Does new U.S. rule favor mutual funds vs. insurers’ annuities?
January 28, 2016 by Joseph N. DiStefano
Lincoln National Corp., the Radnor-based life insurer and retirement investments company, is among a group of American insurers facing a steep drop in annuities sales to retirement investors and their IRA accounts, if a year-old Obama administration consumer-protection proposal gets enacted this winter, as industry observers expect.
“Assuming that the proposal was adopted and implemented as is, we would guesstimate that annuity sales might be as much as 70% lower” at Lincoln National, insurance-stocks analyst Steven D. Schwartz, of Florida-based Ryamond James & Associates, told clients in a report today. Lincoln is “definitely among the most exposed” annuities-sales companies under the proposal, Schwartz told me. MetLife, Prudential and other big companies also face declines.
The Department of Labor’s proposal would add annuity retirement accounts to the list of investments for which brokers would have to more thoroughly ensure that investors know what they are buying — the risks they face, and the fees and commissions the brokers collect for selling them various investments. Brokers would also be considered fiduciaries, with more responsibility for making sure investors get a good deal — and not just retailers pushing investments with the fattest mark-ups.
In rolling out the proposal last winter, President Obama promised it would reduce conflicts of interest so investors spend less on fees and keep more profit from their investments. More here.
Since annuities generally “take a lot more education and create a lot more paperwork” to sell than securities or mutual funds, brokers have been willing to work harder to sell annuities so they can collect attractive annuity commissions, Schwartz says.
But the extra work required by the new rules — even if popular market-indexed annuities are given an exemption from some aspects of the new rule — would likely push brokers away from selling annuities and toward mutual funds and other fee-based investments, he added.
Lincoln officials referred questions to insurance industry lobbying groups such as the American Council of Life Insurers. The insurance groups, with their allies in Congress, have argued that annuities tied to stock and bond market indexes deserve a simpler treatment. They have also noted that fee-based investments create their own conflicts of interest for brokers.
They feel the government is favoring mutual fund companies like Vanguard over insurers like Lincoln.
Schwartz isn’t predicting doom for Lincoln — the company has other profitable products, and its stock already trade at such a discount to its profit stream that Schwartz labels Lincoln shares a “strong buy” at recent prices below $30 a share.
