The capital gains tax reduction that made such a splash in last week's budget deal could feel like a bucket of cold water on the heads of bankers who sell variable annuities.
Experts say variables-which are basically mutual funds in an insurance wrapper that allows tax-deferred growth-will be less attractive in a world with lower tax rates on long-term capital gains.
As a result, investors could go for mutual funds instead.
Banks "will undoubtedly sell more mutual funds," said Kenneth Kehrer, a consultant in Princeton, N.J. "The problem they face is that mutual funds pay a lot lower commission. They'll have to sell three mutual funds to replace every two variable annuities."
Bankers and third-party marketers say they're not worried.
"If a change in legislation makes one product not as competitive, our breadth of services can satisfy the needs of our clients," said Jack Kopnisky, chief executive and president of KeyCorp's investment unit. "We've always taken the view that we don't sell products, we sell solutions to customer needs."
He added, though, that banks relying heavily on variable annuities to the exclusion of mutual funds-generally smaller banks-could be hurt.
Porter Morgan, a senior vice president at Liberty Financial Cos., which controls Independent Financial Marketing Group, disagreed.
Independent Financial, a third-party marketer, has a big stake in the variable annuity business. It sells variables through at least 100 banks.
Mr. Morgan said that attractive features of the products are unaffected by the tax law. Their owners get a guaranteed death benefit, payout flexibility, and the ability to move money …