DOL Executive Order Moves Forward - Affect on Annuity Sales

[Tahoe Ray]

And now the Senate is involved:

http://www.investmentnews.com/artic...roduce-three-bills-to-stop-dol-fiduciary-rule

 

[walthamny]

Suitability versus Fiduciary. It is not just about annuities. 22 year old college graduate who makes 30000 a year and pays no rent wants to start a retirement plan. You can sell 1000 a month whole life, indexed UL or VUL and collect the first year commission. When the kid moves out or gets a girlfriend, hopefully after first year, you get to keep the FYC. This is allowed under the suitability standard. It won't be allowed under an fiduciary standard especially if you did not offer an IRA account or the kid had a 401K that matched each 1% with 20%, you told him 401k is a bad idea even with a company match. Surpisingly recommending to skip the 401K company match and buying permanent life insurance is perfectly legal and allowed under the suitability standard.

You can sell an immediate deferred annuity to a 50 year old who had 3 heart attacks and who is worried about running out of money when he turns 100. Again allowed to put all his retirement savings in an annuity under suitability standard, not allowed probably under a fiduciary standard.

So the DOL ruling will hit Life and Annuity carriers hard, I would not be surprised to see a merger between the big mutuals.

 

[scagnt83]

Suitability versus Fiduciary. It is not just about annuities. 22 year old college graduate who makes 30000 a year and pays no rent wants to start a retirement plan. You can sell 1000 a month whole life, indexed UL or VUL and collect the first year commission. When the kid moves out or gets a girlfriend, hopefully after first year, you get to keep the FYC. This is allowed under the suitability standard. It won't be allowed under an fiduciary standard especially if you did not offer an IRA account or the kid had a 401K that matched each 1% with 20%, you told him 401k is a bad idea even with a company match. Surpisingly recommending to skip the 401K company match and buying permanent life insurance is perfectly legal and allowed under the suitability standard.

You can sell an immediate deferred annuity to a 50 year old who had 3 heart attacks and who is worried about running out of money when he turns 100. Again allowed to put all his retirement savings in an annuity under suitability standard, not allowed probably under a fiduciary standard.

So the DOL ruling will hit Life and Annuity carriers hard, I would not be surprised to see a merger between the big mutuals.

That is a pretty extreme view... and not one that is shared by the DOL.

First, this ruling only affects ERISA retirement accounts. Meaning IRAs/401Ks/403Bs/Pensions/etc.

This ruling has no impact on non-qualified sales.

Now if you tell someone to stop contributing to their 401k and buy IUL, then that could qualify you as a Fiduciary. There are court rulings that already put anyone giving advice about a 401k plan in a Fiduciary grey area.

Also, Permanent Life can be sold under a Fiduciary Standard. You just have to have the documentation to back up the recommendation. You also have to disclose compensation. By law, commissions are not prohibited under a Fiduciary Standard... but disclosing those commissions and documenting the need for that recommendation is required.

This ruling by no means puts an end to commission based sales. It even has a "best interest" exemption specifically for commissioned based sales. It will certainly trim some of the long surrender/high comp products from the annuity world. But considering that NY has had comp disclosure laws for the past few years now, and has seen no decrease in insurance sales; I doubt this will be the end of the world for IRA annuity sales.

 

[DHK]

Here's the other thing: ANYTHING can be justified if you think about it hard enough. All you have to do is have a reason for your recommendation and how it truly is in the client's best interest. Then, as long as you can prove it, you can justify it and sell it.

It's just like a broker/dealer switch letter. Just show how your recommendation is better than what the client is already doing... and back it up with a fact-find... and you'll be fine.

Yes, there are 'usury' products out there. While I do hold to the belief that every product has a market and a purpose, there are usually better products out there with similar compensation that are generally better for similar situations.

But the DOL isn't going after product manufacturers. They are going after agents and advisors for selling inappropriate products because they are driven by compensation and sales contests.

The best defense for the agent/advisor... is a fact-find. Do the fact-find and show how the recommendation fits the client's situation and objectives.

I do think that suitability is too low of a standard, but fiduciary duty may be too high, depending on one's interpretation of being a fiduciary.

I think a professional duty - to do a fact-find and make appropriate recommendations based on the data collected - is probably what we need.

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Oh, and for stopping 401k contributions to fund something else (credit card debt, liquid savings, or IUL)... what would you need to back up that recommendation?

1. Fact-find
2. Knowledge of 401k tax structure
3. Knowledge of client's current debt and savings
4. Realize that there's only one kind of person that invests (puts money at risk) before they save... a DUMB person.

And if someone said that they should keep funding their 401k, despite knowing this... is NOT acting AS a fiduciary in any capacity.

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The biggest key to me is this: Can you back up your recommendations in a court of law, should it ever have to come to that?

I know I can.

 

[Cash]

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The biggest key to me is this: Can you back up your recommendations in a court of law, should it ever have to come to that?

I know I can.

Are you sure about that?

Maybe if the jury is made up of business men but if not, especially if there are more women than men then I'm not sure.

When the lawyer tells the jury members that make $10 bucks an hour that you made $10,000 commission on that poor confused woman you might lose.

The only people who win here are the lawyers. Period.

I honestly believe that lawyers should be outlawed.

Pharisees every one of them.

What the idiots don't realize is that not everyone

1. Gets the best products through a fiduciary relationship.

2. Not everyone deserves the best products.

Is a fee only relationship really "best" for the client? Maybe.

It won't be the worst but I doubt it will be the "best" possible.

But all that matters is that the person selling them is in a fiduciary position. So their ability to serve their clients is limited to products that allows them to be a fiduciary.

Also, different people get different prices. That's life. That's business.

The more money you have and the more knowledgeable you are in a subject the less you pay. The harder it is to earn the client the higher the cost.

Are they not aware of the whole idea behind wholesale?

 

[DHK]

I agree with you. And you're right - only the lawyers are going to win with this ruling.

The part I didn't add is that I create written proposals to go with the product illustrations. I show how the product fits in with the clients needs, goals, and objectives. My compensation is irrelevant when compared to helping people with their long-term plans. Whether I am paid $1 or $100,000... it doesn't matter as long as I have demonstrated that:
1) I listened to the client and their concerns
2) I provided a strategy that addressed those concerns
3) The client can understand and see how the strategy works
4) I have set proper expectations.

If we're not in the habit of creating written planning summaries for the client, nor in the habit of doing a fact-find... those kinds of producers will need to make big changes to how they do business.

How to Close 9 out of 10 Life Insurance Sales

Attorneys target advisors, not companies or policies Best Practices

Why clients win lawsuits against their financial advisors. Best Practices

 

[HealthGuy]

Ok so the DOL ruling will open all of us, fiduciary or not, to more lawsuits ? Anybody else consider WHY we should continue on in this industry?

Is it just me or do others of you here get tired of all this nonsense and regulation upon regulation ?

 

[DHK]

I hate that government makes quality producers out to be the bad guy... as though ALL OF US are just preying on innocent people just to win sales contests and go on trips.

I'm tired of government blaming the industry instead of just continuing to prosecute the individuals that are outright breaking the law and taking advantage of their clients.

But if this profession was easy... everyone would do it and it wouldn't pay as well. I've already fired FINRA as a regulator over me.

If anything... those who can't adapt to a fiduciary standard... may end up out of the business... which will mean even more opportunities for me! There's always a 'silver lining' for those who are looking for it.

 

[DHK]

DOL Rule Heralds New Era in Distribution | Insurance News Net

BIC Exemption Required

Since the financial crisis, several life insurance carriers have moved away from selling variable annuities. Those carriers say the proposed DOL regulation doesn’t affect them as much as it might have in the past.

In the case of Radnor, Pa.-based Lincoln Financial, 70 percent of the company’s products are not affected by the DOL’s proposed rule, said President and CEO Dennis Glass. A few years ago, only 50 percent of the company’s products would have been affected by the DOL’s proposal.

The proposed rule requires a Best Interest Contract (BIC) exemption to sell VAs with commissions. The BIC mandates a signed contract with the client, as well as disclosures on the product and any compensation received.

Whatever the final wording DOL regulators decide on, sales of variable annuities into qualified retirement plans “will not entirely go away,” Glass said. “Many distributors will continue to offer the important guarantees that variable annuities provide.

“In addition, we would expect to see accelerated growth in our fee-based variable annuity products, as we have been approached by many of our largest distribution partners about the fee-based opportunity,” Glass said. “We’re also increasing our focus on fixed and indexed annuities, which still have the PTE 84-24 exemption.”

While PTE 84-24 remains in the new rule, it has been beefed up to include an “impartial conduct standard.” While a contract would not be required, financial professionals still need to provide several disclosures covering the product and any compensation received.

Exemptions make it easier and more lucrative for advisors to sell products, and industry proponents want variable annuities to be included in PTE 84-24, as they are now. Instead, some analysts say the DOL might go the other direction and add fixed annuities to the BIC.

While the DOL is done with its rule, the contents won’t be known until the Office of Management and Budget finishes its review and publishes the rule in the Federal Register.

In short - Variable Annuities sold for commissions are under fire. Fixed Indexed Annuities may be included in the "best interest contract" requiring an exemption to be signed by the client.

In my opinion, if you want to sell variable annuities, just get a Series 65 and align with an RIA to sell fee-based VAs, earn ongoing fees, and kick the B/D to the curb.

As far as an insurance-only agent selling FIAs... looks like we have yet to see the potential result of the ruling.

 

[DHK]

Just got off a webinar with The American College regarding the ruling as it now stands. I'll post a link to the recording if one becomes available. It'll probably show up here:

Webcast | The Perfect Storm: An Aging America and The Department of Labor Conflict of Interest Rule

A big point to me, and I don't know if we've ever discussed this, but there's a fiduciary duty that will be applied to IRA DISTRIBUTIONS.

So, if you want to recommend the purchase of LTC insurance to be funded by an IRA, that will be subject to a fiduciary duty.

My thoughts were:
- If a client wants to withdraw money from their IRA to buy an RV (hey, it's their money), I guess I'm supposed to talk them out of it? Obviously it's a conversation to document for your files and perhaps get a signature that states that the client is acting against the advisor's recommendations.

- If a client gets ripped off by some scam artist, and it affects their IRA... would the advisor also be held liable? After all, distributions are also subject to fiduciary rules... and I'm sure that an Elder Law attorney would LOVE to get their hands on the advisor as a fiduciary who should've spotted something.

- If the client calls the insurance (or mutual fund) company directly and doesn't even BOTHER to talk to their advisor... could the advisor still be held liable for not monitoring the distribution from the IRA?

- The BIC Exception would still require fiduciary judgment in making recommendations for IRAs... but would require commission disclosure. (Which may affect surrender periods and commission amounts... but if there's a living benefit rider, the commission really is immaterial, in my opinion.)

In my opinion, this is a huge elaborate attempt to ensure that these assets continue to grow so that there is a continuing asset ready to be taxed by the federal government. That's what IRAs do - defer taxation until withdrawal. At some point, there may be a power-grab to seize these assets and just pay off the national debt. And with the threat of litigation should the advisor NOT live up to someone's definition of "fiduciary advice"... well, now the lawyers will be happy too.