Mixed Blessings For Annuities
May 3, 2016 by Ben Mattin
In the annuities world, the April 6 announcement from the Department of Labor Secretary Thomas Perez about new fiduciary regulations might appear to be a mixed bag.
Early readings indicate that variable annuities and fixed-index annuities will now require a “best interest contract” to ensure that clients understand exactly what they’re getting and what they’re paying for. But other fixed annuities seem to remain exempt. “From what we’re seeing, it looks like it may be possible that fixed annuities are not going to be subject to the BIC—that they are outside of this, because they offer a clear guarantee of a certain return, not unlike bank CDs,” says Mitch Caplan, CEO of Jefferson National. “With variable annuities and indexed annuities, there’s a greater degree of complexity. But frankly, we all still need clarification. It’s yet to be determined exactly how this plays out in the fixed world.”
Cathy Weatherford, president and CEO of the Washington, D.C.-based Insured Retirement Institute, concurs. “The simpler annuity products—those that provide income options, including deferred, immediate and the new QLAC annuities—will be preserved,” she says.
Another sigh of relief could be heard from purveyors of proprietary annuity products: It is not necessary to inform clients about competitors’ products. “When you are recommending a product, you don’t necessarily have to recommend a whole litany,” says Caplan. “It just has to meet the best interest standard.”
Others were concerned that full pricing disclosure could discourage clients from buying expensive products or protections—in the form of riders—that they really do need. But the DOL made it clear that, in order to satisfy clients’ particular requirements, advisors don’t necessarily have to sell the lowest cost products, if indeed a more expensive alternative is a better fit for the individual client’s situation.
But increased fee disclosure could indeed lead to more competitive pricing or fee compression. “The pricing of commissions paid for selling and distributing these products is likely to come down, but there’s little doubt in my mind that we’re evolving from a commission-based model to more fee-based products,” says Caplan. “There’s a fundamental shift afoot, a likely migration to annuities that fit into a fee-based world.”
It seems that commissions can still be charged, but only if clients sign a contract that indicates they understand why the broker is recommending that product; what fees are being paid; and why and how it’s in the client’s best interests. “We’re still reviewing the details to see whether the BIC expressly permits or forbids participation in commission-based transactions,” says IRI senior vice president and general counsel Lee Covington.
Michael L. Rosenberg, a registered financial consultant at Diversified Investment Strategies in Livingston, N.J., is relatively unfazed by the DOL rule. “I don’t need a rule to act in my clients’ best interest,” he says, adding, “The days of high commissions are over, but commissions will still be paid.”
He does find the details around VA contracts to be somewhat surprising. “One big issue was that, before engaging a client into a VA contract, one would’ve had to provide a cost analysis … with respect to proposing a specific product. Seems now you just have to provide a general disclosure, not specific to any particular product,” says Rosenberg. “All in all, at first glance I believe it looks very workable and fair for the consumer and financial advisor.”
Yet others question whether the ruling could cause clients more harm than good. “I do wonder if the public will get a false sense of security from the fiduciary label,” says Glenn Daily, a fee-only insurance consultant based in New York. “Sometimes disclosure can make people more vulnerable to being misled.”
For the future, he’s a sticking with his recommendation that clients get advice from multiple independent sources.
Still, the DOL ruling has its detractors. “Does the annuity industry need to be cleaned up? Absolutely,” says Stan Haithcock, also known as “Stan The Annuity Man,” in Ponte Vedra Beach, Fla. But to him, the new ruling is tantamount to government overreach—suspiciously timed to be codified before the presidential election. “It started with a great idea, but by the time it got out it’s a bad idea, and consumers are going to lose,” he says.
The BICs, says Haithcock, won’t be “worth the paper they’re printed on,” because signing an understanding of best interests doesn’t guarantee that it’s so. Moreover, before the new rule goes into effect in 2018, Haithcock is convinced “they are going to start bolting things onto it. … It’s a cumbersome law that’s going to grow and grow until it’s impossible to understand and implement. This is a big win for the lawyers.” He foresees lawsuits as the government tries to “seize control of the retirement-advice industry.”
Haithcock believes that fixed annuities may yet be subject to a kind of contract like the BIC, but concedes that the current information does not make this clear. Time will tell. “I don’t think the annuity world is going to be affected now, but it will be,” he says. “This is going to completely disrupt and permanently change the distribution model for annuities and the design of annuities. I don’t know if the industry really gets that. This is a wake-up call. If they don’t respond in unison, then they get what they deserve.”
