Annuity providers should begin preparing now for potential impacts of the Department of Labor’s fiduciary responsibility guidelines that are expected to be implemented in the next several months, according to a report by Novarica.
The impact of the ruling for this year remains unclear, although sales may drop as advisors look for ways to avoid risk. Conversely, there could be a rush to book sales before the rules take effect, the firm says.
Most of the impacts are likely to manifest in 2017 or later. Some carriers already are preparing by establishing governance structures for initiatives, considering changes to their overall product mix commissions and surrender charges, and changing distribution strategies. More carriers should be taking steps like these to avoid being blindsided in the months and years to come, Novarica says.
“These rules mandate that the distribution system and the manufacturing entity ensure that the best interests of the client are being served, as defined by the regulations,” the report says. “This has the potential to create significant new compliance issues, especially when compensation is based on something other than an hourly rate, a flat fee, or a flat fee that is tied to the assets under management. For carriers which have already moved to an AUM based model for compensation, the proposed regulatory changes may well have a very modest impact.”
For carriers that have used commission rates and bonus structures as key elements to support distribution capabilities, the impact could be more significant.
“Several industry studies are projecting significant sales declines,” says the report. “Carriers in this space may find that their investment plans over the near- and mid-term planning horizons need to be adjusted to minimize compliance risks and maximize their potential to continue to deliver these products.”
Novarica offers three strategies carriers can implement to prepare for the coming regulation.
Strategy 1: Wait and See
Many carriers are taking a wait-and-see approach, electing not to make changes until the final version of the rule is released. Some carriers are taking a near-term approach of shifting overall product mixes, such as emphasizing fixed annuities, changing commissions and surrender charges, and emphasizing alternative distribution channels.
Strategy 2: Re-Evaluate Distribution
Some companies have chosen to readjust their distribution channels. AIG agreed to sell its broker-dealer network, AIG Advisor Group, to Lightyear Capital.