Let’s keep this simple: There is a difference between recommendations to purchase insurance and recommendations to purchase securities.
Premium used to fund an insurance plan is not under the control of the advisor after the contract(s) is issued. Money used to fund an investment plan using securities is in control of the advisor, the advisor’s firm or a third party assigned by the advisor/firm after the security is purchased.
The management of the investment portfolio used to determine interest credited is in the control of the insurance company (subject to the terms of the underlying contract). The management of the investment plan is under the control of the advisor/firm/third party manager.
That makes the controlling party of an annuity the insurance company and the controlling party of a security the advisor/firm/third-party manager.
With an insurance plan, disputes over suitability, misleading statements and yes, excessive compensation that are resolved in the consumer’s favor provide the remedy of a premium refund and, often, a minimum interest payment. That’s because the premium is secured and insured by the insurance company.
In the rare instance the company is insolvent, the state’s Guaranty Fund has an unblemished history of protecting consumer’s savings.
The same cannot be said for a dispute over the recommendation to invest in securities. Too often, the funds are long gone by the time the problem is detected or resolved. Often, courts or arbitrators order restitution but that isn’t always fulfilled. Just ask Bernie Madoff’s victims.
Investors Still Short Billions
After almost a decade, only $9 billion of the $17 billion invested by Madoff has been returned. And, it has been determined that the investors are not entitled to any gains listed on the “false investment statements.”
Sadly, had that money been in insured fixed annuities instead and assuming a conservative 4 percent, it would be safe and now worth about $26 million. And, don’t forget Madoff was under a fiduciary duty to serve his clients first. Madoff may be an extreme example, but it serves to demonstrate the difference between insurance products and investment products and purchasing an annuity from an insurance agent or giving your savings to an investment manager.
That brings us to the DOL fiduciary rule.
Since the Department of Justice pointed out in the lawsuit brought by the National Association for Fixed Annuities, “there is no new federal enforcement mechanism” in the rule [referring to the BIC] considering that [fixed annuities] are “already subject to breach of contract claims” under state regulation.
Consumers today already enjoy best interest protections. A new Rule is not required because any recommendation that involves misleading statements or does not address the client’s needs can be challenged today in court; absent the DOL Rule. However, typically the expense and time isn’t even necessary because the insurance departments resolve most complaints first.
Leaving just the “reasonable compensation” standard remaining out of the three-duties required under fiduciary obligations. But, as they say, “you can sue over anything” and the best interest standard is “out of the barn,” we should expect litigation incorporating “excessive compensation” claims.
Fortunately, most fixed annuity products already pay reasonable compensation considering the time, skill and services provided by the annuity advisor. A thorough analysis of the annuity marketplace and the commission-based distribution system will show that consumers who purchase annuities through a fee-based advisor will pay much more for fee-based advice.
Assuming 5 percent growth and a typical 6.5 percent commission on a 10-year fixed annuity and life expectancy of 30 years as opposed to a conservative 1 percent investment management fee, the consumer will pay the advisor almost 130 percent more in fees than one-time commissions paid to insurance advisors.
That number skyrockets to 900 percent more when the annuity (a mortality-based insurance product) is held to maturity.
Annuity Advisors Needed
All of this makes the recommendation of an annuity IRA very different than that of a security IRA. A comprehensive standard of care required for each unique purchase must appropriately and adequately recognize the difference.
The NAIC is already considering the 2010 Suitability Model for possible adjustments to incorporate best interest standards. That is a good step and Americans for Annuity Protection will be present and active in the discussions.
AAP’s engagement will be to ensure consumers maintain access to annuity advisors because the appeal to be an annuity advisor is not marred by costly and complicated compliance; annuity products continue be innovative and abundant because the manufacturers aren’t overly burdened by costly regulation or paralyzed by incalculable litigation exposure; and consumers understand their advisors duties and the pros and cons of the product(s) they are considering without thousands of more confusing disclosures and disclaimers.
Following the President’s Feb. 3 memorandum, the DOL has no choice but to rescind the Rule because:
1. Updated economic and legal analysis will demonstrate that the DOL Rule significantly alters Americans ability to choose the type of financial advice and the advisor from whom they receive that advice.
2. The costs have been grossly underestimated and when correctly adjudicated will show they outweigh any perceived benefit.
3. It is inconsistent with the policies set forth by the Administration.
Americans for Annuity Protection believes consumers need and deserve a comprehensive, coordinated and effective solution to a consumer-focused standard of care that recognizes the unique (and different) advice and control of both insured and invested savings.
The approach should judiciously and effectively leverage the safe guards and protections that already exist in today's state-regulated marketplace. Regulators who are closest to and with superior understanding of the marketplace are the best to address this issue for insurance products.
Kim O’Brien is a 35-year veteran of the insurance industry specializing in guaranteed annuities and life insurance. She is the current CEO of Americans for Annuity Protection and Founder of AssessBEST, Inc., a sales and compliance software system. Visit www.AAPnow.com or www.AssessBEST.com for more information. Contact Kim at [email protected]
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