AAP Responds to DOL FI Exemption: Boon or Bust?

Commentary

We begin anew with a 45th President and 115th Congress. New beginnings always offer new opportunities regardless of politics.

Americans For Annuity Protection will seize on these new opportunities with all members of the new Congress and new administration, just as we did with the last. In that spirit let’s discuss what we see and need to address in the Department of Labor’s proposed Best Interest Contract Exemption for insurance intermediaries released on Jan. 19.

The DOL exemption as written applies to any firm or intermediary that meets the exemption’s requirements and not just Independent Marketing Organizations (IMOs, FMOs, NMOs). However, the publication was a direct response to the 22 IMOs who filed for the exemption. If you read the filed documents (and we did), you recognized the serious and insightful desire to better supervise the annuity marketplace. That is GOOD for consumers.

AAP agrees that consumers need additional oversight requirements on any intermediary that has not (in the DOL’s words) “had the same regulatory oversight, and often have not played the same supervisory role with respect to advisers, as the Financial Institutions [insurers, banks, broker-dealers and registered investment advisors] covered by that [BIC] exemption.”

Eradicating bad behavior from a few bad actors will help to keep consumers safe from misleading annuity advertising, lowest-bar recruitment practices, and commission-driven sales rather than needs-driven sales.

Let’s review what the Proposed Exemption means for consumers.

THE BOON

IMOs can continue to operate as independent product intermediaries and receive commission for their services.

Removing any requirement of paying all downline commissions creates a substantial savings in operating costs for many IMOs -- savings that can be used for training and development. IMOs provide a valuable service to the annuity marketplace.

They help advisors navigate through thousands of fixed annuity products (and often variable) and through these efforts guide the advisor to a product(s) solution that meets the needs of the client. Unfortunately, too often the latest product is pushed without requiring a client needs analysis first.

The Fiduciary Rule (now called the Conflict of Interest Rule – more on that in a separate column), will all but eliminate the “product push” practice because it requires a thorough understanding and documentation of the consumer’s needs ahead of any product recommendation. It will be necessary to document that procedural order to defend both best interest and suitability recommendations in the future.

Therefore, keeping the IMO front and center with the advisor, while keeping their overhead reasonable, is a good outcome. The proposal states that an IMO that does not meet the definition of Financial Institution under this proposal can continue to work with an insurance company or other intermediary, and receive compensation, if the insurance agent and the insurance company or other intermediary complies with the conditions applicable to advisers and Financial Institutions, respectively.

The proposal informs (and our reading confirms) that some IMOs believed an exempt Financial Institution – as well as any other IMO -- would need to be paid the aggregate (gross) commission thus, requiring the IMO to pay their downline. That’s an expensive prospect for many mid-size IMOs. Fortunately, the DOL said that is not a requirement of the exemption.

The exemption stipulates that IMOs (as well as other IMOs in their hierarchy) can continue to receive commissions separately from their advisor and allow the advisor to be paid directly by the carrier as most do today. In the proposal, the DOL outlines both the gross-payment approach and the direct-payment-to-each-party approach.

They conclude that in the direct payment method “insurance companies can continue the practice of paying commissions directly to agents, with an override payment going to the intermediary.”

Advisors/Agents do not need to be exclusive to any one IMO or intermediary.

The DOL was very clear that an agent may have several IMOs and that they do not need to be exclusively supervised by one IMO. This was mentioned numerous times throughout the proposed exemption.  Specifically, Proposed Section II (d)(3) specifically states that the “proposal does not mandate exclusivity.”

The requirements to meet the exemption for Financial Institution status are steep and have been reported extensively already. However, allowing multiple IMOs provides the advisor with more carrier choice and, subsequently, more product choice. Choice is good for the diverse marketplace of American savers!

THE BUST

Fixed Indexed Annuities are under attack AGAIN and Fixed Rate are also in their crosshairs.

The DOL spends almost 1,700 words of their over 42,000-word proposal discussing fixed indexed and fixed rate annuities. They make assumptions based on misinformation and clear misunderstanding of the product and its contractual features and actuarial design. It explicitly criticizes fixed indexed annuities and the intermediaries who distribute them. But they do so without any demonstration of consumer harm or dissatisfaction.

On page nine they quote the source for this misinformation: three SECURITY regulators – the SEC, FINRA and NASAA. The DOL poses a series of questions that are leading and suggestive of the answers they hope to receive. Fixed indexed annuities may be pulled from the consideration for consumers with qualified money!

The department asks for comment on these issues and features, with the intent of providing additional guidance on them in the final exemption, if it is granted, or potentially limiting the exemption to annuity contracts that do not permit insurers to change critical terms during periods in which the customer is subject to a surrender charge or penalty.

If the department continues down this misinformed path, consumers will only be left with a handful of low interest, CD-like annuities.

This battle over FIAs was fought once and won. The result was the Harkin Amendment in Dodd-Frank. The industry is now under strict suitability rules and heightened scrutiny and audit from state insurance departments. Sadly, it appears we must fight again and use facts as our weapons and demand to be heard with equal honesty and openness that the FIA opponents seem to enjoy.

The DOL is being informed by the wrong people. It is time to listen to AAP, who are represented by experts in the insurance marketplace and understand how annuities are manufactured and distributed. Stay tuned for our activities so you can help us inform and correct.

Visit AAP for up-to-the-minute information and analysis or email [email protected].

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].

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