Annuities And The Fiduciary Rules

Tuesday, March 01, 2016 14:38
Annuities And The Fiduciary Rules

Tags: annuities | client education | fiduciary standard

I have often written about the “evils of annuities.” In my experience, I have seen annuities sold:


  • Within retirement accounts – There is no purpose to putting a high cost tax-deferred product into an account that is already tax-deferred.
  • To elderly people – A variable annuity sold to an 80-year old with a 10-year surrender charge just doesn’t make financial sense.
  • To people earmarking the money for a shorter-term purpose – Can you believe an annuity with a 10-year surrender charge was sold to a couple for their 12-year old child’s college funding?

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Having said all that, there are times when annuities make sense. For example, a retiree investing in an immediate annuity can get guaranteed income for life. Although annuities might not offer the same returns as “non-annuities”, there can be a valid place for them in clients’ portfolios – depending on the circumstances.


Unfortunately, many annuities are sold that are not in the best interest of the investor –due to the brokers’ lack of knowledge and/or commission incentive. Up until now, It has been difficult, if not impossible, to stop these predatory annuity sales. However, the Labor Department’s pending fiduciary rule could put an end to these reprehensible practices – as well as put a huge dent in variable annuity sales overall. Under the proposed rule, investment advice standards for brokers working with retirement accounts, such as IRAs and 401(k)’s, would be raised to a fiduciary standard. This means that rather than a “suitability” standard, brokers would be required to put the best interests of the investors first.


The new rules would not only impose a “best interest” standard, they also require written acknowledgement of the advisor’s fiduciary status, that the advisor will serve the client’s best interests and a disclosure of the compensation arrangement.


Under typical current variable annuity compensation structures, it would be virtually impossible for a broker to claim that selling a high commission annuity is in the best interest of the client. So, what will happen? If the annuity lobby doesn’t prevent finalization of the rules, commission based variable annuities will likely be a thing of the past for retirement accounts.


Since (according to Cerulli data for 2013, 2014 and through mid-2015) over 60 percent of variable annuity sales were in IRAs, this could be the beginning of the end for commission based variable annuities. However, because the law only applies to annuities sold within retirement accounts, brokers’ focus could turn to sales outside of retirement accounts.


Should the fiduciary standard be required for all sales of investment products? If so, brokers dependent on commissions would likely disappear, making all advisors subject to the same rules. It will be interesting to see if and how this first step is actually implemented.

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