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Reality Check: Annuities in a Fiduciary World

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I put the finishing touches on this article just hours after the Department of Labor (DOL) proposed an 18-month delay to the fiduciary rule. Now we will have to wait and see how the rule might be changed during this delay.

Regardless of the final version of the DOL rule, there is little doubt that the entire financial services industry is moving toward a best-interest standard. While DOL may have provided the initial push toward a common fiduciary standard, the following three events are increasing the momentum.

The Certified Financial Planner Board of Standards is currently taking comments on a recently proposed update to the Standards of Professional Conduct governing all 77,000 CFP professionals. This proposed update would require CFP professionals to act as fiduciaries on all financial advice.

In June, the state of Nevada surprised the industry when it revised an existing law to include brokers and investment advisors under its fiduciary standard. Effective July 1, 2017, financial advisors must disclose any “profit or commission” they receive based on their guidance to Nevada clients and must make a “diligent inquiry” about a client’s financial condition and goals. Other states are considering similar requirements.

Jay Clayton, the new chairman of the Securities and Exchange Commission, has indicated that at long last the SEC is getting serious about creating a fiduciary standard for all types of investment accounts.

A fiduciary has both a duty of loyalty and a duty of care. In plain English, the duty of loyalty requires an advisor to put the interests of the client above his or her own. Any conflicts of interest must be eliminated. To the extent the conflicts cannot be eliminated, they must be minimized and fully disclosed. The duty of care requires the advisor to give advice only if he or she is qualified to do so.

What would a duty of loyalty and care mean to the annuity industry?

Most advisors would most certainly say that they already put their clients’ best interests first; therefore, they already meet the duties of loyalty and care. However, one cannot meet a fiduciary standard through intent alone. Working within a fiduciary framework with the least amount of liability also means the creation of a process, the documentation of that process and the reduction of potential conflicts of interest. It is these aspects that are driving changes throughout the entire industry. Within the annuity industry specifically, we can expect to see the following changes occur.

1. Commissions will be more “level,” if they continue to exist at all. Despite the obvious conflicts created by any product paying a commission, no current proposal or law prohibits them. While the CFP Board’s proposal makes it clear that commission-free advice is preferred, it would allow its members to receive commissions as long as they are clearly disclosed in plain English. The current DOL rule created an exemption permitting the continued recommendation of commissionable products. Although commissions are still allowed, the inherent conflict they create does in turn create additional legal exposure for firms and individuals in this new fiduciary world.

In an attempt to reduce the potential legal exposure inherent with the conflict, distributors are building supervisory frameworks that will make every recommendation of a commissionable annuity look a lot like the supervisory process that today is reserved for 1035 annuity exchanges.

This enhanced supervision will provide a tremendous incentive for advisors to simplify their lives by recommending a fee-based annuity instead of a commission-based annuity. If enough advisors choose the fee-based route, then the annuity distributors are likely to eventually reach the conclusion that the additional supervisory costs and infrastructure required to support commissionable annuities are simply not worth it.

In the interim, we will see commissions leveled by product type in order to eliminate any possibility of an advisor being accused of recommending one annuity over another because of compensation. For example, every variable annuity offered on a firm’s platform will likely pay the same commission.

In short, the days of insurance companies offering multiple flavors of products — especially in the fixed and indexed annuity space — in order to justify products at different commission points is about to come to an end. Eventually, the annuity companies will get out of the commission business completely. They will likely offer only a non-commission product that an advisor can either place in a fee-based account or have his or her back office tack on a “reasonable commission.”

2. The industry will have to work with regulators to rethink the current annuity suitability requirements. At most distributors, annuities are the most highly supervised product on the platform. Not only do advisors face the supervisory requirements related to the Financial Industry Regulatory Authority’s annual list of complex products, but they have all of the state insurance suitability requirements as well. And if an advisor proposes the replacement of one annuity for another, he faces supervision on steroids. These requirements are based mostly on regulators’ concerns that advisors make annuity recommendations that are unduly impacted by the commissions they receive.

It stands to reason that if an advisor recommends a fee-based annuity, thereby eliminating any conflict of interest associated with a commission, the annuity supervisory requirements should be much different. In fact, I would suggest that under such circumstances, the supervisory requirements for an annuity should be no different than any other product recommended within that fee-based account.

Any differences that do exist should solely be to make sure the client fully understands the more complex aspects of the annuity. However, until the regulators acknowledge this difference, compliance departments are unlikely to change their current requirements, which may well be a barrier to the development of fee-based annuities within the industry.

3. Advisors will have to demonstrate they are qualified to give advice. Today, anyone with a life insurance license can recommend a fixed, indexed or immediate annuity. Tack on a securities license and they can also recommend a variable annuity. In my view, the level of annuity knowledge that is required to earn these licenses doesn’t fully prepare someone to be qualified to recommend an annuity, let alone choose one over another.

I expect that some agreed-upon accreditation programs will begin to emerge so advisors can demonstrate their ability to meet the duty of care required under a fiduciary standard. While I don’t expect most firms to require all of their advisors to earn a CFP designation or a Retirement Income Certified Professional (RICP) designation from the American College of Financial Services, designations such as these will likely become the gold standard for demonstrating necessary expertise.

Furthermore, over the coming years, I expect the industry will begin to classify various areas of financial advice. Organizations like the American College will offer individual courses and designations around these specific areas.

For example, just as a doctor has a specific educational path to become a retinal specialist, financial advisors will have to complete an educational path in order to give advice on Social Security, Medicare planning, retirement income advice, etc. Advisors may even have to demonstrate that they are qualified to recommend individual products such as annuities.

4. Discussing the merits of lifetime income with clients will become a requirement, not an option. Unless an advisor is working with a high-net-worth client, how can an advisor meet their fiduciary duty if they don’t at least discuss the merits and considerations of using an annuity as a part of a client’s retirement income plan? In the broker-dealer world where I live every day, it’s been estimated that only about 30% of the advisors have ever recommended an annuity. Are we to believe that the other 70% of advisors have never had or currently don’t have a single client who would benefit from an income guaranteed for life?

I’m certainly not suggesting an annuity should always be part of the solution, but it should certainly be, at the very least, part of the discussion. If this were to occur, then the predictions of immediate and deferred income annuity sales eventually moving well beyond their current 3% of total annual annuity sales will finally come true.


While many factors influence annuity sales, the industry is already seeing the effects of a move toward a fiduciary world. Preliminary sales reports indicate that total industry annuity sales continued their descent during the second quarter. Additionally, variable annuity sales are on track to hit a 20-year low. Given the uncertainty created by the industry’s move toward a fiduciary standard, sales results aren’t likely to improve much in the near term.

However, annuities uniquely fill the very real need for the highest possible guaranteed income for life on what, for many clients, is likely to be an inadequate amount of retirement savings. And as the baby boomers continue to march into retirement, that need will only grow.

In addition, unless personal income taxes are greatly reduced, tax deferral will continue to be a key strategy for accumulating those retirement savings. And finally, as the current bull market nears its ninth anniversary, there is a need for the downside protection that annuities can provide.

Simply put, annuities are too valuable of a planning tool for the industry not to find a way to make them work in a fiduciary world.

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