Most variable annuity manufacturers are going to have to take a close look at their business, says Girmann. Some will fight the rule, some will comply and some will exit the annuity business entirely to concentrate on their mutual fund and life insurance channels.
Caplan says the rule will do three things to the annuity industry in general: change the relationships within the vertical chain of manufacturers, distributors and advisors; put more focus on value and cost; and ultimately continue to prompt the migration of advisors from commission sales to fee advice business models.
“Everybody is trying to figure out what role they’re going to play,” Caplan says. “This is also part of another long-term movement where power is migrating from the hands of product manufacturers and distributors into the hands of the consumers and investors.”
Variable annuity manufacturers and distributors will have to decide whether to continue selling the products in the current environment, with their choices being company-specific, says Caplan. Many companies will leave the business entirely.
Others may choose a partial exit from manufacturing and distributing variable annuities, says Girmann. “The rule doesn’t touch in-force policies in a significant way, so you might see some companies choose to defend their current block of business and decide that’s profitable enough, [but] that they don’t want to participate in these markets any further.”
The companies who stick around will likely address the rule in different ways, says Caplan. “Some will focus on how they pay for distribution. Do they modify the way in which they compensate for distribution and move entirely to fee-only, or do they try to fit into the exemption that’s allowed? I think it depends on the individual manufacturer.”
Some insurance companies may follow MetLife’s lead and sell their distribution channels. Broker-dealers may decide it’s easier to become fiduciaries rather than find other ways to comply with the rule.
“Some migration to fee-only advice may be forced by the product manufacturers and not the distributors,” Caplan says. “On the other hand, some broker-dealers are going to say that it doesn’t matter if manufacturers build a solution; they’re not going to want to take on the risk of selling a commissioned product. I think you’ll see both.”
Still other firms will attempt to comply with the requirements of the Department of Labor’s best interest contract exemption. Under that rule, firms will have to disclose their fiduciary obligations, investment expenses and potential conflicts of interest to clients in a written contract.
Because the annuity sales would be bound by a written contract, clients would have the right to arbitrate individual complaints against an advisor, or to litigate their disputes as part of a class action.