Three Reasons Why the BIC Exemption is Flawed – InsuranceNewsNet

InsuranceNewsNet — Your Industry. One Source.™

Sign in
  • Subscribe
  • About
  • Advertise
  • Contact
Home Now reading Regulation News
Topics
    • Life Insurance News
    • Annuity News
    • Health/Employee Benefits
    • Property and Casualty
    • Advisor News
    • Washington Wire
    • Regulation News
    • Sponsored Articles
    • Monthly Focus
  • INN Exclusives
  • NewsWires
  • Magazine
  • Webinars
  • Free Newsletters
Sign in or register to be an INNsider.
  • Exclusives
  • NewsWires
  • Magazine
  • Webinars
  • Free Newsletters
  • Insider Pro
  • About
  • Advertise
  • Editorial Staff
  • Contact
  • Newsletters

Get Social

  • Facebook
  • Twitter
  • LinkedIn
Advisor News
Regulation News RSS Get our newsletter
Order Prints
September 23, 2016 Regulation News No comments
Share
Share
Tweet
Email

Three Reasons Why the BIC Exemption is Flawed

By Kim O'Brien InsuranceNewsNet

Commentary

The Department of Labor fiduciary rule as a whole has many flaws, but the Best Interest Contract Exemption (BICE) in particular is one of the most flawed.

Market Synergy Group’s (MSG) lawsuit was heard in Kansas district court on Wednesday and the surgical precision of their case is very welcome. MSG is a consolidated group of independent marketing organizations. Market Synergy focused specifically on the last-minute move of fixed indexed annuities to the BICE.

Related stories

  • Jury finds Lexington investment advisor, guilty of charges related to fraud
  • Chicago investment advisor indicted for allegedly swindling clients out of $683,000

The dead-of-night, 11th hour, non-transparent switch by the DOL is extremely problematic for consumers needing FIAs for guaranteed income or asset protection. It will make the transaction to purchase an FIA more expensive, more complicated, and riddled with paperwork and confusing/conflicting information when contemplating between a fixed-rate annuity and fixed indexed annuity.

The entire BIC exemption is flawed and the rule should be reopened to remove this misguided and misinformed aspect of the regulation. To quote Assistant Secretary Phyllis Borzi: “We had to be creative to try to find a way to make the responsibility for acting in your client’s best interest—the fiduciary responsibility—enforceable in the IRA context.”

The result of that “creativity” was the rule’s BICE provision. Regulators and policymakers are put in place to enforce and provide guidance on existing law (in this case ERISA) and not creatively construct rules that have the impact of new law.

Big Flaws

Our three reasons the BICE is flawed are:

ONE: The department dismissed credible evidence that the rule will harm consumers.

In constructing the BICE, the DOL conducted a faulty cost-benefit analysis, relying principally on obsolete studies of unrepresentative mutual funds. This incomprehensible reliance caused the department to immensely overstate the rule’s benefits.

Without reliable and accurate information about the true impact of the rule on annuity consumers, there can be no justification for their harsh treatment of annuities under the rule.

In addition, the DOL did not adequately account for the burden of regulatory uncertainty that comes from relying on courts and juries scattered across the country to interpret and enforce the department’s vague new standards.

TWO: The BICE inaccurately segregates fixed indexed from fixed rate annuities.

The rule must be fixed to address the flawed distinction made between fixed rate and fixed indexed annuities. Both annuities protect the owner against loss of premium and earned interest due to investment risk—the contract’s premium is not invested in a separate account or specific investment, but rather is supported by the general account of the insurance company, and the insurance company assumes the market risk.

The only difference between fixed indexed annuities and fixed rate annuities is the method for determining the interest that is credited to the contract. For fixed indexed annuities, the interest rate determined by the positive performance of a market index. The consumer does not participate directly in the market or in the market index.

For fixed rate annuities the interest rate is determined by the earnings in the insurer’s own investment portfolio and credited during the guaranteed-rate period. After that, the rate may move above a minimum rate based at the insurer’s discretion.

In addition, both fixed indexed and fixed rate annuities:

1. Do not charge fees other than for those for optional benefits like lifetime income, long term care, etc. – which are fully disclosed;
2. Offer similar death benefits;
3. Are covered by state guaranty funds; and,
4. Are regulated as insurance products by state insurance regulators rather than as securities by the SEC and FINRA.

The disparate regulatory treatment of FIAs will create unjustified competitive advantages and disadvantages among competing fixed annuity products. The DOL claimed its “uniform approach” of subjecting fixed indexed annuities and variable annuities to the BICE “avoids creating a regulatory incentive to preferentially recommend indexed annuities.”

Yet in doing so, it creates a regulatory incentive preferentially to recommend fixed rate annuities. This disparity is not helpful to America’s savers.

Also, the BICE itself creates a regulatory preference for level-fee products over commission-based products with variable compensation. The department neither acknowledged this biased behavior nor explained why creating regulatory incentives and preferential treatment for non-BICE recommendations and level-fee recommendations enhances the fiduciary duty to consumers.

Prejudice Against Commissions

THREE: The BICE misunderstands and is prejudiced against commission-based compensation.
In last week’s commentary we stated that no one compensation structure is all good or all bad.

Nor for that matter is one compensation type free from conflict. Level-fee advisors can just as easily have conflicts of interest as variable-fee advisors.

Fee-only hourly advisors can create more “billable” hours than is warranted for the advice the consumer receives. Fee-only asset under management can make money off the client when they, as managers, under-perform. Commissioned advisors can push a product that pays higher commission when a lower commissioned product may work just as well.

However, understanding the basic math of the annuity commission-based model, the commission expense is ONLY on the premium paid and is typically less expensive over time. Commission-based annuities are typically priced in direct correlation to their surrender period.

So a 6 percent commission (the average for the pool of fixed indexed annuities) actually pays .6 a year until the consumer can take their money with no surrender charge. If you compute the 6 percent over the life expectancy of the owner – an annuity is after all an insurance policy priced in large part on the expected death of the annuity owner – a 25-year life expectancy would take that commission down to .24 a year.

Fee-based models pay the advisor on the investment and the growth of the investment. It is generally agreed that most fees range between 1-2 percent annually paid by the consumer directly out of their assets or savings.

So on $100,000 of premium, the commission paid to an annuity advisor is $240 over the owner’s lifetime. That same $100,000 invested with a fee-based planner for the same 25 years could cost the consumer four times more on the low side and as much as eight times or more on the higher end.

Michael Kitces latest posting confirms the high consumer cost of other models in a recent article: "…despite all the “robo” buzz, the AUM fees that financial advisors charge their clients aren’t falling. In fact, they’re rising."

Meanwhile, industry sources tell us annuity commissions are falling!

Conclusion

While some may say that more regulation helps consumers, they would be completely wrong. In the end, all the RULE does is create more legal exposure and regulatory compliance procedures for financial institutions and advisors and more costly and limited access to insured annuity solutions for American savers. The additional exposure and compliance are unnecessary in light of the DOLs inability to show that the current regulatory regime hasn’t vigorously and successfully protected consumers.

Fixing the flawed BICE will provide consumers with better access to insurance solutions of guaranteed income and asset protection; relief from high fees accounts in exchange for the more efficient and affordable annuity; and, a wider selection of annuities for the insured portion of their financial plan.

A federal rule that is based on bad analysis, obsolete information, ignorance of the true cost-burden imposed and creating more harm to consumers must be dismantled and the flaws fixed.

The DOL must make a serious effort to address these flaws and make recommendations or guidance that will fix them.

Register for your own copy of “The Complete Fiduciary Guide for Annuity Advisors” published by Americans for Annuity Protection and available FREE to all AAP members. Not a member? Join today!

Kim O’Brien is the vice chairman and CEO of Americans for Annuity Protection. She has 35 years of experience in the insurance industry. O’Brien served The National Association for Fixed Annuities (NAFA) for almost 12 years and led the organization to defeat the SEC’s Rule 151A.

Contact Kim at [email protected]

© Entire contents copyright 2016 by InsuranceNewsNet.com Inc. All rights reserved. No part of this article may be reprinted without the expressed written consent from InsuranceNewsNet.com.

Older

Kansas Judge ‘Sympathetic’ to Market Synergy DOL Case

Newer

Judge Could Issue Partial Block of DOL Rule, Lawyer Says

Advisor News

  • Jury finds Lexington investment advisor, guilty of charges related to fraud
  • Chicago investment advisor indicted for allegedly swindling clients out of $683,000
  • Will the family maximum limit my Social Security benefits?
  • South Florida resort sold for $835M, biggest deal for a U.S. hotel since pandemic started
  • Passage of the Secure Act 2.0 brings retirement crisis into focus
More Advisor News

Annuity News

  • $747 million Powerball jackpot still up for grabs
  • Study: Does pessimism really suppress annuity sales?
  • Sweet streams of income: ChatGPT, the bard of annuities
  • F&G Annuities & Life announces equity investment in life IMO SYNCIS
  • Investors scrambling to lock in rates propel annuity sales to record highs
Sponsor
More Annuity News

Health/Employee Benefits News

  • Florida looks to double amount of medical-marijuana licenses
  • Bipartisan group of Missouri lawmakers look to extend healthcare coverage for new moms
  • Medicaid extension for new moms advances amid abortion discussion
  • Medicaid's pandemic benefits are ending
  • Congress has capped Medicare insulin costs. Here’s how it works and what it means
More Health/Employee Benefits News

Life Insurance News

  • In Murdaugh murder trial, the path to conviction remains unclear
  • Libby Murdaugh's caretaker saw Alex night of murders for '20 minutes', but he said '30 to 40'
  • SC judge in Murdaugh murder trial allows jury to hear alleged financial crime motive
  • How the cases in Alex Murdaugh's murder trial are shaping up
  • Testimony: Maggie Murdaugh may have bought gun that killed her
More Life Insurance News

- Presented By -

Top Read Stories

  • Pennsylvania woman sentenced in elderly fraud case
  • NY man sentenced for operating a Ponzi scheme, stole more than $1M
  • For agents and advisors, dispelling LTCI myths is crucial to building sales
  • A life lesson in success — with John Wheeler
  • Fed slows interest rate increases; more hikes expected
More Top Read Stories >

FEATURED OFFERS

Meet Encova Life
We know agents matter. You can count on our life team to be high tech, high touch and responsive.

How to Write For InsuranceNewsNet

Find out how you can submit content for publishing on our website.
View Guidelines

Topics

  • Life Insurance News
  • Annuity News
  • Health/Employee Benefits
  • Property and Casualty
  • Advisor News
  • Washington Wire
  • Regulation News
  • Sponsored Articles
  • Monthly Focus

Top Sections

  • Life Insurance News
  • Annuity News
  • Health/Employee Benefits News
  • Property and Casualty News
  • AdvisorNews
  • Washington Wire
  • Insurance Webinars

Our Company

  • About
  • Editorial Staff
  • Magazine
  • Write for INN
  • Advertise
  • Contact

Sign up for our FREE e-Newsletter!

Get breaking news, exclusive stories, and money- making insights straight into your inbox.

select Newsletter Options
Facebook Linkedin Twitter
© 2023 InsuranceNewsNet.com, Inc. All rights reserved.
  • Terms & Conditions
  • Privacy Policy
  • AdvisorNews

Sign in with your Insider Pro Account

Not registered? Become an Insider Pro.