In the scrum over the Department of Labor’s latest proposal to raise investment advice standards for retirement savings, everyone is piling on oversight of annuity sales.
The White House promoted the DOL measure as an antidote to what it asserted is weak state regulation. President Biden and other administration officials warned that fixed index annuities are laden with “junk fees” that can harm retirement savers. They say the DOL rule is required to fill the regulatory gap concerning insurance products that aren’t securities.
Instead of Regulation Best Interest, the broker advice standard promulgated by the Securities and Exchange Commission, “advice to purchase these insurance products is governed by state law, which varies state by state. These inadequate protections and misaligned incentives have helped drive sales of fixed index annuities up 25% year-to-date,” the White House said in a fact sheet about the DOL proposal.
Just as the Obama administration did in promoting the previous DOL rule, the Biden DOL is elevating annuities as a primary source of the investor harm that can be caused by commissions and other financial incentives for advisors who sell them.
The White House was implicitly criticizing the revised annuity suitability standard the National Association of Insurance Commissioners approved in 2020, which has been adopted by 40 states.
The NAIC says the rule establishes a best-interest standard for annuity sales and prohibits insurance agents or carriers from putting their revenue interests ahead of their customers’ interest in high returns. They also say it complements Reg BI.
The NAIC pushed back against the White House’s characterization of state protections.
The White House statement “suggests either ignorance of, or willful disregard for, the hard work of 40 states and counting that have worked diligently to enhance protections for consumers by adopting the NAIC’s suitability in annuity transactions model regulation,” the NAIC said in a statement.
Critics of the NAIC rule say that, unlike Reg BI, it does not address compensation — such as commissions — as a potential source of conflict for financial professionals. “Material conflict of interest does not include cash compensation or non-cash compensation,” the NAIC model states.
The Certified Financial Planner Board of Standards Inc. highlighted that point in guidance it published on Nov. 14 that compares the NAIC model to the code of conduct attached to the CFP credential. The CFP Board said its standard treats compensation as a material conflict of interest.
“The foundation of the [CFP Board’s] code and standards is its fiduciary duty,” CFP Board CEO Kevin Keller said in a statement. “As this guide makes clear, a CFP® professional makes a commitment to the CFP Board to act as a fiduciary and, therefore, to act in the best interests of the client at all times when providing financial advice.”
Insurance trade groups take umbrage at the argument that the NAIC annuity model rule is lax on compensation oversight.
“That is a red herring,” said Howard Bard, vice president and deputy general counsel at the American Council of Life Insurers. “What [the rule] says is compensation is not automatically a conflict.”
The notion that compensation is never a conflict “is not what the model says, and that’s not what any insurance commissioner in the country would say,” Bard added. “They adopted a best-interest standard in lieu of a suitability standard.”
But David Lau says the NAIC model rule is misleading because it is labeled as a best-interest standard even though it sidesteps compensation.
“Compensation is the material conflict of interest,” said Lau, founder and CEO of DPL Financial, a platform that offers no-load, commission-free annuities that can be sold by investment advisors within the constraints of fiduciary duty. “I don’t know what conflict of interest would be bigger than the advisor’s compensation.”
The Biden administration is unfairly targeting insurance sales, and the CFP Board is trying to promote fee-only fiduciary advisors, said Marc Cadin, CEO of Finseca, a financial industry trade association. Fee-only advice is too expensive for retirement savers with modest assets, he said.
“The framing of the rule is offensive,” Cadin said. “The substance of the rule is unfortunate and misguided. The supporters of the rule are myopically focused on promoting a narrow business model, and the result will be that fewer Americans will get the advice they need to become financially secure.”
The DOL proposal would redefine the term “fiduciary” to include almost any advisor who is making a recommendation to retirement savers for a fee — regardless of whether they’re an investment advisor, broker, or insurance salesperson. The proposal would amend a prohibited transaction exemption that allows independent insurance agents to earn commissions but subjects them to fiduciary duty.
Annuities will likely remain in the middle of the debate over the DOL proposal. The products can be expensive and opaque, but they also provide lifetime income in retirement that many savers covet. Proponents say the lifetime-income feature makes annuities more costly than mutual funds.
“Annuities are great product structures,” Lau said. “Consumers should be able to get them through a fiduciary.”
The Department of Labor’s proposal would hold to a fiduciary standard most financial advisors and most financial advice to retirement savers.
Support for fiduciary concepts – such as acting in a client’s best interests and not making misleading statements – is widespread. Critics of the DOL proposal say legal fiduciary duty, which applies to investment advisors, should not govern one-time transactions involving commissions, such as the sale of annuities.
“We’re not anti-fiduciary,” said Howard Bard, vice president and deputy general counsel at the American Council of Life Insurers. “One [fee model] is not right. One’s not wrong. They’re just different standards of conduct based on consumer expectations and consumer choice.”
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