The Department of Labor's proposed fiduciary rule will be a hot topic throughout 2016. SMS is watching legislative and marketplace developments, and will keep you informed of any changes that might affect your business.
Note that until the new DOL fiduciary rule is officially announced and implemented, anything offered is purely a best guess. We are all awaiting more details, although it seems to be no longer a question of whether it will happen, but when.
We are confident that most of the producers we work with are already acting in the best interest of their clients, so any changes to best practices should be minimal. A recent LifeHealthPro article does an excellent job of describing the proposed Best Interests Compensation Exemption (BICE), and that should be a focus for a number of advisors.
However, there is another wrinkle — namely, Prohibited Transaction Exemption (PTE) 84-24, which specifically allows for compensation to be received if all of the stated rules are met.
Some of those stated rules include “no misleading statements,” “reasonable compensation” and “acting in the best interest of the client.” An advisor must exercise the care, skill, prudence and diligence that a reasonable person would exercise for the needs of the buyer. The actions must meet the investment objectives, risk tolerance, financial circumstances and needs of the buyer. Compensation must come directly from the insurance carrier, not from an independent marketing organization (IMO), with a strong push toward trail commissions instead of upfront commissions.
What one party sees as reasonable compensation could lead to a lot of discussion and draw possible adverse action from the regulators. Of positive note is the possible reduction of surrender charges for the buyer should commissions be reduced. Given the long life of an indexed annuity, most producers already sell them with that in mind. A 6% or 7% commission does not look bad if spread out over the life of the policy, or a minimum of 10 years.
If compensation needs to be disclosed, should that be a hurdle? Not necessarily. If explained properly at the beginning of the process, it should not prove fatal. Most buyers do not begrudge someone making a living, and if given the proper care and advice, would welcome the additional support, especially if they do not have to pay for it directly.
Some advisors say that the fiduciary rule will not impact them at all because they do not sell annuities on a qualified basis. They mainly use them as a non-qualified program to supplement someone’s retirement plan, as an alternative to the very low interest rates on bank CDs or as a bond alternative. That may be true for now, but if the carriers decide it is too difficult to manage these changes for only qualified plans and instead choose to treat all indexed annuity products equally, it could impact a much larger group of advisors and producers.
Should all of this mean doom and gloom for indexed annuities? Not by any stretch. We have weathered the storm of compliance and suitability. We have weathered the storm created by tremendous scrutiny on our industry and the products that we represent. The market will adjust to these changes. Some will say that we are already positioned for these changes and instead there are huge opportunities for growth among our group. There is certainly a place for non-commissionable products and for products that offer trail commissions or some type of first year and trail option. There is also an opportunity for the carriers and actuaries to create additional products to meet the demands of our clients and keep the new regulations in perspective.
I’m betting that the distribution of indexed annuities can continue with advisors in all three of these categories and even more. We are already competing with other institutions like broker-dealers, wire houses and banks. All of us will find a way to work within the new rules, we will continue to be successful and our industry will continue to grow. There are too many people that need our help.