Insurers Get Creative With Products in Delayed Fiduciary World

Retirement product development against the backdrop of a delayed Department of Labor fiduciary rule is leading to a more mature view of the regulation, an insurance industry expert said Monday.

The upshot of the product activity indicates a more nuanced approach to the DOL landscape compared to the spring 2016. At that time, insurers and distributors were gearing up to meet an April 2017 deadline and Democrats were expected to retain control of the White House.

But then Donald J. Trump won the White House and delayed the rule from April to June, followed by further delay of key aspects of the rule until July 1, 2019. The added time is giving the industry more time to think through the product adaptations.

Companies have “time to think through things rather than reacting quickly,” said Scott Hawkins, director, insurance research, with Conning, a Hartford-based insurance researcher and asset manager.

“That's where it's interesting – with the delay going forward, barring any major changes, how will this extra time be put to use by insurers and distributors?” he said.

If the Securities and Exchange Commission and the National Association of Insurance Commissioners decide on a “radically different” regulatory approach, then the challenge becomes adjusting products to meet new, harmonized standards.

“There’s a more nuanced view among insurers of what the DOL landscape is,” Hawkins said. “It’s not all fee-based and it’s not getting rid of traditional forms of compensation.”

Hawkins, who authored a report on life and annuity distribution published last week, conducted the research in the spring, before major portions of the fiduciary rule over the summer were delayed by 18 months.

Product Activity Follows Three Tracks

Over the past 12 months, product changes have taken place on simultaneous tracks, Hawkins said.

Fixed indexed annuities (FIA), which make up nearly 30 percent of all fixed annuity sales, were roped into the final version of the fiduciary rule’s best interest contract requirement. That surprising change led insurers to get creative with FIAs and improve profiles of other fixed annuity product lines to give advisors more attractive products to sell.

Guaranteed living withdrawal benefits found their way into fixed annuity products as a result, Hawkins said.

Moving on a parallel track, insurers proceeded to develop fee-based products to give retail distributors more choices given the fiduciary rule’s uncertain outcome.

Even if the fiduciary rule never eventually comes to pass, insurers figure that fee-based FIAs and variable annuities will be acceptable to registered investment advisors (RIA).

Moving on still a third track, insurers offering mutual funds began to restrict the number of fund families and that led to broker-dealers paring down investment options for registered representatives, Hawkins said.

Commissions Survive

Broker-dealers, who were quick to tamp down on commission-based sales at first, seemed to back away as a rule delay became inevitable under a new administration.

Commission-based retirement products, which dwarf fee-based product sales, were never banned under the fiduciary rule, but regulators wanted to make sure advisors were looking out for the best interest of retirement investors.

Broker-dealers have grasped that commissions are still acceptable – and in some cases in the best or better interest of a client than fee-based alternatives – and clients don’t automatically have to move to an asset-based fee, Hawkins said.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at cyril.tuohy@innfeedback.com.

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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 cyril.tuohy@innfeedback.com.