Climbing Out Of The Rabbit Hole On Annuity Suitability
By Jack Aiken
Like Alice, that white rabbit caught our eye and we have tumbled down the rabbit hole. Straight to the bottom.
We entered Wonderland, where things are upside down and backwards regarding the prevailing “suitability standards” embraced by regulators.
Fortunately, the basic values of fixed annuities mesh nicely with the reality of our clients’ actual needs, so there is still time to scramble out of the rabbit hole.
It is helpful to reflect on how we got so deep in the hole so that we can backstep our way out. But the process is confusing. What could possibly be wrong with doing things that are “suitable?” Well, it started in not so obvious ways and led us off to a really bad result.
A while back I found myself alone in an elevator with an insurance commissioner, and I offered a mild opposing view of her position that annuities were not suitable for older people. She responded by saying, “No one over 85 should buy an annuity.”
I hurried to warn a friend that in just a few days he would become too stupid to buy another annuity. I fretted about being unable to interrupt him in the middle of the polo match he was riding on the several-hundred-acre horse farm he owns and manages. I worry now whether anyone has told Warren Buffet he is too old and stupid to buy a guaranteed annuity. Probably not.
This commissioner’s wrongheaded notion, shared by many regulators of every stripe, was a convenient justification for dictating age as a key suitability consideration. The prevailing result was acceptance that at some age you should have very few or even no assets in annuities.
It was a short step for these misguided regulators to pressure and intimidate carriers into limiting product design, prescribing internal guidelines, and restricting innovation precisely when it is needed most for the group that needs it most.
In reality, once we step out of Wonderland, the exact opposite is true. The No. 1 concern for aging Americans is that they will outlive their income. There is no other financial product that can provide a guaranteed lifetime income.
In what universe does it make sense to restrict and even deny access to the one product that guarantees to address the number one concern of retiring Americans?
Down The Slippery Slope
But we followed the beguiling and benign white rabbit of “suitability” onto the slippery slope of accepting that it was OK to have someone else determine how people can use their personal assets to address their personal concerns.
And we accepted a suitability standard that gives someone other than the customer control over how the customer may conduct their affairs.
As there is no limit to the number of agencies, bureaus, departments, commissioners and deputies standing ready to improve the lives of each person in ways they think they should be improved, soon there was simply not enough room in suitability to accommodate all the guidelines waiting to be imposed.
In what seemed like no time at all, suitability had metastasized into an immediate need for “fiduciary accountability” and “best interest” standards.
There is a growing list of regulatory bodies providing “guidance,” and even outright mandates, as to suitability, best interest standards, and what constitutes a standard of conduct for fiduciaries.
Everybody is in the arena. The Securities and Exchange Commission, Financial Industry Regulatory Authority, each state insurance commissioner, the National Association of Insurance Commissioners, the Department of Labor, and, of course, opportunistic politicians eager to be characterized as protectors of the elderly, the uninformed, and my polo-playing octogenarian friend who one day was arbitrarily deemed too feeble-minded to make his own decisions.
These groups and others are posturing and thumping their lecterns about how exactly financial service providers, agents and customers will interact. Each group touts their own agenda, authority and justifications to shape and control the affairs of others via a weird game of regulatory musical chairs.
The market uncertainty, created by this horde, blunts innovation and the development of product-driven solutions. The cost of compliance has skyrocketed and burdened already historic low yields to the customer.
The risk of being declared noncompliant has disenfranchised thousands of very competent, responsible agents and distributors from properly servicing their clientele. This is particularly true for the middle-income and family markets that need personalized professional access to the best possible solutions to their concerns.
Fixed annuities should be the majority-share bedrock of most Americans’ retirement plans. Instead of allocating 20 percent, 30 percent or 40 percent of a retirement portfolio to fixed annuities, the ratios should be flipped and the scrutiny shifted.
For the vast majority of people, if fixed annuities make up less than 60 percent, 70 percent or 80 percent of their retirement portfolio, the suitability of the advice they received should be evaluated.
Given clear explanations and full disclosure of the basic arithmetic and the relative plan success rates over time, most people would choose guaranteed fixed annuities as being appropriate to their risk tolerance and financial aspirations in retirement.
Recent court decisions have declared much of what fueled the dysfunction in responsible planning for clients to be way out of bounds. Even within the various regulatory communities, the more thoughtful have agreed that perhaps the concepts need reconsideration. This is a great time to not only stop the encroachment, but also to regain for clients the ability to make their own decisions in ways they find appropriate.
It is a relief to hear more discussion around better disclosure about the issues. Guaranteed fixed annuities offer unique benefits that are exactly in step with the needs of those who want assurance as they age.
Development of objective, plain-English, side-by-side explanations as to what fixed annuities do and do not provide compared in the same manner to the ballyhooed alternatives will secure annuities’ role as the biggest portion of almost every client’s retirement strategy.
Jack D. Aiken is president of LTA Marketing Group, Fargo, N.D. Jack may be contacted at [email protected]