In early April, U.S. Department of Labor Secretary Thomas Perez released his office’s final determination on the extents and limits of the fiduciary standard for retirement products and the professionals who represent them. A key consideration was the handling of annuities.
Reactions were swift and diverse. But in the time since the announcement, many in the industry are still delving into the 1,000-page ruling and trying to decide if they like it or not.
They’d already had plenty of time beforehand to consider and comment. A draft of the regulations to address potential conflicts of interest was proposed a year earlier. Perez says his office received more than 300,000 reactions to that version. The final ruling made significant concessions to the financial industry, some say, while others are sorely disappointed.
Yet perhaps the most important question is what the future holds for annuities in the post-DOL world. How are issuers likely to change their products, if at all? How will brokers and advisors step up to the new standard? Will consumers even notice the difference—and if so, to what extent will demand for annuities and other retirement products be altered?
A Client-Focused Rule
“What we saw primarily from DOL was a focus on the client,” says François Gadenne, chairman and executive director of the Boston-based Retirement Income Industry Association and the president and CEO of Retirement Engineering, an R&D company that designs proprietary insurance and investment products. “Whatever may or may not be in there, we’re just pleased that it’s intended to create a client focus.”
Certainly that’s the idea behind the stricter fiduciary standard—always put the client’s interests first, ahead of the broker’s or firm’s. But will the rules as laid out actually achieve that goal?
“There is a French proverb that says, ‘What goes without saying goes much better when you say it.’ It’s in that perspective that I like this. It goes without saying that we work for the client, but it goes much better when you say it,” says Gadenne.
Not everyone is so pleased. “For nearly a year, we have been actively monitoring the DOL rule’s progress,” says Jerry Lombard, president of the private client group at financial services firm Janney Montgomery Scott in Philadelphia. Corresponding by e-mail, Lombard writes, “We still hold the position that our clients, and all investors, should be free to choose how they wish to receive financial advice for retirement and how they pay for that advice. Today, however, this rule puts into place certain requirements and restrictions that limit choice [and] access, and that may impact the affordability of advice.”
Fixed-Indexed Annuities
For many, a particular bone of contention is the inclusion of fixed-indexed annuities among the products that will now require a signed “best-interest contract” (or BIC) before sale. “Many of the significant changes between the proposed rule to the final [version] were unexpected. Clearly, the most disappointing for the annuity consumer was throwing indexed annuities under the BIC bus,” says Kim O’Brien, CEO and chief advocate at Phoenix-based Americans for Annuity Protection.
O’Brien argues that the ruling will only make indexed annuities “more confusing” and possibly more expensive as companies scramble to meet the new requirements—and unnecessarily so. “The [Labor Department’s] explanation that they moved indexed annuities to the BIC because they were complex is arbitrary and uninformed,” she says. “Not only do they clearly not understand annuities as insurance products—or were informed by those who do not understand—they didn’t even bother to study the impact of their decision on the annuity marketplace and on Americans seeking the certainty and protection of fixed annuities, including fixed-indexed annuities.”
Ultimately, the effect could be catastrophic, she says. “If the DOL rule is allowed to move forward as it is, it will have a devastating impact on the fixed-annuity marketplace,” she says. “The cost of compliance is huge, and the almost certain litigation exposure will send many advisors out of the annuity business.”
Critics of fixed-indexed annuities, however, are pleased to see the product receive tightened scrutiny. Among them is columnist and commentator Jane Bryant Quinn. “What do I have against FIAs? Aside from the fact that they’re neither ‘fixed’ nor ‘indexed?’” she asks. “And that you don’t know what you’re paying for? And that the insurer can change participation rates, etc., if you start earning too much to make the annuity as profitable as the company wants?”
But in the last few years, sales of fixed indexed annuities, which bear many similarities to structured notes, have surged while variable annuities have lagged. The guarantees and downside protection of these vehicles have appealed to many risk-averse investors, even if many, like Quinn, question their transparency.