So far, so good. But fixed indexed annuity sales have seen a drop-off.
After much debate, the Department of Labor’s fiduciary rule went into effect on June 9. In short, the rule mandates that insurance agents and financial advisors serve their clients’ best interests rather than their own, openly acknowledge any possible conflicts of interests, and disclose their compensation so that clients can judge it for themselves.
Since the rule has only been in place for a month, insurance agents and advisors have yet to realize its full impact. However, since the industry was well-aware of the rule’s eventual enforcement, insurance professionals have had time to prepare, so agents and advisors have reported little disruption.
Impact on Fixed Indexed Annuity Sales
Perhaps the product most impacted by the fiduciary rule are fixed indexed annuities (FIAs), which can be sold by non-securities-licensed independent insurance agents. Research from Wink, Inc., an annuity and life insurance analysis firm, reported that sales of FIAs plunged to $12.9 billion in Q1 of 2017, a 14% decrease from Q1 of 2016.
Wink President and CEO Sheryl J. Moore attributed the drop-off to the impending DOL fiduciary standard. “Insurance distributors have been so busy preparing for the rule that they haven’t been able to focus on marketing products," she said. “Sales show it.”
Yet other industry insiders maintain that the impact has been negligible on sales of other annuity products. Speaking at the Des Moines Insurance Conference last month, Ray Wasilewski, CEO, Life Companies, for FBL Financial Group, said annuity sales have been “flowing in” from agents selling annuities into retirement plans. “All of our products in qualified plans are DOL-ready,” he said in a report from InsuranceNewsNet.com.
Impact on Independent Insurance Agents
Independent insurance agents accounted for 57% of indexed annuity sales in Q1, making them the largest distribution channel for the product, according to Wink. In an effort to maintain sales via independent agents, several insurers have responded with a new class of fixed-rate deferred annuities with income riders, InvestmentNews.com reported.
Traditionally, income riders, which provide a lifetime income stream, are attached to variable and indexed annuities. But with the DOL’s changes, those products seemed more difficult to sell, particularly for independent insurance agents. “I see [fixed rate deferred annuities] mostly as a way to serve and continue to provide a product to that big independent agent group that has been sort of disenfranchised," Carolyn Johnson, CEO of annuities and individual life at Voya Financial, told InvestmentNews.com.
Currently, independent agents can sell fixed-rate deferred annuities under the Prohibited Transaction Exemption 84-24. Starting next year, however, agents must comply with the best interest contract exemption (BICE), which allows agents to receive sales commissions when selling indexed and variable annuities so long as they adhere to the fiduciary standard. Just as significantly, the BICE also creates a class-action right to sue.
In a brief filed in the Fifth Circuit Court of Appeals in New Orleans on July 3, the DOL defended the BICE, arguing that the rule was necessary for the sale of complex products like variable and fixed indexed annuities. Plaintiffs sought to have BICE eliminated or amended. “DOL reasonably concluded that any contraction in the market share of such products as a result of the fiduciary rule would reflect not harm to consumers but a reduction in mismatched recommendations of products to investors,” the brief stated.
The DOL fiduciary rule will further require heightened record-keeping and disclosure by agents. In order to comply with it, agents will likely experience some short-term hardship, Ron Grensteiner, President of American Equity Investment Life Insurance Company, stated in the InsuranceNewsNet.com report. But “it’s just a matter of time before they make the changes and get used to the adjustment,” he said.
For agents already acting in the best interest of their clients, the new fiduciary rule will have minimal impact. But it’s always a good idea to disclose your compensation to your clients and keep your records accurate.