Annuities Face A ‘Fiduciary Threat’ As They Enter A Golden Age
June 17, 2015 by Cyril Tuohy
Even as the annuity industry seems primed to enter a golden age with retirees looking for guaranteed income, it faces a new “fiduciary threat” from the U.S. Department of Labor (DOL) and the Securities and Exchange Commission (SEC). That’s the view from annuity expert Jack Marrion.
Marrion, CEO of the consulting firm Advantage Compendium, said that in 2014 the National Association of Insurance Commissioners received only 508 consumer complaints about annuities. That compares to the $90 billion in annuity sales reported that same year.
“That works out to one complaint for every $1.1 million in sales,” Marrion said during a webcast earlier this month on innovation in annuities.
The webcast, titled “Annuities Then and Now: We’ve Come a Long Way,” was sponsored by the Coalition for Annuity Awareness in conjunction with Annuity Awareness Month. The webcast covered innovation in the annuity industry over the past quarter century.
“That also means that 99.99991 percent of annuity customers felt no need to complain about their agent or their fixed annuities — 99.99991 said everything is wonderful, we have no problem with our fixed annuity or our agents, we love them,” Marrion also said.
He said that despite the high satisfaction rates, fewer complaints, an effective suitability model, and surrender periods and commission structures “far lower than they were 10 years ago,” the DOL insists that the suitability standard doesn’t do enough to protect consumers adequately.
Sen. Elizabeth Warren’s recent comments that insurance agents are more interested in “diamond-encrusted NFL Superbowl-style rings than customers,” is an example of where “we’ve done nothing wrong and there’s no cause, yet there’s an effect.”
In April, Warren, D-Mass., sent letters to 15 of the largest annuity carriers raising questions about the incentives, perks and rewards carriers provide to distributors for selling annuity products that may not be in the best interest of Main Street investors.
“Annuity agents that are more interested in earning perks than in acting in their clients’ best interest can place Americans’ savings and retirement security at risk,” Warren wrote in her April 28 letter to the CEOs of the annuity companies.
Earlier this year, the DOL issued a new set of fiduciary rules governing retirement plan advice and the SEC is widely expected to release its own set of rules governing the fiduciary responsibilities advisors have toward investors.
Government agencies say investors need more protection and are best served when advisors meet a fiduciary standard of care. However, trade organizations representing insurance and financial advisors have responded that the rules are unnecessary and will raise costs of doing business.
In many instances, the proposed rules may even have the opposite effect as advisors limit investment choices or decline to serve middle market investors altogether.
The DOL, under pressure from industry groups, extended the fiduciary rule comment period by 15 days beyond the original July 6 deadline.
Marrion said that in case of the DOL’s fiduciary rules, insurance agents are getting dragged into the debate unnecessarily.
Marrion said the fiduciary threat was one of several facing the annuity industry and its distributors emanating from what he called “a complex network,” affected by other networks in turn affected by “seemingly unrelated variables.”
Other threats include competitive disruption, “benevolent paternalism” and political threats, said Marrion, the author of several books on annuities.
Some threats, such the litigation launched against insurance agents 15 years ago for bad market conduct by carriers, their distributors and their agents, are generated by the industry itself and only lead to more regulation.
In the case of the National Association of Securities Dealers (NASD) Regulation 05-50, broker/dealers must supervise index annuities, a product broker/dealers have no control over.
Despite the threats, the industry has remained as innovative as ever, particularly since the introduction in 1995 of the fixed index annuity.
Marrion said that after the turn of the century, annuity carriers addressed longevity risk with lifetime withdrawal benefits.
Today’s innovations include long-term care benefits tacked on to a fixed annuity, and a class or annuity known as contingent deferred annuities even bestow distinct annuity benefits on a security, he added.
Marrion said that despite the headwinds — some predictable and others unforeseeable — the industry has remained resilient and has met the low interest rate challenge with competitive products that meet the needs of millions of people.
“We’ve done surveys showing the millennials and Generation X want annuities,” Marrion said. “They like the protection and the media occasionally says something nice about annuities. In a lot of respects, this is the golden age of annuities.”
