It's debatable if the fiduciary standard is 'higher' than suitability. But the better question might be, who's holding the bar?
By Linda Koco
When financial planner Michelle Ford answered the phone one day, she heard the voice of a worried older gentleman. “Is there anything I should be worried about?” he asked Ford nervously about allocations in his fixed index annuity (FIA).
The man had learned that New York Attorney General Eric Schneiderman had filed a lawsuit against Barclays, the British bank, for alleged “dark pool” violations including fraud, deceit and misrepresentations to investors. Barclay’s response can be viewed here.
Dark pools are essentially private exchanges maintained by some brokers and banks for trading securities. The caller was not in a dark pool nor was he invested in Barclays stock. But he remembered that some of his FIA funds were allocated to a Barclays indexed option, so he started wondering about his FIA assets in that option.
The phone call illustrates the “public relations backlash” that occurs when bad news comes out, or when clients pick up misinformation about a carrier, said Ford, chief executive officer of LifeLong Retirement, a Bridgewater, N.J., advisory firm. They hear a familiar financial name and they start to worry.
“For me, the response always comes down to education,” she said, explaining that clients sometimes need help understanding what is happening.
The Barclays news
Other FIA advisors may be fielding similar calls about the Barclays news, since Barclays has become a popular index option over the past year.
For instance, Sheryl Moore, president and chief executive officer of Wink Inc., reported that 20 percent of total FIA sales in first quarter 2014 were allocated to Barclays indexes. That’s up from under 1 percent in first quarter last year.
The Barclays indexes are part of the rising popularity of what Moore calls “hybrid indexes.” A hybrid is essentially an index of indexes. In first quarter, about 25 percent of FIA sales went into the hybrids, according to Wink numbers.
The greatest share of the Barclays elections (nearly $2 billion) was allocated to the Barclays Capital U.S. Aggregate Bond Index of FIAs issued by Allianz, according to Wink data. Allianz has an exclusive agreement to use that index in its products until 2020.
Moore sees continued interest in using hybrid indexes. “Ten companies asked me about them in the last two months,” she noted. The carriers want to offer such options in order to provide uncapped interest crediting methodologies in their FIAs during the low interest rate/low cap environment, she said.
However, when interest rates rise, the keen interest in the options will diminish or even go away, she predicted.
Meanwhile, insurance regulators want to see carriers using indexes that consumers can easily look up online or in the newspaper. The hybrids don’t always qualify, so this could serve as a countervailing force to the recent growth.
The information hurdle can be crossed if carriers provide compliance-approved handouts that define the indexes, Moore said. She also suggested that carriers appoint a registered representative at the home office for advisors to direct customers for explanations.
A number of FIA experts contacted by AnnuityNews believe that the dark pool issue may tarnish the Barclays name for a while, but that it will have virtually no long-term negative impact on sales of FIAs having the Barclays option or on advisors’ recommending that option to suitable clients.
“Yes, another side of the Barclays business is involved in a lawsuit,” said Jack Marrion president of Advantage Compendium in St. Louis. “But it’s a separate side of that firm’s business.
“And yes, the dark pools will cause some questions, but agents will point out that this is not insurance.
It’s an accounting thing related to another business at Barclays.”
Unless the issue gets bigger, Marrion added, agents who sell products having the option will continue selling it, due to the appeal of the non-capped status.
Other, bigger problems
About those uncapped sales, several sources contended that sales involving these strategies could be more of a problem for FIA producers than any backlash from the dark pool lawsuit involving Barclays.
One marketing organization executive, who asked that his name not be shown due to existing business relationships, said policyowners in these strategies will not get the full upside growth in the equity markets. To reduce volatility, he explained, the indexes shift weightings back and forth between stock and bond indexes, effectively producing a lower return than if tracking only equities.
It’s complicated, he allowed, but he predicted that “even though allocations to hybrid indexes have potential for greater returns than allocations to several other strategies, clients will be disappointed.”
It’s not the uncapped strategy that is the problem, he added. “It’s how the strategy is being sold.”
Another hovering issue has to do with the licensure of FIA producers. Agents who have only an insurance license can’t provide advice on securities, since they are not licensed to do so. When selling products offering the less-well-known hybrid indexes, these advisors may encounter customers who ask about what is in those indexes. The insurance-only agents will be walking a fine compliance line if they attempt to answer, because it’s difficult to talk with clients about what’s in the indexes without also talking about securities.
That could create difficulties for a lot of producers. According to figures at Wink, about 45 percent of current FIA agents currently do not hold licenses as registered reps.
Ford, the planner quoted previously, is dual licensed. She said she addressed her client’s questions about the dark pool news. She said she reassured the caller that “this has absolutely nothing to do with the money in your indexed annuity. Your annuity money is not invested in Barclays or in any other company for that matter.”
She suggested that the client think of his policy’s index allocation options as akin to intellectual property or a mathematical model. A financial index measures performance of certain types of investments or, in this case, of indexes. In the FIA market, insurers use the values of the index when calculating whether and how much interest may be credited to policy, she said.
Ford said she also used the conversation as an opportunity to re-educate the client on the FIA’s role in his portfolio, on the issuing company and on how his money is protected from loss.
The more they talked, she said, the more comfortable the client became. “At the end of the conversation, he said ‘OK, good.’”
Joan E Boros, a Washington attorney who has followed the indexed annuity business for several years, said she thinks the public’s reaction regarding the Barclays issue “will track how the public has responded to the General Motors recall issue. That is, all those recalls didn’t seem to have any negative effect on their sales of new cars.”
In the case of index products, the public is turning to the products because of the lack of appeal of the bond market and the quest for downside protection, said the Stradley Ronon Stevens & Young attorney.
“So long as the dark pool problem doesn’t relate to the indices, that seems a reasonable reaction.” “Having said that, I am a lawyer, not a marketing guru.”
Linda Koco, MBA, is a contributing editor to AnnuityNews, specializing in life insurance, annuities and income planning. Linda may be reached at email@example.com.
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