inquiry” about a client’s financial condition and goals. Other states are considering similar requirements.
Jay Clayton, the new chairman of the
SEC, has indicated that at long last the
SEC is getting serious about creating a
fiduciary standard for all types of investment accounts.
A fiduciary has both a duty of loyalty
and a duty of care. In plain English, the
duty of loyalty requires an advisor to put
the interests of the client above his or
her own. Any conflicts of interest must
be eliminated. To the extent the conflicts
cannot be eliminated, they must be minimized and fully disclosed. The duty of care
requires the advisor to give advice only
if he or she is qualified to do so.
What would a duty of loyalty and care
mean to the annuity industry?
Most advisors would most certainly say
that they already put their clients’ best
interests first; therefore, they already meet
the duties of loyalty and care. However,
one cannot meet a fiduciary standard
through intent alone. Working within
a fiduciary framework with the least
amount of liability also means the creation
of a process, the documentation of that
process and the reduction of potential
conflicts of interest. It is these aspects
that are driving changes throughout the
entire industry. Within the annuity industry specifically, we can expect to see
the following changes occur.
1. Commissions will be more
“level,” if they continue to exist at
all. Despite the obvious conflicts created
by any product paying a commission, no
current proposal or law prohibits them.
While the CFP Board’s proposal makes
it clear that commission-free advice is
preferred, it would allow its members to
receive commissions as long as they are
clearly disclosed in plain English. The
current DOL rule created an exemption
permitting the continued recommendation
of commissionable products. Although
commissions are still allowed, the inher-
ent conflict they create does in turn create
additional legal exposure for firms and
individuals in this new fiduciary world.
In an attempt to reduce the potential
legal exposure inherent with the conflict, distributors are building supervisory frameworks that will make every
recommendation of a commissionable
annuity look a lot like the supervisory
process that today is reserved for 1035
This enhanced supervision will provide a tremendous incentive for advisors
to simplify their lives by recommending
a fee-based annuity instead of a commis-sion-based annuity. If enough advisors
choose the fee-based route, then the annuity distributors are likely to eventually
reach the conclusion that the additional
supervisory costs and infrastructure required to support commissionable annuities are simply not worth it.
In the interim, we will see commissions
leveled by product type in order to eliminate any possibility of an advisor being
accused of recommending one annuity
over another because of compensation.
For example, every variable annuity offered on a firm’s platform will likely pay
the same commission.
In short, the days of insurance compa-
nies offering multiple flavors of products
— especially in the fixed and indexed an-
nuity space — in order to justify products
at different commission points is about to
come to an end. Eventually, the annuity
companies will get out of the commission
business completely. They will likely of-
fer only a non-commission product that
an advisor can either place in a fee-based
account or have his or her back office tack
on a “reasonable commission.”
2. The industry will have to work
with regulators to rethink the current annuity suitability requirements. At most distributors, annuities
are the most highly supervised product
on the platform. Not only do advisors face
the supervisory requirements related to
FINRA’s annual list of complex products,
but they have all of the state insurance
suitability requirements as well. And if
an advisor proposes the replacement of
one annuity for another, he faces supervision on steroids. These requirements
are based mostly on regulators’ concerns
that advisors make annuity recommendations that are unduly impacted by the
commissions they receive.
It stands to reason that if an advisor
recommends a fee-based annuity, thereby
eliminating any conflict of interest associated with a commission, the annuity supervisory requirements should be
much different. In fact, I would suggest
that under such circumstances, the supervisory requirements for an annuity
should be no different than any other
product recommended within that fee-based account.
Any differences that do exist should
solely be to make sure the client fully understands the more complex aspects of
the annuity. However, until the regulators
acknowledge this difference, compliance
departments are unlikely to change their
current requirements, which may well be
a barrier to the development of fee-based
annuities within the industry.
The days of insurance
multiple flavors of
products — especially
in the fixed and indexed
annuity space — in order
to justify products at
points is about to
come to an end.