DOL Fiduciary Rule Would Slam Variable Annuities, Credit Suisse Says

By John Hilton

The Department of Labor’s proposed fiduciary rule will disproportionately harm financial firms that deal significantly in variable annuities, according to Credit Suisse analysts.

In a July 12 research note, Credit Suisse singles out Lincoln National, Prudential Financial and Aegon as three firms for which VAs have been “an important driver of earnings growth.”

VA sales from qualified accounts are “most vulnerable,” the note said. “We believe the value proposition will be a harder argument to make under the new standards.”

In April, the DOL proposed new fiduciary standards governing the advice provided to qualified retirement plans employer plans and individual retirement accounts (IRAs).

The DOL proposed the rule as a way to impose a fiduciary standard on advisors to prevent what it called conflicts of interest and ensure that advice is in the consumers' best interest. Public comments on the revised fiduciary rule are due by Tuesday. The DOL plans a three-day public hearing on the fiduciary rule Aug. 10-12.

“As drafted, we see the regulation having a negative impact for specific companies, but only modestly negative for most,” the Credit Suisse note said.

Although considered a security, VAs have remained exempt for fiduciary standards via the 84-24 rule. The new DOL rules would revoke that exemption. Fixed-income annuities will retain the 84-24 exemption, but fixed index annuity (FIAs) sales will need to meet stepped-up “impartial conduct standards.”

Credit Suisse predicts that FIAs will see little impact from the rule.

“We believe this will be a relative positive for the product since brokers may not need to materially alter current business practices,” the Credit Suisse report said.

Financial Services Institute officials disagree, noting the rule requires onerous disclosure contracts that could alienate small savers.

Financial services firms are likely to lose out on small savers who like to shop around before deciding where to place their money, said David Bellaire, FSI’s executive vice president/general counsel, during a Monday conference call.

“This proposal would have the advisor make them sign a contract virtually upon entering the office,” he said.

Citing the White House backing, Credit Suisse analysts predicted eventual passage of a fiduciary rule “without much dilution” to the proposal. The process could drag out, however, the report stated.

“We are not changing 2016 earnings at this time," the analysts wrote, "as we think it is possible that the timing will get pushed back until late 2016 (or) early 2017."

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected].

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.