What changes do you foresee for carriers, wholesalers and brokers if the new DOL fiduciary guidelines remain unchanged?
John Douglass: The U.S. Department of Labor’s new proposed rules defining fiduciary investment advice is a huge issue for registered reps, broker/dealers and insurance representatives. Broker/dealers are re-evaluating compliance rules for their reps. Brokers with minimal production or only collecting trail income from a few clients not actively managed will be a liability and could receive a U-5 if the liability is considered too high. I foresee E&O costs are likely to go up and these changes will force many brokers who are not active enough to justify the additional expense and liabilities to consider retirement. To further complicate the situation, regarding insurance reps, each insurance company develops its own agent guidelines so each will approach the proposed rules differently.
There are many troubling new regulations in the works in respect to the U.S. Department of Labor’s new set of proposed rules defining fiduciary investment advice, but one provision in particular opens the door for lawsuits involving brokers and firms. [It does not allow the investment advice contract between the adviser and the retirement investor to provide for the retirement investor’s waiver of his right to bring a class action lawsuit in court to resolve disputes or to include any exculpatory provisions disclaiming or limiting the adviser’s liability for violation of the contract.] This is a troublesome new era we are entering.
I would like to mention the implications and predict the fallout of these regulations. These regulations will be the final bullet to many brokers to give up security licenses and keep their life insurance licenses. Let’s look at the positive implication—this will bring more brokers to the independent channel who will need help in addressing these new regulations. We offer cost savings, along with the variety of product choices and assistance on applications. We are ready to embrace the new guidelines and move on, offering attractive alternatives for many brokers to help them build their business.
Rich Hellerich: Based on numerous conference calls and meetings with home office management and distribution partners in our industry, I wish we all had a clearer picture of the changes the DOL Fiduciary Rule will bring to brokerage distribution if it goes into effect. I still cling to hope that one of the industry lawsuits that have been filed will result in the DOL being forced to comply with the appropriate analysis of the impact of this regulation on both the consumers they are purporting to protect and our industry in terms of ridiculous compliance expense and potential employment reduction.
Hopefully, judges hearing suits filed challenging the Labor Department will find merit in arguments that:
• The rule is “impermissibly vague”;
• The DOL lacks statutory authority to redefine the term ”fiduciary”;
• Advice to roll 401(k) assets to an IRA raises to the level of fiduciary recommendation;
• The definition of reasonable compensation is vague;
• Question the legality of FIAs being regulated under the Best Interest Contract Exemption (BICE);
• The rule creates a new “private right of action” which gives individuals/classes the ability to sue. This right can only be created by Congress (and was upheld in a 2001 Supreme Court decision: Alexander v. Sandoval).
Your question states “if the fiduciary ‘guidelines’ remain unchanged” (I have inserted regulation since “guidelines” usually suggest participation is voluntary), so I will not spend time presenting a compelling argument that insurance products (fixed indexed annuities) regulated by state insurance departments are different from variable annuities and other securities investment options for qualified funds. Heaven knows many financial reporters have failed to understand the difference between fixed indexed and variable annuities for years. I wonder if there was any review of the number of consumer complaints regarding FIAs versus other financial products that come under this rule?
Based on the information I have presently here are some possible (probable?) outcomes I anticipate:
• This rule will create substantial unintended consequences in the fixed annuity marketplace for most annuity carriers, AMOs, and licensed producers since sales using qualified premiums are 50 percent or more of total sales.
• Carriers that do not become “Financial Institutions” may exit the fixed indexed annuity marketplace resulting in fewer product options and less competition to benefit the consumer.
• Heaped compensation is probably modified, with insurance-only agents expected to embrace and adapt to a new model of trail commissions.
• Because of the new costs of meeting this regulation on top of stringent annuity sale suitability review that went into effect January 1, 2012, many carriers may modify products and streamline their annuity portfolios (again reducing choice and benefits currently available to the public).
• If the DOL is allowed to create a new “private right of action” (consumer lawsuits) E&O premiums may rise dramatically.
• A possible scenario where “independent brokers” might ultimately be forced back into captive or PPGA distribution models with limited access to carriers and products. Due to the application of “financial institution” and “fiduciary” legal liabilities, I believe brokers could be limited to 2-4 carrier solutions rather than scores of carriers and products available today. (By the way, I find this result ironic in that my broker’s ability to search the entire marketplace for my best insurance solution may come down to 2-4 options rather than the numerous solutions available today.)
• Safety-conscious consumers nearing retirement with only 401k/qualified accounts set aside for retirement will lose access to advisors and insurance products that help them understand and eliminate market-risk to their savings, move the longevity risk to the insurance carrier and provide them guarantees.
No matter how well-intentioned this and other regulation is, we seem to always end up with more and more Federal bureaucratic control increasing the cost of the product or service, reducing product benefits and features, and resulting in hundreds if not thousands of new government jobs while harming the very people they were claiming to protect. The Patient Protection and Affordable Care Act comes to mind as an example. Seems to me that recent legislation, bills and other decrees are written that create the opposite outcome of how the regulation is named.
Ron Lane: Wholesalers are planning to beef up their in-house underwriting departments. If the DOL is able to implement their approved regulations, additional pre-underwriting steps will have to be taken before a qualified annuity case can be submitted to a home office. Although most wholesalers already have compliance and suitability departments, if the DOL implements their approved regulations, many additional pre-underwriting steps will have to be taken before an annuity case can be submitted to a home office.
Brokers will have to form alliances with broker/dealers if they don’t already possess them. Many brokers have these relationships already, but have been reluctant to utilize them due to the resulting costs. BDs usually mandate that new business goes through the “grid.” In that case, either the rep or the broker gets a haircut on the override commission. If the DOL is successful in implementing the new rules, carriers may not accept new business directly from a writing agent that isn’t represented by an up-line entity.
Carriers will build stronger partitions between the producers and themselves. I say this because, ultimately, insurance carriers are still responsible for the actions of their licensed representatives. The carriers want/need layers between their writing agents and home offices. Before a qualified annuity is approved, it first will have to go through more rigorous processes like double suitability and double compliance from the departments of the registered rep, RIA or bank to reduce the carriers’ liability.
Living benefit riders on indexed annuities have become a popular presentation tool. How have these income options changed the market place?
John Douglass: The annuity market had focused on accumulation versus income with the tax advantages they offer over traditional CDs or other investments. The living benefit rider dramatically changed the focus to income. The low interest rate environment, reduced cap rates, and market volatility has made this a strong talking point with retirees. I see indexed annuities as another tool in the tool box, not the only focus. The living benefit option can be oversold, and easy to do while offering a lot of attractive benefits.
Many agencies and companies have the attitude that an indexed annuity with a living benefit rider is the product you are going to sell and will tell you how to do it! Obviously, these products have captured millions of dollars that will be with insurance companies for years into the future. Think of sales future and building a block of business you control as your clients’ needs change. A reminder, there are many options for obtaining future monies from annuities: SPIAs; periodic withdrawals; or your clients may never need additional income. A prudent broker puts his client’s objectives and needs first. The fact finder interview with your client will determine their needs and where to begin the planning process to determine the product choice: MYGA, SPIA, SPWL, or fixed index annuities to name a few, each offering unique benefits. Your independent brokerage firm offers various product options with different durations, meeting different objectives, and can help diversify a portfolio to meet each client’s unique needs.
Rich Hellerich: I believe the presentation of these riders is popular because the fixed annuity marketplace has once again brought innovative solutions to meet the concerns consumers have when planning for a long retirement. Imagine you are sitting with a couple nearing retirement that asks the following three questions:
• What if one of us lives to be 95?
• What if one of us faces chronic care health issues?
• What if we die unexpectedly?
We can now offer our clients options to address their concerns with numerous solutions from excellent insurance carriers. Educating your prospects on the idea of maintaining control of their financial assets while addressing these concerns has to be rewarding!
If recent industry and academic studies are correct regarding savings most pre-retirees have earmarked for their financial futures, what other products offer the flexibility, benefits and guarantees found in fixed and fixed indexed annuities? The ability for the same premium dollars to “multi-task” to provide this insurance, without the fear of paying premiums for coverage you may not need, is both appealing and popular.
Ron Lane: The long term care side of the insurance market has been greatly affected by living benefit riders. It can be difficult for clients past a certain age to qualify for LTCI policies. Generally, LTCI policies aren’t what they used to be when considering price versus benefits. Many older consumers find that LTCI policies are “too little, too late” and don’t bother with a stand-alone policy. Annuities with living benefit riders can provide some peace of mind in lieu of one of these LTCI policies or to supplement them. Although the riders don’t cover all the benefits of long term care entirely, they can certainly help. Policies providing early access to monies in a time of need can help diminish the reluctance clients may have toward purchasing an annuity.
We also see many producers offering annuity products with living benefit riders to older clients who want to earn something on their money but are afraid to lock it up in case of changes in their financial picture or changes in their health. When a client is in a situation where they are worried about paying the high cost of long term care but seek a future income stream that could be doubled or even tripled, an indexed annuity with living benefit riders should fit nicely with their needs.
The low interest rate environment is continuing. How can brokers address the topic with consumers while promoting annuities?
John Douglass: The low interest environment has hurt a lot of investment options. For the last eight years, we have had to deal with the uncertainty of interest rates. Many annuity policies have maintained a 3.00 percent contractual minimum interest rate. These strong guarantees have helped many investors keep a reasonable floor on their return. Regarding sales of new policies, annuities compete strongly with other products experiencing the same historically low rates. We have been very strong in attracting money market funds and bank CD monies offering competitive interest rates for 1-10 years. We continue to watch for existing annuities that are dropping to low guaranteed rates, providing the broker an opportunity to improve the interest rate with a new product sale. The sales remain strong, mainly to an older market and the increase to age 90 issue ages has helped. Risk of market fluctuation and loss of principal is a scary thought for fixed annuity potential buyers, making guaranteed annuities an attractive alternative. The guarantees that fixed annuities can offer are reassuring product choices for many investors. An alternative sales tip is to be aware of other product ideas, like the very popular SPWL with new living benefit riders.
Rich Hellerich: Take back control of our currency from the Federal Reserve? No, that’s not likely.
I believe the answer lies in first evaluating the client’s risk profile and reviewing their other financial options compared to fixed/fixed indexed annuities. The second aspect is addressing the differences, benefits and guarantees of annuities when compared to other financial vehicles.
For the conservative saver, current rates of return on CDs make many multi-year guaranteed annuities (MYGAs) attractive provided they understand the specifics of the annuity contract, any available liquidity features and potential surrender charges on early withdrawals. That combined with techniques like yield laddering into longer maturity annuities can increase overall returns.
More aggressive savers can recognize the value proposition of a fixed indexed annuity that guarantees no losses to principal due to stock market declines and a better–than-average chance to earn better–than-average interest credits over the life of the contract.
We may be stuck in this low rate environment for years to come, so agents need to be working with a production partner that can help them effectively present this message and educate their prospects.
