Unless you’ve been living under a rock, you know the Department of Labor (DOL) issued new standards for retirement products last April. Included among the items subject to a higher fiduciary standard are variable annuities (VAs) and fixed-indexed annuities (FIAs). But what exactly that means isn’t entirely clear. Yet.
Whether you believe the new regs will save the industry from unscrupulous practices or destroy it with unnecessary and overly complex rules, one fact appears indisputable: The industry and the products will have to adjust to fit the new regulations. As insurance companies scramble to redesign their annuities for this post-DOL world, how can advisors prepare themselves for what’s likely to be a complex transition?
Multifaceted Pressure
In late September, Nationwide acquired Jefferson National, a provider of low-fee variable annuities, and said the DOL Rule was the deal primary impetus for the deal. “There will be pressure to transform what annuities are, but annuities aren’t going to disappear,” says Larry Greenberg, president of Louisville, Ky.-based Jefferson National, in an interview shortly before the transaction was announced.
That pressure, he says, is multifaceted. “There is intense regulatory scrutiny, a lot of public distrust of financial services companies in general, and a strong focus on educating consumers to think about the price of financial products, their value and costs,” Greenberg explains. These distinct but overlapping factors are generating a move toward products that “will be lower cost, represent stronger value and be more transparent.”
Lower Commissions
To most observers, though, the new breed of products will probably also carry lower commissions—possibly even NO commissions—and favor more fee-based contracts. That’s because, under the new rules, VAs, FIAs and other equity-based products and services sold on commission will require a best interest contract exemption (BICE) for every client. That’s a legally binding guarantee of non-bias as well as full disclosure on all costs and fees.
Several FIA providers have already announced plans to issue new fee-based products to get around the BICE regulation, and in late-september Jackson National Life Insurance Co. released its first fee-based VA. “I see commissions getting reduced, which is fine by me,” says Andrew Murdoch, president of Somerset Wealth Strategies, in Portland, Ore. As a result, he says, “insurance carriers’ sales will be down, some advisors will be forced to leave the business as they will not survive, and clients will lose advisors that do not make it or are newer to the business.”
Murdoch is in the camp that thinks these reforms are for the good. To be clear, though, he isn’t sounding the death knell of annuities. “They will always have a place in a portfolio,” he says, “but [the DOL ruling] will eliminate some people’s overselling the benefits, which is a problem now.”
Eliminating Bad Actors
Eliminating the bad actors—those who make false promises to clients or issue recommendations solely based on the commissions they receive—will of course be good for the industry. And after all, that’s partly the point of the new regulatory scrutiny. Yet the repercussions of these changes could catch many well-intentioned and scrupulous advisors by surprise.
One recent FUSE Research Network survey found that two-thirds of advisors don’t believe the new regs will have any impact—either positive or negative—on the use of VAs. A few even believe the rules will lead to greater use of the products. “[Those] advisors will be surprised, unless they do not use annuities,” says Murdoch.
Duane Thompson, a senior policy analyst at Pittsburgh-headquartered fi360, a fiduciary training firm and the credentialing body for the Accredited Investment Fiduciary and the Accredited Investment Fiduciary Analyst designations, puts it this way: “They are in an unfortunate state of denial.”
Thompson adds, however, that many others are on the opposite end of the spectrum. There’s “a tremendous amount of uncertainty and concern from firms that rely heavily on commission and third-party revenue. They—and all of us—are anxiously awaiting additional regulatory guidance promised by the DOL,” he says.
Echoing others, Thompson anticipates a “significant transformation from a sales-oriented business model to a client-centric fiduciary culture.” He says this transformation could take years to accomplish. But he, too, believes that equity-linked annuities will continue in some shape or form, as retiring baby boomers seek sources of income that can appreciate over time.