The Department of Labor has missed the mark when it comes to fixed insurance products and its proposed fiduciary mandate in connection with any advice on qualified retirement account assets. Here's why...
The DOL has defined the word fiduciary in such a narrow manner, it accommodates only fee-based planning models. This fails to recognize the decades-old, high-consumer satisfaction distribution model currently in existence in the insurance industry. Within the insurance industry, there are high duties already in place. In fact, they could readily be referred to as fiduciary duties. The problem is the DOL has placed this duty in the wrong hands.
One definition of "fiduciary" describes the word as, "A person in whom another has placed the utmost trust and confidence to manage and protect property or money. The relationship wherein one person has an obligation to act for anther's benefit."
I believe there exists a fiduciary duty in the insurance industry already and it is one that can be rightfully defined. The conflict created by the DOL is how they have defined the fiduciary role and who they are applying the role to. In the fixed insurance industry, consumers are not purchasing an investment they can buy and sell in a bid market. They are reviewing and purchasing a legal contract between themselves and the insurance company.
Prior to going to market, exhaustive pricing is conducted by sophisticated actuaries who develop features and benefits believed to serve the need of consumers. These contracts, once priced, are then filed with the department of insurance in each state for review and to assure the contract meets the standard non-forfeiture rules. This essentially assures the contracts will provide a legal minimum return prior to going to market. Once approved, the insurance company can market their product.
Within the contract, the insurance company clearly defines benefits, promises and commitments. The insurance company receives the policyholder funds and manages these funds along with the company's own assets. The policyholder is guaranteed to receive the benefits, promises and commitments granted within the policy. In fact, the company is now legally bound to provide these benefits, etc. The company is must fulfill their obligations. In this way, the insurer is acting as a fiduciary.
The policyholder also receives a free look period, typically 30 days, to examine the contract. During this period they may return it for a full refund. Additionally, the state Department of Insurance acts as a powerful advocate on behalf of the policyholder and can rapidly correct a bad situation as they compel the insurance company to refund money if an inappropriate transaction takes place. In the fiduciary model, insurance departments may lose their ability to intervene and lead the departments to act more like the Securities and Exchange Commission than advocates for consumers. The SEC will not cause transactions to be reversed and people made whole. Rather, they leave it up to the legal process which involves expensive litigation costs which small investors cannot afford to pay. The current insurance model provides greater protection at a lower cost to the consumer.
The insurance agent, in contrast, is not acting as a fiduciary. An agent may not alter the contract or the commitments and are prohibited from doing so. An agent may not negotiate benefits on behalf of the client. An agent may not take an annuity on an individual's life and "sell" it to another party in a bid market.
Fixed insurance products are not investments and the fiduciary standard as described by the DOL simply falls short of reality. Defining the fiduciary the role of an insurance company might be a wise and useful exercise. Applying this burden to agents who cannot modify or structure the contracts is not workable. Agents are already monitored and required to provide suitable recommendations for the consumers and the insurance company works on the consumer behalf to fulfill all contractual obligations. The Department of Insurance advocates for consumers and holds insurance companies accountable to their obligations and financial duties. This explains the high satisfaction rate of policyholders in America today.
Agents representing insurance companies and selling fixed insurance products, therefore, should be granted a seller's exemption within the proposed DOL rule.
W. Andrew Unkefer is president of Unkefer & Associates, a national annuity and life insurance marketing organization and involved in product design and national sales distribution, based in Glendale, Ariz. Unkefer can be reached at [email protected]
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