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Should the DOL Limit Annuity Sales Commissions?

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The Department of Labor (DOL) fiduciary standard that applies to financial advisors who offer investment advice and sell financial products to their clients has been changed multiple times in recent years under various administrations.

Under the Biden administration, recent proposals would focus on commissions that are received by financial advisors who sell annuities to their clients. Some of those proposals would prohibit financial advisors from receiving any commissions on annuity sales.

We asked professors Robert Bloink and William Byrnes, authors of ALM’s Tax Facts with opposing political viewpoints, to share their opinions about proposed regulations that would limit commissions for annuity sales agents.

Below is a summary of the debate that ensued between the two professors.

Their Votes:

thumbs up Bloink
Thumbs down Byrnes

Their Reasons:

Bloink: We need to be conscious of the conflicts of interest that often arise in these situations. Selling annuities for commissions means that the advisor may primarily be motivated by their own desire to make a profit, rather than by what is actually in the client’s best interests.

Unfortunately, we now have a complex set of ever-changing fiduciary regulations designed to prevent these and other types of conflicts in the annuity marketplace. Prohibiting, or sharply limiting, a financial advisor’s commissions on these annuity products can be a step toward making sure the advisor is motivated by what the client needs rather than annuity commissions.

Byrnes: All we would be doing by adopting these proposals is making it more expensive for the average American to get the smart financial advice they need and deserve. These proposals and rules make annuities a less attractive sales product for financial advisors, meaning that it becomes less likely that the financial producer will recommend these products even if they do happen to be in the client’s best interest. After all, why would the producer be inclined to even pay attention to a product when there’s no financial incentive for the producers themselves?

Bloink: Insurance companies often offer high commissions to financial producers who sell annuities. Those commissions can motivate some advisors to recommend and sell annuities when they really aren’t in the client’s best interests. We need to focus on new ways to compensate these advisors aside from a straight commission-based system.

Byrnes: I think we all agree that annuities can be a valuable financial product and provide important benefits for clients as they enter retirement. Any proposed rule change that would make it more difficult for advisors to recommend and sell annuities has to be considered in light of the value annuities add to the client’s retirement portfolio.

Bloink: While eliminating commissions altogether may not be realistic or even the best solution, we do need to focus on what motivates financial advisors to recommend these types of products. Annuities can offer a powerful lifetime income tool to the right client. On the other hand, the annuity option isn’t the best tool for every single client.

Sky-high commissions can color a sales agent’s “pitch” when it comes to these products, whether they realize it or not. Reducing commissions and finding different ways to compensate these advisors can be a step toward protecting clients who are interested in annuities.

Byrnes: We should be considering this issue in light of the fact that investment advisors have a wide array of annuities to choose from when making their recommendations — and that they aren’t going to pick an annuity merely because it offers a commission.

That said, we should support rules and regulations that do provide investment advisors with an opportunity to make a decent living. Any other system would make it impossible for lower- and middle-class taxpayers to get the quality investment advice they need. Removing commissions for annuity sales agents is certainly not the way to protect access to investment advice.