David Lau: Taking High Commissions Out of Annuities

Episode Summary

Executive Summary: David Lau, CEO of DPL Financial Partners, argues that annuities and insurance can be transformed into lower-cost, adviser-friendly tools by stripping out commissions, simplifying products, and making them billable AUM assets for RIAs. The conversation covers annuity types, pricing differences, insurance carrier incentives, risk management, tax location, and emerging products like RILAs and long-term-care hybrids.

Main Topics: What annuities are and how they differ (Priority: 5/5): Lau breaks annuities into several types—fixed annuities/MIGAs, income annuities (SPIAs/DIAs), variable annuities, fixed-indexed annuities, and RILAs—framing them by return type, risk profile, and whether they are used for accumulation, income, or risk mitigation. Why DPL exists: removing commissions and complexity (Priority: 5/5): DPL was founded to address Lau’s view that insurance products became opaque and expensive because commissions never evolved away from the old transactional model. The company’s goal is to create transparent, low-cost annuity and insurance access for fiduciary advisors. RIA marketplace and billable AUM (Priority: 5/5): Lau explains how DPL helps RIAs offer insurance without sacrificing fee-based economics by making annuities billable AUM assets and integrating them into advisor workflows, reducing the old conflict between selling annuities and charging asset-based fees. Product design for advisors and carriers (Priority: 4/5): DPL works with insurers to create simpler products that can be used, not sold—especially products that solve planning problems without excessive riders. Lau says carriers are eager to participate because RIAs represent a major growth market and require a fee-based product model. Efficiency, risk management, and tax location (Priority: 4/5): The discussion emphasizes that annuities can be more efficient than bonds for funding retirement income because of risk pooling and tax deferral, and that variable annuities can still be useful for tax location of fixed income, REITs, or high-turnover strategies. RILAs and the shift toward downside protection (Priority: 4/5): Lau describes registered index-linked annuities as buffered products with higher caps and partial downside protection, noting their rising popularity as advisers seek alternatives to traditional fixed income in volatile markets. Long-term care, life, and disability product innovation (Priority: 3/5): DPL is expanding into other insurance lines, including hybrid long-term-care annuity products and disability coverage, but Lau says regulation and legacy commission structures make these markets harder to disrupt than annuities.

Key Arguments: Insurance and annuities became expensive and hard to use largely because commission-based distribution preserved an outdated industry model. Removing commissions can reduce annuity product costs dramatically and make them more suitable for fiduciary advisors and consumers. RIAs need insurance solutions to serve clients holistically; otherwise, they risk losing the client relationship to commissioned insurance salespeople. Making annuities billable AUM removes the traditional advisor objection that annuities shrink fee-earning assets. Advisors should view annuities not only as longevity-income tools but also as risk-management and fixed-income-replacement instruments. Income annuities can be materially more efficient than bonds because of risk pooling; Lau cites large funding differences for the same income goal. Variable annuities are best used for asset location, not necessarily income, especially for high-income or tax-inefficient holdings. RILAs are gaining traction because they offer equity exposure with a buffer, fitting a market environment where investors want downside protection without giving up all upside. Some existing commissioned annuities may still be good products; DPL’s review tools are meant to determine whether an investor should keep or replace them. Life and long-term-care innovation is constrained by regulation and commission economics, especially where regulators limit long elimination periods or consumer-friendly product structures.

Data Points: DPL membership fee for firms under $100 million AUM: $1,000 per year - Annual membership pricing for smaller RIA firms using DPL’s platform Variable annuity cost on commission side: About 140 basis points - Lau’s comparison of typical product cost for commission-based variable annuities Variable annuity cost through DPL: 20 to 30 basis points - Lau says DPL’s no-load variable annuities are far cheaper than traditional commissioned versions Cost reduction from removing commissions: 80% to 85% - Estimated price decline when distribution expenses and commissions are removed Typical commission level in commission products: Up to 8% - Lau cites the size of some embedded annuity commissions Fixed annuity/MIGA rates: About 4% on four-year products - Current example of accumulation-phase fixed annuities mentioned by Lau Fixed-indexed annuity fixed-account rates: 3% to 3.5% - Rates cited for fixed accounts inside FIAs RILA downside buffer: 10% - Example of a buffered annuity where the carrier absorbs the first 10% of losses RILA upside cap: 15% to 18% - Higher cap rates cited for buffered annuities versus FIAs Fixed-indexed annuity cap: 6% to 9% - Example caps mentioned for FIA index-crediting strategies Immediate and deferred income annuity share of annual sales: About 3% to 4% - Lau says SPIAs and DIAs are a very small part of annuity sales Comparison tool coverage: 2,500+ annuities; 25,000 riders; 400,000 price points - DPL’s technology for evaluating existing annuities and replacement opportunities Income efficiency example: $50,000/year for 30 years can require $1.2M-$1.3M in fixed income vs. about $750,000 in an annuity - Illustration of annuity efficiency in funding retirement income Industry coverage with carriers: 14 of the top 20 annuity providers - Lau says DPL is working with most of the largest annuity carriers Long-term care pricing advantage: 25% to 40% - Estimated pricing improvement from removing commissions in certain insurance products Long-term-care annuity design: Income doubles for 5 years if 2 of 6 ADLs are unmet - Example hybrid LTC product built on an annuity base RILA origin timing: About 7 to 8 years ago - Lau notes buffered annuities are relatively new to the market Market participation in early DPL years: Very few RILAs sold in first 3 years - Demand increased later as market volatility raised interest in buffering Coverage-limits discussion: Multi-carrier splitting is possible but uncommon - Advisers may diversify across carriers, but Lau says it is not widely done

Pivotal Quotes: "It's not annuities that registered investment advisors dislike and mistrust. It's what they become: complex, opaque, and expensive products that benefit the people who sell them more than those. Who buy them?" — David Lau: Describing why he founded DPL Financial Partners "We want to bring products to market that can be used and not sold." — David Lau: Explaining DPL’s product-design philosophy for carriers and RIAs "We're creating the first no-load insurance marketplace." — David Lau: Comparing DPL’s model to Schwab OneSource and the mutual fund no-load evolution

Implications: For advisers, annuities may be more useful as transparent, billable, low-cost portfolio tools than as sold insurance products. For insurers, fee-based distribution and simpler designs may be necessary to access the growing RIA channel.