Advisors Wary Of Fiduciary Rule’s Annuity Exemption
December 5, 2016 by Juliette Fairley
The Department of Labor is expected to make it easier for insurance agents to continue selling fixed-index annuities, but many financial advisors say allowing such an exemption defeats the purpose of the looming fiduciary rule.
“It allows for what I believe is one of the biggest problems in the industry, which is people holding themselves out to be a financial planner or the like with limited licensing,” said Allan Katz, a financial advisor in Staten Island, New York.
Some $54.5 billion in indexed annuities were sold in 2015, a 13 percent increase from 2014, according to LIMRA. Fixed-index annuities, which feature some of the same characteristics as structured notes, have gained popularity with risk-averse investors because they offer certain quasi-guarantees and limit an investor’s potential loss.
“Non-securities licensed agents sell fixed-indexed annuities, fixed annuities and non-variable life insurance, but only FIAs (fixed-index annuities) will be affected because fixed annuities and non-variable life insurance are sold under 84-24,” said Bruce Ashton, attorney and partner with Drinker Biddle & Reath in Los Angeles.
Also known as Prohibited Transaction Exemption (PTE), 84-24 permits fiduciaries to receive a commission for selling insurance or annuity contracts to ERISA plans or IRAs, according to the National Association for Fixed Annuities.
If granted, the DOL exemption contained in the fiduciary rule would bestow financial institution status to independent marketing organizations (IMOs) and their contracted agents could then initiate variable compensation. IMOs contract with insurance companies to perform distribution, recruit agents and perform other marketing functions for the companies’ products. Their agents typically do not have broker-dealer or investment advisor affiliation.
“Although some 20 IMOs have applied to become financial institutions, no more need to apply because the DOL has indicated that it will be coming out with a broad exemption for IMOs,” said Brown.
In other words, if an IMO can fall within the scope of the exemption, it can be granted financial institution status.
Kristin C. Sullivan, a certified financial planner in Colorado, is concerned about the reputation of the financial advice profession being hurt by unethical sales practices.
“If there is a huge swath of vendors who don’t want to follow the rules, it’s a red flag about the product they are selling,” Sullivan told Financial Advisor.
Fixed-indexed annuities are not treated as securities with commissions.
“The DOL rule says that fixed annuities and multiyear guaranteed annuities do not require a best-interest contract (BIC) exemption in order for the financial professional to earn commissions,” said Ryan Brown, attorney and partner with CR Myers & Associates and special counsel to M&O Marketing, an IMO in Southfield, Mich. “The shock within the annuity industry was why FIAs were not included within 84-24.”
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