel or reduce your term insurance, you don’t need it. Same thing deal with this, you’re insuring the riskier time of your retirement, which is that sequence of return risk period, or red zone or we call it the Fairchild decade.

Craig: That’s a good way of saying it so it’s like term insurance, but it’s a term insurance for your portfolio.

David: It’s for the income off the portfolio. So everybody has done really well I think over the last decade plus in markets can still do much better going forward. And so why take the risk of a market drop off for volatility for nominal premium protect your income off your portfolio.

Craig: And now’s the time. Like most advisors I think are telling their clients take some risk, de risk a little bit the markets really high, it seems to be getting a little more volatile.

David: And we’ve also done analysis where just the mere fact of increasing your equity exposure 10-20% over, you know, 10-30 years of retirement, more than covers the cost of the guarantee. You’re gonna have a much better outcome, increase market exposure from, you know 40/60 to 60/40 for example, in almost every markets mirror you can do much better, but you’re also protected in the event of a really nasty downturn in the first few years of retirement. But the cost of guarantee is basically paid for by the performance of the portfolio over that period.

Craig: Does this integrate with financial planning tools because I imagine that would be really helpful if I’m doing my Monte Carlo and I’m looking at your retirement income to say well here’s your gap, and we can plug this Constance product in there.

David: Yeah, so this product is so new it isn’t fully integrative yet. We have been working closely with the planning software companies to get it integrated, they do have annuity simulations more generically, which this is no different in terms of what you’re guaranteed income can do for a portfolio, but we really want to customize it because it is really unique and different from what most annuity calculators or tools can provide. So we’re trying to get in the next several months more of these planning and services and companies to be able to integrate this.

Why RIAs Can No Longer Ignore Annuities

Craig: That’s fantastic. And another article you wrote was called Why RIAs Can No Longer Ignore Annuities, less than half of Americans own an annuity. So what are the benefits of owning an annuity to to other to other clients?

David: There’s just general disdain for annuities, based on what the industry was all about 10-20 years ago where products were very expensive, all commission, everybody’s kind of feeding at the trough, and clients didn’t get the best deal out of it. But that’s changed dramatically if I can kind of say that the mutual fund industry is still charging 100 basis points for equity mutual funds ignore the fact ETFs have taken over. It’s the reality of the new world now I think most advisors who spent so many years competing against annuities are now realizing, wait a minute, these are actually really good products. With the commissions taken out the benefits are more robust than ever because the benefit is now been improved because the commissions were taken out, and the technology allows it to be fully integrated what I’m doing, and I can bill off it. I think the astute advisor is aware of that, and there’s still stragglers who still think it’s 1998 and he knew the industry is all tainted and crooked, but nothing could be further from the truth.

I think we’re seeing more and more firms understand how to be competitive, you have to integrate these solutions because of the superior benefits, but also as a fiduciary how can you not consider these? There’s some way to get a guarantee, either on the accumulation side or decumulation side, as a fiduciary I think you have to look at that.

Craig: You’d think they have to, I mean it is part of their overall mandate to look at that.

David: We’ve had advisors say I’m putting my clients in cash or CD, and we’re like what are you doing you can get a risk free investment with a much higher potential return if you looked at some kind of insurance solution. And so then we built tools to show them how if you do that, replace some of your fixed income portfolio with a higher yielding annuity solution to get better outcomes. So we’re starting to see how they can actually integrate these more holistically across their portfolios.

Craig: That makes a lot of sense. Can you explain the the the dedicated desk for RIAs? So RIAs that aren’t affiliated with a broker dealer, don’t have an insurance license, how do they work with the RetireOne insurance desk?

David: Yeah, so it’s very simple. We understand most advisors, many fee based or fee only advisors have no insurance, license or encrypted affiliation, a lot of these products do require one or the other or both for insurance license, certainly, so we want to make it as simple as possible so we work closely with the advisors, we partner with them. We basically want to protect the advisor. If you’re not licensed, you can’t do certain things with insurance, we want to protect the advisor, so we’ll take over the transaction, we’ll determine if it meets the client’s best interest standard, make sure it’s totally simple for the client, and then we’ll be able to sign as Agent of Record and transact it for the client. And we will have the arm’s length relationship with the client, so it’s the advisor’s client we partner with the advisor, we transact it for the advisor and the client.

Craig: That seems really convenient.

David: Advisors want to focus their job on doing what they do best which is manage your clients assets, and do the financial planning for them, and we take out the grunt work of whatever it takes to onboard these on solutions for the client, but we do it in a very seamless way. Constance, for example is going to be all electronic, so the client can just sign on their phone or their iPad or computer, we want to make this as seamless and easy as possible for everybody.

Craig: That’d be great if you can just do it on your phone.

David: The old rule of annuities was there’ was thousands of pages of paper and you have to sign and return it could take two, three weeks to get something issued. This is going to be a lot different. Once the decision is made to move forward with this, as mentioned before, no money has to even move to the insurance company all the money could stay at Schwab or Fidelity, we just need a signature, and then the nominal premium is paid quarterly in arrears, can’t be any easier than that.

Craig: That sounds really easy, it’s almost like a Robinhood kind of solution where you go on your phone you say I want this boom, you got it.

David: That’s the new paradigm we’re trying to really initiate in the industry ,to forget about how things might have been done before in the traditional broker dealer commissioning world. The reality is that world doesn’t exist anymore. It’s not a growth engine anymore. And so what is the growth engine are people who are trading, like you said before in Robinhod, people who are going to low cost or no cost model portfolios. So fees and technology integration simplicity are the keys to success in this industry, adn that’s where we want to be.

Craig: Simplicity is the key to success and making it easy, both for advisors, not only easy to trade and to involve trade and buy and sell but to understand. That’s the key. So, Constance sounds like a great product. If advisors broker dealers, who’s ever listening wants more information about Constance, how do they find out?

David: I would say come to our website RetireOne.com, we have information if anybody’s interested, and while I mentioned before we can transact the annuity for the fee only advisor, I mean, certainly we can work with hybrid advisors, advisors that do have a broker dealer affiliation. We don’t have to be the agent of record or the broker dealer of record. The main role we play, now we get compensated as being the outsource technology vendor for the insurance companies to enable them to do this, and that’s the role we play in the industry, the sale part is a combination to make it happen. But the core of what we do is the technology aspect of it to make it all happen.

Craig: That sounds great. David, thanks so much for being here, really informative. I think everyone really got a lot out of this and good luck with the new product.

David: My pleasure Craig. Thank you so much for the invitation. I loved it.

Click here and schedule a Discovery Session to find out how Ezra Group can help your fintech firm grow revenue in the wealth management space.



The Wealth Tech Today blog is published by Craig Iskowitz, founder and CEO of Ezra Group, a boutique consulting firm that caters to banks, broker-dealers, RIA’s, asset managers and the leading vendors in the surrounding #fintech space. He can be reached at craig@ezragroupllc.com