DOL Rule Confusion Leads to Wait-and-See Approach

Confusion surrounding the Department of Labor’s fiduciary rule has caused insurance distributors to hold back on specific sales strategies and that could affect annuity sales this year, insurance company executives said.

The rule, which raises investment advice standards into retirement accounts, also appears to be having an impact on the amount of money going into nonretirement accounts.

“The DOL is creating confusion more than anything else, and so you’re seeing some of our distribution partners not coming forward with their specific plans, because they are waiting to see what the final rule is really going to be,” said Dennis R. Glass, president and CEO of Lincoln Financial, a major seller of variable annuities.

New sales of variable annuities fell 21.4 percent to $101 billion in 2016 compared to 2015, Morningstar reported earlier this year.

Nonretirement accounts have also been affected, Glass said in a conference call with analysts earlier this month.

Originally set to go into effect April 10, the rule has been pushed back to June 9 in the wake of President Donald Trump’s victory election.

“We continue to suspect that uncertainty regarding the DOL conflict of interest fiduciary rule may be distracting from marketing activities and playing a role in lower sales,” said John Matovina, president and CEO of American Equity Investment Life.

“In some cases, registered representatives may be positioning money away from annuities and into managed money in anticipation of the fiduciary rule," he said.

American Equity is a major seller of FIAs.

In 2016 FIA sales rose 9.7 percent to a record $58.2 billion compared with 2015, industry tracker Wink's Sales & Market report said.

The record haul, however, masked weakness in the fourth quarter, during which FIA sales slumped 15 percent to $13.3 billion compared with the year-ago period, Wink’s said.

Some analysts wouldn’t be surprised if FIA sales this year drop below last year’s record. First-quarter 2017 annuity sales data are expected to be released in the coming days or weeks.

Exemptions and the Reversals of Fortune

If distributors are confused about the rule and its implementation schedule, it’s not hard to see why.

DOL regulators threw the industry a “curveball” earlier this year when they pushed back the rule’s implementation date, said Bradford Campbell, a Washington-based DOL rule expert and partner with Drinker Biddle.

In doing so, regulators also left the door ajar to amending, replacing or even repealing the rule down the road, Campbell said.

The introduction of transitional exemptions will allow agents and advisors to continue collecting traditional compensation until Dec. 31, 2017.

But for many advisors, the changes to the Best Interest Contract Exemption, or BICE, are now easier to live with than the restrictions imposed by Prohibited Transaction Exemption 84-24, or PTE 84-24, said Fred Reish, a Los Angeles-based partner with Drinker Biddle.

This is a reversal of where things stood six months ago, he said.

Here is where the three-part DOL rule stands:

On June 9, anyone working with retirement dollars must act in the best interest of the client at all times, and be able to prove it, or face possibility of a lawsuit.

On Jan. 1, the BICE, required to sell variable annuities and FIAs, comes into effect. BICE mandates hefty disclosures and a signed contract.

Also on Jan. 1, the rule’s Impartial Conduct Standards are applicable to PTE 84-24. Impartial conduct standards mean agents must act as a fiduciary, accept only “reasonable” compensation, and make no materially misleading statements.

The sale of FIAs and variable annuities with commission are allowed under PTE 84-24 until Jan. 1.

Emerging Softness

FIA sales rose 9.7 percent last year, but the percentage increase was lower than the 13 percent rise in sales in 2015 over the year before that, industry tracker Wink’s Sales & Market Report said earlier this year.

LIMRA Secure Retirement Institute reported 2016 FIA sales of $61 billion, a 12 percent increase over the year-ago period. That, too, was shy of the 13 percent rise in FIA sales recorded in 2015 over 2014, LIMRA reported.

For the thousands of independent agents responsible for 60 percent of FIA sales, the message is clear: Sales are softening.

Separate from the changing deadlines issued by the DOL is the reshuffling of distributors within the broker-dealer and independent agent channels as companies grapple with a “red light-green light” approach.

Some brokers/dealers have cut back on the number of independent marketing organizations (IMOs) that have access to advisors within the broker/dealer. Other broker/dealers want to consolidate FIA sales under a single IMO, annuity market experts said.

IMOs are looking to operate under their own financial institution exemption to be on the same footing as banks, broker/dealers, insurers and registered investment advisors, and an era of consolidation has already begun.

The sooner distributors distill directional certainty about how to proceed under the DOL rule, the sooner the industry will be able to move forward with sales of annuities, an income tool considered vital for millions of retirement investors.

“So I think the whole market – candidly, both qualified and nonqualified business - is being affected by the uncertainty created by this rule, and the distribution partners waiting for certainty so they can formalize what their practices and policies are going to be,” Glass said.

“So I’m hopeful that we’ll get to that certainty sooner rather than later, and I think that will help annuity sales overall,” he said.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].