DPL is an intermediary platform for the registered independent adviser (RIA) market aimed at closing the gap between some of the country’s insurance carriers and financial advisors. SRP spoke to chief executive officer David Lau (pictured) about how the increased connectivity between product providers and distributors can support the increasing demand for indexed annuities.
DPL Financial Partners launched in 2014 as a RIA insurance network to provide the market with fee-based insurance solutions from a variety of the US top insurance carriers. According to Lau, DPL's goal is to bridge the gap between product manufacturers and distributors around products that would have no commission embedded.
Traditionally, US fee-only advisers have not been able to use insurance products because they were all commission-based.
“My focus has always been on facilitating access since I joined E*Trade Bank as a chief marketing officer almost 20 years ago,” says Lau.
This was the first internet bank in the US: it had a similar mission as it was aimed at eliminating expensive distribution and provide better value products than insurance marketing organisations (IMOs).
Earlier, Lau was at Jefferson National – an annuities provider that helped eliminate commissions on its annuities offering to bring better value to end clients.
“At DPL, instead of working with just one carrier, we work with carriers across the industry,” says Lau. “At the moment we are working with up to 15 of them.”
Market outlook
Recent changes around fee-based products are reshaping the RIA space which currently has US$4 trillion assets under management and is a market that has not used primarily insurance products.
“The opportunity for players to expand into that market is very attractive but they generally don’t know how to do it which is when we come in,” says Lau, adding that DPL works in two fronts.
“We work with carriers so they understand how to build the products to respond to investors’ needs and how to support them from a technology and compliance basis," he says. "We also work with advisers to make sure we deliver the products and the expertise they need around a commission-free product line up.”
Part of the firm’s model is that it can be product agnostic about the product type, the product structure, and it has no links or ties with any particular carrier.
“That gives us a level of objectivity that our adviser clients appreciate,” says Lau. “Because we don’t have a link to any particular carrier we can look at different products that are structured to deliver a particular outcome such as guaranteed life time income and which one would better suit a particular need whereas it’s a fixed index-linked annuity or a single premium annuity.”
There are several reasons for the recent increase in activity around fixed indexed annuities, and there is scope for “even higher growth as education is helping these RIAs understand the value these products can offer to their clients’ portfolio by adding downside protection as well as market exposure via liquid and low volatility indexes," according to Lau.
“This kind of product has proven to be an efficient way to maximise returns and provide downside protection for people approaching retirement,” he says. “We see FIAs as a very good match for conservative clients that are weary of investing in the equity market but want some kind of regular income and address longevity risk.”
Regulatory environment
Recent developments around regulation have been helpful for DPL because its target market is fiduciarie. "We want to work with firms that work in clients’ best interest, and regulation is driving a change around business models and governance," says Lau.
“Firms should only offer products that meets clients’ needs as opposed to products that provide a good margin,” he adds, noting that DPL expects greater demand for index-linked strategies than traditional variable annuity products.
“There is real momentum in the market for this kind of product. We expect FIAs will be a high-selling product for us and will overtake traditional annuity products," he says.
The problem with variable annuities in the past has been that they were originated in a “bad way with very high commissions and very long surrender periods, and they had a bad name”.
“But the market has come a long way and in their new incarnation they have become a source of returns and protection,” says Lau. “Structured notes perform in a very similar way to index-linked annuities, and they can fit different risk profiles.”
However, to address the lack of adoption Lau believes the industry will need to increase its efforts around education and disclosure.
“Some advisers were recommending them without disclosing all the risks,” says Lau. “Another factor that has limited the level of adoption is that to run a structured note program you need significant capital and that makes it prohibitive for many firms.”
Overall structured products have been misrepresented around fees and pricing but they are a valid investment as long as they are subject to full disclosure at the point of sale, “so that the investors can see that the cost does not override the benefits”.