It’s a scene that takes place thousands of times each day across the nation.
An employee gets fired or laid off, and isn’t sure about what to do with the $25,000 balance in the 401(k) account from their now-former employer.
The solution: The ex-employee calls their insurance agent. Two days later, the client and the agent meet face to face.
A conversation ensues and, before long, the client is asking for advice about what to do with their 401(k) balance: keep it in the plan, roll it over into a new or an existing individual retirement account or cash out.
As soon as the agent speaks to make a recommendation — even if that recommendation is not acted upon — it triggers the recommendation test proposed by the Department of Labor (DOL) under new conflict of interest rules.
The client then says, “Oh, and by the way, since we’re here together, I have another $10,000 sitting in a 401(k) from my first job. Should I add that to my $25,000?”
There’s another question that will elicit a recommendation that triggers the fiduciary duty clause under the DOL proposal.
And then the client asks, “And what about a Roth IRA?”
In the space of five minutes, our fixed annuity agent has triggered the fiduciary threshold at least three times. That’s why Kim O’Brien and the consumer advocacy group she leads, Americans for Annuity Protection (AAP), are worried that the DOL’s new proposed conflict of interest rules are too broad.
“All of this makes sense in a mutual fund conversation and in an investment account conversation, but it makes no sense in the fixed annuity conversation,” said O’Brien, CEO and vice chairman of AAP.
When agents talk to clients about fixed annuities, it’s a bit like a first or second date. The conversation, filled with highs and lows and fast and slows and ebbs and flows, sometimes moves quickly and at other times lurches to a halt.
But now the DOL is asking agents to sign the equivalent of a prenup outlining the parameters of the fiduciary responsibility and where commissions are coming from. For sellers of fixed annuities, it’s a burden.
More to the point, though, is that this isn’t how annuity conversations take place. Agents don’t sit across the table and robotically run through their clients’ “financial Miranda” rights.
“That’s not how conversations go,” O’Brien said. “Conversations do not happen in a vacuum with a he said, she said, he said.”
Agents and clients warm toward one another as the relationship unfolds, develops and deepens. They meet at community events, and again at weddings, at christenings, in times of need, at funerals or on the golf course.
Discussions evolve, move in one direction, then another, even backtrack.
O’Brien said the DOL’s proposed approach would kill any kind of relationship agents have with their clients or with fixed annuities. In addition, she said, the DOL proposal would drive an estimated one-third of the 150,000 to 170,000 licensed life and annuity agents out of the business.
Should the DOL’s rules be see the light of day as proposed, millions of middle- and lower-middle-class investors would be stood up at the altar grieving, bitter and alone as agents run for the hills and clients are left to face the challenge of generating guaranteed income on their own or for a fee.
DOL isn’t buying the sob stories, not for a minute. Regulators say the time has come to clamp down on what they see as conflicts of interest rife among sellers of retirement products.
With the decline in defined benefit plans, individual investors, not intermediaries, deserve to reap many of the rewards that guaranteed income products have to offer, the DOL contends.
DOL officials said they have a clear, distinct idea of when a fixed annuity seller crosses the line from educating a consumer to offering investment advice.
If an agent talks about one company’s fixed annuity and explains its features, surrender charges, interest payments and deferral periods, that’s education. When the agent asks a client what he or she wants to do next based on that criteria, that’s education.
But that same life and annuity agent who recommends that a client buy one annuity over another has crossed the line into a fiduciary recommendation, in the eyes of the DOL. This means that the proposed changes to the conflict of interest rules would apply.
Regulating a conversation between an agent and a client may tread a very fine line. But there’s little doubt that the vast number of consumers in fixed annuities are perfectly happy with the investments. This is borne out by the industry statistics that show the number of complaints faced by agents selling fixed annuities is only a fraction of those filed against broker/dealers and investment advisors. One reason for that is because fixed products, tightly regulated by the states, are designed never to lose money.
That makes the rare fixed annuity dispute the subject of litigation. O’Brien said it’s difficult to see how annuitants can be harmed by a fixed product deemed suitable and entered into through mutual consent by the agent and the client at the time of sale.
Where, proponents of fixed annuities ask, does the conflict of interest lie?
InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at firstname.lastname@example.org.
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