Should best practices prescribed for structured settlement professionals be implemented through voluntary guidelines or state regulation? This perennial question is now debated among observers of annuity-funded structured settlements. Experts disagree as to whether states should impose requirements regarding disclosure of compensation and potential conflicts of interest, insuring product suitability and securing plaintiffs’ written, informed consent to structured settlement provisions.
Society of Settlement Planners President Charles Schell maintains the aforementioned best practices should not be state-mandated. Respecting, for example, the imposition of a product suitability standard, he observes the recommendation that a structured settlement is the product of negotiations among attorneys representing defendants and claimants in personal injury cases. Because financial professionals aren’t part of these discussions, they therefore shouldn’t be held responsible for settlement terms that may prove inappropriate.
Proponents of the current regime, in my view, are only half right on this score. Yes, attorneys make the recommendation for an annuity-funded structured settlement, but the extent to which damage awards to plaintiffs should be structured versus distributed as a lump payout to be invested in other asset classes must be delegated to a financial advisor. For only a financial professional has the expertise to determine how periodic payments from a structured settlement best fit into a financial plan.
In this role, the advisor is playing a recognizable part: determining the amount of assets to allocate to an annuity-funded income stream based on different financial criteria. Among these are the client’s annual income, goals and objectives, financial time horizon, existing assets, liquidity needs, net worth, risk tolerance and tax status.
If these criteria sound familiar, that’s because they’re part of the 2010 Suitability in Annuity Transactions Model Regulation adopted by the National Association of Insurance Commissioners (NAIC) and that serves as a blueprint for state product suitability requirements governing producers.
Unfortunately, when the NAIC established its suitability standard, it saw fit to carve out an exception for structured settlement brokers and planners. Patrick Hindert, an attorney and managing director of The Settlement Services Group, Loveland, Ohio, labels the carve-out a “disservice” to injury victims—a claim that clearly is at odds with the NAIC’s charge to protect consumers.
But I concur with Hindert’s assessment. Think about it: The NAIC is effectively saying that structured settlement brokers and consultants are free to regulate themselves—this at a time when the Securities and Exchange Commission and the Department of Labor are weighing proposed fiduciary standards for, respectively, broker-dealers and advisors who sell retirement investment products. The proposals aim to harmonize these professionals’ regulatory requirements with those of registered investment advisors governed by an existing fiduciary standard under the Investment Advisors Act of 1940.