Americans for Annuity Protection (AAP) has continually argued that the burdens of compliance the DOL fiduciary rule creates is most harmful to consumers because it will cause confusion and conflicted feelings about the recommendation and the relationships with the parties involved in the recommendation.
To understand this first hand, let’s take a typical conversation with an advisor and a client with qualified money:
JILL: Hello, Jack. Thanks for coming in to discuss your insurance situation and needs for guaranteed income and asset protection. You gave me a lot of information last week and I have some ideas that will address the objectives we identified.
JACK: No problem Jill, I appreciate the fact that you may have some ideas about how I can make sure I have lifetime income that is guaranteed as long as I live.
JILL: I know with your family history, you do have longevity risk and you could live well past 90. I’ll show you a product that will make sure your money lasts as long as you do.
JACK: Great, let’s hear what you have for me.
JILL: Well, first I need you to look at this disclosure that says I am working in your best interest, will not make any misleading statements and will only be paid reasonable compensation. Now, Jack, understand that I have always worked in your best interest, but a new rule by the Department of Labor says that I must tell you that in writing. It is called a Best Interest Contract.
JACK: I’ve been working with you for years Jill and I have no doubt that you’ve always done what is best for me. Okay let’s see this document. (Jill hands Jack the Best Interest Contract)
JACK: Jill, who is “ABC National Marketing?”
JILL: Well they are what the DOL calls the “Financial Institution” that is issuing the Best Interest Contract.
JACK: Okay, but why am I entering into a contract with them? I thought you said that you are the one who must act in my best interest and all the rest.
JILL: Well that is true Jack, but the DOL Rule says that the contract promising all of this must be between the financial institution and you.
JACK: But how do they know what you say or recommend?
JILL: Well they have to have policies and procedures that show they are supervising me.
JACK: (chuckling) Like the SEC did with Bernie Madoff? Well, let’s put this aside for now, tell me what you think might be a good product for my longevity insurance.
JILL: Well, I recommend an indexed annuity from XYZ Annuity Company. It has a great income rider that also provides a bonus that is added to your account value from day one.
JACK: I like the sound of that. Let’s see how it works. (Jill shows Jack the illustration). I really like this product, Jill. Let’s get all of the paperwork filled out today so I don’t need to make an extra trip downtown.
JILL: Well, I also wanted to show you another product that has a guaranteed interest rate for just 5 years. Remember we talked about tying up all of your savings in a longer-term product. This annuity, with a five-year guarantee, along with the income annuity, will solve both of your objectives. That way if, well hopefully when, interest rates rise, we could look for another insurance solution that will perform well for your savings.
JACK: Okay show me that one.
JILL: Before I do, I need to show you another disclosure form that is issued by the company who offers the annuity.
JACK: Is that ABC National Marketing?
JILL: Well, no, it is MYGA Life Insurance Company.
JACK: It says here that you get paid $3,000 on this annuity. How much do you get paid on the indexed annuity with the income rider?
JILL: Well I am not required to tell you that specifically, but ABC National Marketing warrants that it is reasonable, however, and you can find compensation information at www.ABCNational.com. Rest assured though that you do not pay me out of your pocket or using any of your premium placed in the annuity.
Like all insurance products, the cost to build, market and sell the annuity is “baked into” the product itself, including my commission. Really, the way I am paid is just like your homeowners or car insurance agent. The amount may be different, of course, because they are different types of insurance.
JACK: I understand that and have never really needed to know how much you were paid. But, what I don’t understand is if now you have to tell me the MYGA commission, why don’t you have to tell me the Indexed Annuity commission?
JILL: (shrugs) That’s just how they made the rule, they are treating fixed indexed annuities differently than fixed rate annuities and vice-versa. But rest assured, my recommendations today are in your best interest. Let’s complete some of this paperwork.
JACK: Why is this application from XYZ Annuity Company, I thought you said my contract was with ABC National Marketing?
JILL: Well XYZ Annuity Company is issuing the annuity contract and ABC National is issuing the best interest contract.
JACK: And MYGA Insurance Company is issuing the other annuity contact? But with that annuity there is no other contract that warrants you are acting in my best interest.
JILL: That’s right Jack, I am required to do so but there is no contract.
JACK: Jill, I have to be honest. I am getting a little anxious and confused with all of these contracts. Everyone is with a different entity and I don’t know any of them, but I do know you. I know I can always call you for help, but what happens if I have a problem with either of these annuities and you aren’t available anymore. Do I call the company who issued the annuity or this ABC National Marketing?
JILL: Well that depends on your problem. If you believe one or both annuities are not suitable, you call the insurance company who issued the annuity and/or the Department of Insurance here in Arizona. If, however, you feel the fixed indexed annuity is not in your best interest or that a fiduciary duty was breached you will need to call ABC National Marketing.
If, you’re unhappy with the fiduciary duty under the fixed MYGA, I’m not sure who you call. You might start with the Department of Labor, but I am not sure who regulates the supervision of the DOL fiduciary duty for fixed rate annuities? It might be the insurance company. Maybe you should just call a lawyer to either arbitrate your claim or sue?
JACK: And pay money? Most of these options involve big institutions – government and private. Will they/can they help little ole me? How are all of these different contractual relationships, with different actions for recourse, and some without any clear recourse, actually helping me?
JILL: I hear you, Jack. Walking through all of this with you has shown me how conflicting and confusing it can be for your interests for clear regulation and regulatory authority.
JACK: And you said the rule was supposed to mitigate conflicts of interest.
JILL: Well actually, it was supposed to mitigate my conflicts not yours, Jack.
JACK: Well that may be but it has caused me more conflicts. Maybe we should just leave the money in my underperforming qualified account. It’s not the best for me, but it at least is one contract with one firm.
JILL: I’m wondering the same thing Jack! Maybe we can get this fixed in the meantime. There are some lawsuits that hope to stop this rule. But we haven’t heard anything yet.
JACK: In the meantime, let’s hope Americans for Annuity Protection will work with the Department of Labor to seek guidance and fixes to make this workable for annuity buyers like me.
JILL: You read my mind, Jack.
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@example.com.
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