The cost for the fixed indexed annuity industry to comply with the Securities and Exchange Commission’s Proposed Rule 151A, which would require FIAs to be treated as securities, will be staggering.
It will top $2 billion, according to the Economic Impact Analysis performed recently by the National Association for Fixed Annuities, Milwaukee.
These costs and other problems with Proposed Rule 151A should be addressed.
Even in the strongest of economic times, let alone today’s turbulence and economic crisis, the cost noted above is extremely burdensome to the thousands of small business owners that sell and distribute the affected products. Most will have to suspend operations and their employees’ livelihoods until they can meet the additional regulatory requirements, or they may need to find a new business.
A number of problems will follow from the cost pressures. For instance, the increased costs will reduce the availability of indexed products for consumers. In fact, the costs of registering FIAs as securities and building new distribution networks are likely to make the contracts prohibitively expensive and unprofitable for some insurers, causing them to leave the market.
The Proposing Release even recognizes that decreased competition could adversely affect consumers’ access to insurance products offering index linkage, leading to consumers receiving “less favorable terms [on] insurance products and other financial products, such as increases in direct or indirect fees.”
Further, the proposal’s requirement that FIAs be sold exclusively through broker-dealers and not through traditional and established agent networks would severely limit, if not polarize, sales of these products–products that are very much in demand ($75 billion over the last 3 years).
Complicating matters is that if Proposed Rule 151A is finalized, broker-dealers will need to take time to obtain carrier appointments, train on FIAs and put those products on their shelves. Insurance agents will also need to take time–to train and obtain their securities license, which in its present state, doesn’t include any additional training on FIAs. Meanwhile, Americans seeking to purchase FIAs will be uncertain about where to go to obtain the product.
Also, many Americans would be hard pressed to trust just one source (i.e., registered brokers, as prescribed by Proposed Rule 151A) with all of their retirement savings. They will want access to a variety of advisors and channels, as they now have.
Before seeking federal regulation of these products, the Financial Industry Regulatory Authority and the North American Securities Administrators Association, Inc., both of Washington, voiced strident disapproval of indexed products as a whole and of the products’ specific benefits and features.
It is unlikely that the distribution system accountable to FINRA will change its steadfast position against FIAs. This is despite the fact that baby boomers studied in various surveys indicate they believe they will run out of money in retirement and the fact that FIAs can help ease this concern. After all, fixed annuities, including FIAs, can guarantee a stream of income that can’t be outlived, with annuitants even being able to decide when to take that income–or not to take it, should there be no need.
Another issue that needs to be explored is the notion that a securities license puts the seller in a better or more informed position. This notion is patently false.
A review of this author’s Series 6 course material has only 2 pages on annuities–it describes the 2 types of annuities as fixed and variable. The Series 63 course material has no mention of annuities whatsoever. Furthermore, the tests themselves only mentioned fixed annuities in multiple choice questions about whether they were securities or not.
So, broker-dealers lack substantive training, knowledge and expertise regarding FIAs. They will need to turn to insurance channels for that–state and carrier FIA certification programs, for example, and the insurance licensing exams for testing.
There is rare unanimity in the insurance industry, even among those in favor of the proposed rule, that 151A is a flawed proposal with many implementation, interpretation and execution problems that need to be evaluated and addressed. If 151A is adopted while these problems are being addressed, consumers will have no insured recourse from the stock market crisis with guarantees of minimum interest, income they can’t outlive, and protection from negative market returns.
The best hope for consumers, financial professionals, and even the regulators is to delay any adoption until all parties can agree on the best course of action.