Insurance lobby groups are howling again at proposed state regulations on annuities that require the best interests of the investor client to be considered.
Why Are Stronger Regs Needed?
Because the annuities model has morphed into a colossal sales machine. It's sales disguised as "advice," with many broker-dealer reps / insurance sales agents titled as "advisor" or something equally trustworthy -- rather than sales rep or sales agent. They recommend annuities that are designed to extract the maximum money from the investor to the company and selling rep, year after year. They mislead and pressure investors to buy products that are in the insurer's interest -- not the investor's. Advertisements are equally misleading -- some say fraudulent -- claiming to be "on your side" or working "in your best interest," when, clearly, the insurers are working in their own interest.
The colossal insurance sales machine provides contests and trips to fire up the sales staff, which does wonders for sales, but does not work in the investor's or public's interest.
I've seen a presentation where a speaker misled a crowd of pre-retirees that wouldn't they rather have a smooth and carefree, "green line" of "guaranteed" returns, instead of the bumpy "red line" of stocks? Never mentioned "insurance" or "annuity" until prodded specifically. Not a word about that on their web site. Also never mentioned: that this speaker was a former stockbroker who'd been expelled from the brokerage industry. Expelled from a major BD. Forever. This happens across the U.S. all the time.
That's a broken model.
State Regs Now for a Higher Standard for Annuities Sales?
All intermediaries who advise retirement plans and retirement investors are now required to place retirement investors' interests first, under the Department of Labor's (DOL) 2016 Fiduciary Rule. The first part of that DOL Rule, the Impartial Conduct Standards, went into effect last June. (The second part of the rule, and some exemptions are postponed for now.)
The DOL's Impartial Conduct Standards are pretty simple: they require fiduciaries to adhere to "basic fiduciary norms and standards of fair dealing:"
But the DOL Rule covers retirement investors and plans only, not investors in non-retirement accounts. So the National Association of Insurance Commissioners (NAIC) has proposed a transitional Rule to raise the standard for all annuity sales. "The NAIC Annuity Suitability Working Group accomplished a significant goal in 2017 by completing its Annuity Transactions Model Regulation. The regulation is seen as a bid to transition annuity sales to a suitability standard that includes a stronger, consumer-focused component," according to an article on Insurance News Net.
The NAIC proposal is not actually fiduciary. It's suitability with more disclosure and a best interest component. While insurance lobby groups are howling, some state insurance commissioners say the NAIC rule doesn't go far enough. Some states are proposing their own regulations, and some want to extend NAIC's Rule to also cover life insurance.
“The proposed revisions to the existing model would dramatically alter the standard of care that applies to the sale of all forms of annuities and impose broad new compensation restrictions without offering clear benefit to consumers,” wrote Wesley Bissett, senior counsel for government affairs for the Independent Insurance Agents and Brokers of America," in the article, " NAIC Finding Little Support for Best-Interest Annuity Model ."
Not Strong Enough
The article notes that "several state officials weighed in urging the NAIC to strengthen the model law to cover life insurance in addition to annuities." "Maria T. Vullo, New York superintendent of financial services, first suggested covering life insurance in an early comment letter. New York bypassed the NAIC and proposed its own best-interest standard in late December. It is in a 60-day comment period."
"The Virginia Bureau of Insurance added a comment in support of specifically banning bonuses in the model law," according to the Insurance News Net article.
The article notes that one of NAIC's proposed provisions, that "compensation exceeding $100 must simply be disclosed, was termed 'insufficient' by Jodi Lerner, attorney for the California Insurance Department."
Insurance News Net adds that Lerner said: “Bonuses, contests, special awards, differential compensation and other incentives that are won or received as a result of having sold a threshold dollar amount of annuities would reasonably be expected to affect a producer’s ability to act impartially and in the consumer’s best interest,” adding: “Therefore, these types of incentives should be prohibited.”
Here's the thing: If your model is built on deceptive sales, titles, ads, and compensation practices, of bilking investors of much of their savings while pretending to advise them, then the model is broken. It's time to fix this broken model. The annuities status quo is not acceptable.
Investors are becoming much more aware of how to find bona fide advice that's in their best interest, at a reasonable cost, with full and fair disclosures. There are thousands of fiduciaries who already work in their client's best interests, period. As the Investment Adviser Association's Evolution Revolution report notes, 11,800- plus fiduciary RIA firms already work in investors' best interest – for all types of accounts, retirement & non-retirement. These fiduciary firms employ 781,000people, serve 36 million investors, and manage nearly $67 TRILLION. And they've been doing this for decades under the Investment Advisers Act of 1940.
As formerly non-fiduciary firms and intermediaries that wish to participate in the retirement sector move to comply with the DOL Fiduciary Rule, investors will search for genuine advice on all of their assets -- retirement and non-retirement. They are voting with their feet. It would make sense for financial services to catch up.