Annuity Expert To DOL: What Is ‘Reasonable’ Compensation?

By Cyril Tuohy

Department of Labor (DOL) officials need to refine their fiduciary rule proposal by detailing what they mean by insurance commission, an insurance and annuity expert said. He added that the department should retain sales incentives and marketing payments paid to agents.

Jim Poolman, executive director of the Indexed Annuity Leadership Council, also urged the Labor Department officials to spell out the definition of the phrase “reasonable compensation.” The Indexed Annuity Leadership Council is a consortium of life and annuity companies.

Giving the insurance industry clarity surrounding the distribution of retirement products will only benefit agents and consumers in need of a secure future, Poolman said.

“We hope that a final rule will balance the department’s desire to expand the application of ERISA’s (Employee Retirement Income Security Act) fiduciary rule with the need to maintain a vibrant distribution system of financial products of retirement savings,” said Poolman, a former North Dakota insurance commissioner.

Labor Department regulators want to dampen the influence of third-party fees and commissions as regulators believe these income streams unduly influence advisors in recommending one product over another. Regulators believe these recommendations may not always be in the best interest of consumers.

The DOL proposal would amend conflict-of-interest rules to impose a best interest standard on advisors, a standard which many insurance agents already meet. However, the details regarding how agents and advisors would be paid under the new proposal remain unclear in the minds of many.

Hearings this week in Washington were designed to help educate the DOL on the intricacies of how distributors of insurance and retirement products work. The DOL is expected to issue its final proposal on the fiduciary rule in the fall.

In the insurance world, agents can receive commissions from an insurance carrier, a broker/dealer with whom the agent is also a registered representative, or an independent marketing organization with which the agent has a contract, Poolman told the regulators.

Marketing payments to agents also support activities that help with the distribution of insurance and annuity products.

“The complete elimination of these payments is unnecessary to minimize the risk that an insurance agent might be motivated to recommend a specific product on the basis of a potential payment rather than what is in the best interest of the consumer,” Poolman said.

Financial Industry Regulatory Authority rules dictate that insurance agents follow a best interest standard.

Poolman was one of four panelists who spoke in one of seven sessions before the DOL regulators on Wednesday, the third day of the hearings. Dozens of other witnesses have testified over the course of this week.

The hearings ended Thursday.

The DOL’s proposals offer insurance and annuity producers leeway through exemptions but agents have to qualify. One of the conditions for qualifying is that agents be paid “reasonable compensation,” a phrase Poolman said was still too vague.

“We believe it is important to have a very clear definition of what reasonable compensation is to be able to comply,” Poolman said.

He said insurance agents need a “safe harbor” standard similar to one already defined by ERISA as “such amount as would ordinarily be paid for like services by like enterprises under like circumstances.”

Poolman also urged regulators to make changes to proposed payment disclosures and proposed that the DOL add a “carve out” to clarify that an insurance carrier does not become a fiduciary when helping agents in communicating with clients by providing an illustration of a quote.

“Illustrations can be important tools to agents or for agents to help them understand how a fixed index annuity works,” he said. “Similarly, providing a quote to an agent should not somehow heighten the legal obligations of an insurance company.”

Under questioning from Joseph Piacentini, chief economist and director of policy and research for the DOL’s Employee Benefits Security Administration, Poolman said that insurance sales incentives could “potentially” influence which carriers’ products an agent recommends.

Given proper disclosures, however, consumers could ask for all the agent’s products and commission structures to be able to compare and contrast how a particular product sale affects an agent’s remuneration, Poolman said.

Commissions paid to agents closing a fixed index annuity sale tend to cluster around a relatively compressed range of between 6 percent and 8 percent.

If every agent were to follow a best interest standard, would some of that variation disappear?

“Would there be less reason to variably compensate a salesperson if you knew that they would not, could not, be taking into consideration any variation into account when they made their recommendation, would the variation diminish?” Piacentini asked.

Poolman stopped short of answering, but Dr. Marcus Stanley, policy director for Americans for Financial Reform, said the variation would shrink because some of that variation in income is designed to induce agents to prioritize some products over others.

Some products in the market are “in the best interest of very few, if any, investors so we do believe that there would be very real market changes,” Stanley said.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].