Regardless of what you have or haven’t heard, your fixed indexed annuity (FIA) sales and much of your fixed indexed universal life (IUL) sales will significantly change after April 10, 2017 and January 1, 2018. These are the two deadlines the Department of Labor has imposed on the financial industry to comply with their new fiduciary guidelines. The result? Your indexed annuity and life sales will be different; the types of products you now sell will be different; the compensation you now earn will be different; and the way you gain access to the products will be different.
The DOL extension of ERISA regulations require that any professional offering investment advice on qualified plans such as IRAs and 401(k)s do so as a fiduciary and thus are subject to a higher standard of conduct. In many cases this will include a written contract attesting that the fiduciary acted in the best interest of the investor, signed between the financial institution and the individual client.
By all accounts, qualified dollars make up over half of the current FIA sales across the country. In fact LIMRA studies have shown that FIAs will decline from a predicted record high of $60 billion in 2016 to $40 billion in 2017 representing a 30 to 35 percent decrease in industry sales. What’s more, if fixed indexed annuities aren’t the majority of your annual production, don’t stop reading here—there are serious implications to your IUL business as well. The upside? This could be a major opportunity for you!
You may have overheard during side-bar conversations at your local NAIFA and industry meetings that this regulation will never see it through to actual implementation. In fact, if you listened to some of those same conversations a year ago you would have heard that the regulation would never see its way to actually being passed in the first place. So now that it has passed you can do one of two things. You can embrace the somewhat naïve idea that legislation, litigation or politicization will step in and save the day (probably not very likely). Or you can prepare your practice to not only survive in this new environment, but thrive. At this point in the game, it’s a real enough threat to your business that exploring a way to responsibly protect your livelihood probably makes the most sense. What’s more, the right preparation could also add another substantial source of revenue to your practice.
It’s important to be mindful that being held to the standards of a fiduciary is in no way a negative thing for an insurance professional nor for their clients and prospects. I’d like to think that the professionals reading this are already acting in that capacity. The crux of the issue for the insurance and annuity professional lies in the exemption that will continue to allow them to help clients with qualified solutions and receive commission for doing so.
The Best Interest Contract, or BIC, exemption includes fixed indexed annuities amongst a host of other retirement products and requires that the financial institution (FI), i.e. bank, broker/dealer, wirehouse, RIA or insurance carrier, enter into a contract with the investor stating that they and the representative are acting in the best interest of said investor. Not to be overlooked, this contract is held between the financial institution and the investor, not the agent and the investor. It also gives the investor unlimited opportunities to file a complaint and/or litigate against all parties involved should they ever feel that their best interests were not observed and that another product or solution may have performed better for their individual needs. Either incredibly forwardly thinking or deviously serendipitous, with this small clause the DOL, having no means of enforcing regulation themselves, have put the power of enforcement in the hands of tort attorneys.
Obviously this puts a lot more responsibility and liability on the financial institution, specifically when that FI is an insurance manufacturer who typically does not have the oversight and compliance infrastructure that a B/D, RIA, wirehouse or bank might. In fact, it may just be prohibitive all together for a carrier to use an insurance-only licensed representative that doesn’t already have a go-between FI to sign the BIC as a conduit to distribute their products to the public. In other words, rather than taking on the additional liability and exposing their seemingly deep pockets by entering into a contract with a client with whom they have no working relationship, some carriers may look to offer their products only through other financial institutions that do.
There is no doubt that the DOL regulations are still unclear at best. What is not completely understood is how various institutions will interpret and react to them. For instance, if a BIC must be signed and a carrier does not have adequate distribution through B/Ds or wirehouses, they may be forced to enter into the contract themselves. While this may seem like a good thing for an insurance-only licensed agent, there is still the exposure to litigation on their qualified sales. Another approach a carrier may opt for is in the product development arena. Because only FIAs, and not fixed annuities, are treated under the BIC exemption, carriers may choose to swing the pendulum back to non-indexed products that are treated under the less intrusive 84/24 exemption and have some of the same features that make so many FIAs attractive. A fixed annuity with a guaranteed income rider and a confinement doubler may not be a difficult transition for many of today’s insurance-only licensed agents to make. In a move that may prove a bit more difficult for today’s producer to transition to, many carriers are now looking to develop fee-based-only FIAs which would make it necessary for a producer to affiliate with an RIA and thus add a layer of protection to the manufacturer.
Although the 84/24 exemption does not require a written contract to be signed at the point of sale like its close cousin, it still clearly puts onus on the representative to act as a fiduciary and carries with it the shadow of exposure.
So where does this leave your indexed universal life sales? The overwhelming majority of focus in the insurance industry has been placed on the impact the DOL will have on the sale of FIAs. However, unlike FIAs, the majority of premium deposited into an IUL is not qualified and thus does not fall under the DOL’s jurisdiction.
This is not to say that an IUL or any life insurance product is completely exempt. It is certainly not an uncommon solution to individuals who are unknowingly and unwillingly creating a heavy future tax burden for themselves by deferring compensation into their company 401(k), over the company match, to redirect those funds into a more tax advantaged product like an IUL. Likewise it can sometimes prove prudent for an individual to liquidate a qualified account, pay the tax now at a known and possibly lower tax rate and transfer the remainder into an IUL which will enjoy tax deferred growth and, if structured correctly, provide a tax free income into perpetuity. If qualified funds are involved in the sale of an IUL they will be treated under the 84/24 exemption and thus experience a bit of regulatory relief from the DOL. There is also little to no immediate threat to an insurance-only licensed producer in being able to continue to sell IULs as the carriers incur no additional liability.
There is no doubt that indexed sales are changing. Carriers are looking to add a layer of protection between themselves and the client. New products are being developed, some that producers unaffiliated with an RIA may not be able to sell. The DOL has opened up the door for potential legal actions surrounding the recommendations producers make. For indexed annuity producers, the proverbial “cheese” is moving and the opportunity could very well lay within indexed universal life alternatives. Though a different type of sale with additional requirements making it a less transactional procedure, with the right training and proven process a move to more life solutions to retirement dangers could make the difference between a dying practice and a thriving practice.
For indexed universal life producers, carrier illustrations alone are not going to be enough to protect you in the future. Having a systematic way of documenting every step of the sale and providing clients with comparisons to other types of retirement vehicle options will be imperative.
For both insurance and annuity-only licensed producers, there is another solution that may be part of the answer. An affiliation with a true registered investment adviser is a viable and important path to consider looking toward. For conservation purposes it will allow today’s producers to continue to sell the products they have always sold. Becoming an investment adviser and having an RIA to perform compliance and due diligence will protect against future liabilities. By becoming a true financial adviser an agent now has the ability to develop an additional and recurring revenue stream. The revenue is no doubt a tremendous bonus, but think of the value proposition to existing clients and prospects alike that can now enjoy the benefits of true and holistic financial planning.