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Life Health > Annuities

The case for federally-regulated annuities

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If it’s been a while — say, 10 years — since you last wrote a fixed annuity contract on a client, you would be understandably shocked at how much the process has changed over such a relatively short period of time.

It wasn’t so long ago in the grand scheme of things that a fixed annuity could be bought after filling out as little as a single page of information. There was no suitability review, no lengthy disclosure to read. Just some personal information and a check, in some cases, was enough to get you a brand new annuity contract.

Fast forward to today, and the contrast could not be more stark. The average application for a fixed-indexed annuity contract is around thirty pages, with some stretching out as long as eighty, most of that coming from lengthy disclosure statements and suitability questionnaires. And that’s a good thing.

Indexed annuities are a product surrounded by controversy. While they are a useful tool for many retirees, the commission-based sales model and product design lead to many dismissing them as a product that is “sold, not bought.” This has led to a steady increase over the last decade in regulations applying to these annuities; at one point, they were even close to being classified as a security by Rule 151A, despite not constituting an actual investment. While that effort ultimately failed, it evolved into an amendment to the Dodd-Frank Act which required that all fixed and indexed annuity sales be preceded by the agent or advisor completing a dedicated training module on that product, ostensibly to ensure that they are completely familiar with the product they are selling.

Recently, fixed annuities — indexed annuities in particular — have also been experiencing a paradigm shift in terms of who offers them. While fixed products have long been sold by a vast majority of independent, life-licensed agents, the business is increasingly moving towards the registered broker-dealer space. Not long ago, indexed annuities were practically verboten for registered representatives. Today, Raymond James, one of the largest independent BDs around, does around $650 million in indexed annuities per year, according to Scott Stolz of Raymond James Insurance Group.

By virtue of this shift alone, indexed annuities have been forced to become more client- and regulator-friendly, due to the 10/10/10 standard suggested by Ruling 0550 and employed by the majority of broker-dealers: an annuity product sold by the BD may not have a surrender penalty exceeding ten years or ten percent, and may not pay a commission exceeding ten percent. The effect of this new market is already apparent, with many carriers developing new products that are less commission-heavy and have shorter surrenders. Some even have separate product lines that are sold exclusively to BDs or banks.

Coupled with this ongoing change is the White House’s recent effort to increase the level of scrutiny that financial advisors are subject to. Specifically, the Obama administration has lately been backing the idea that advisors should be subject to a fiduciary standard, whereas they are currently held to the much more loosely defined suitability standard. There is a growing sentiment that financial products in general, if not annuities specifically, need to be regulated more heavily.

All of this is to say that for those who remember the single-page annuity application, it’s not likely to make a comeback anytime soon. The rules surrounding the sales of these products will also continue to increase and evolve, as will general consumer knowledge of what they are and how they work. As the annuity market in the U.S. matures, it will naturally come under closer federal scrutiny. Whereas annuity product approvals are currently conducted at the state level, a federally regulated industry twenty years from now is not an unreasonable prediction.

These changes, in addition to likely being inevitable, are all to the eventual good. An industry that is recognized and monitored federally is one that can, at least on paper, be held accountable to providing the best service possible to retiring Americans. 


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