While some industry watchdogs believe that the best interest contract exemption is too onerous for many annuity manufacturers and distributors to comply with, Girmann says that many firms will decide to adopt the contract and its requirements.
“I think the industry has become accustomed to more paperwork and regulation over time,” Girmann says. “The disclosure rules mean that if they’re moving money into an annuity, or out of another product, or replacing one annuity with another, they have to show how the new annuity is better for the client. The simple answers like offering more investment options are no longer sufficient. It has to be tailored to the client.”
Those disclosures should place fee pressure on products sold within annuities, says Caplan, as clients and advisors become aware of how investment expenses are used. Investors will expect annuity providers to offer lower-fee share classes within their products.
“Whether clients understand ‘fiduciary’ or not, what they do understand is cost,” Caplan says. “The power of technology has given them access to understanding what investment costs are, and how they can lower costs to improve returns. The whole fee structure and institutional share classes are going to be the next thing that people focus on.”
Currently, around 4 percent of annuities are sold in institutional share classes, says Girmann, and there are only around 20 carriers offering I-shares within their products.
The movement toward lower costs means that different types of funds are going to show up within annuities, too, says Tony D’Amico, CEO of the Fidato Group, a Strongsville, Ohio-based hybrid RIA. “They’re going to have difficulty justifying higher up-front costs, so we’re going to see a lot more use of index funds and ETFs.”
Annuities might also shift to products with few up-front costs and trailing fees and commissions, says Girmann, and the average product hold time within annuities will probably increase. Surrender fees, charges for withdrawing or abandoning an annuity—typically charged within a certain period after its purchase—will also be decreased or eliminated.
While D’Amico argues that product manufacturers will begin to eliminate riders and living benefits in order to offer a lower-cost product, Girmann argues that the add-ons could be used to justify variable annuities’ higher costs and commissions.
“Firms are going to try to differentiate themselves to find ways to charge additional fees or to justify the additional fees they already charge,” Girmann says. “Commissioned products still make sense. They’re just going to have to be positioned properly. A client that isn’t going to make a lot of changes and who will hold onto a product long-term might be better off paying an up-front commission, which over the long term might be lower than an ongoing fee.”
The highest cost annuities likely won’t survive past the DOL rule’s effective date in April 2017, says D’Amico, because advisors likely won’t be able to justify the expense clients would pay for the tax benefits.