Despite the extended delay of the Department of Labor fiduciary rule, insurance carriers have wasted no time in introducing a line of annuity products designed to fit within the rule’s constraints.
Thus far, fee-based annuities have seemed like the product of choice for advisors who wish to continue to sell variable and fixed indexed annuity products under the fiduciary rule, so that carriers have been rolling out new variations on the products for months. Despite this, each situation is different (as always), and advisors must be cautious to avoid taking a one-size-fits-all approach to selling fee-based annuity products—weighing the costs and benefits of these newly emerging products can be critical to ensuring that the client’s needs are met while avoiding unpleasant surprises down the road.
Fee-Based Annuities: The Appeal
Generally, a fee-based variable annuity charges an ongoing asset-based fee instead of providing the advisor with a traditional commission. Because these fees are typically “level,” firms that sell them are not required to deal with all of the onerous requirements of the DOL’s best-interest contract exemption.
The availability of a streamlined version of the exemption for level fee advisors makes selling fee-based products more attractive for advisory firms, which can be held liable for advisors who, as DOL fiduciaries, sell products that are not in the client’s best interests. While level fee advisors must acknowledge their fiduciary status in writing and adhere to the generally applicable “best interests” standard, they are not required to execute the formal contract that is otherwise required to satisfy the best interests contract exemption.
Historically, advisors have been compensated for the sale of variable annuity products on a commission basis, which is believed to motivate advisors to recommend products because of their high commission value, rather than because they are in the client’s best interests. This structure generates concern both that the advisor’s compensation may not be reasonable and that the advisor may not be able to satisfy the stringent requirements of the best interests contract exemption.