As Americans scramble to fund 30 years of retirement, their quest for guaranteed income has led them to annuities, doubling sales in the industry over the past four years to $40 billion dollars.
That’s likely to accelerate as some 13,000 Americans turn age 65 each day. But what most consumers don’t know is the insurance brokers who sell them annuities are not fiduciaries and are not required to put customers’ best interests first. In fact, insurance brokers will likely never discuss their retirement plan or needs with them again, despite charging them upfront commissions of 10% to 15%.
The majority of advisors—including fee-only, hybrid and commission-based professionals—not only believe that insurance brokers who sell annuities products should be held to fiduciary standard, but that the lack of such a requirement gives them an unfair advantage, according to a new survey from DPL Financial Partners, a Louisville, Ken.-based platform for commission-free annuities.
“It’s remarkable to find such a strong consensus among all types of advisors that a fiduciary standard is needed when it comes to insurance products,” DPL Founder and CEO David Lau said.
“The fact that hybrid RIAs and even broker-dealer reps, who receive compensation in the form of commissions, would welcome such a standard speaks volumes about the need for the Labor Department’s common-sense proposal.”
When asked whether they agree that “a fiduciary standard for insurance brokers providing retirement investment recommendations is needed,” advisors’ average response was an eight on a scale of one to 10, indicating high agreement among all types of advisors. Fee-only advisors felt the strongest the rule is needed (8.7), while hybrid RIAs and broker-dealer representatives rated their agreement slightly lower (6.8), DPL found.
When asked if they “believe it is an unfair advantage for insurance brokers to not have to comply with a fiduciary standard,” fee-only advisors registered the strongest level of agreement at 8.4, and again, 6.8 of hybrid and commission-based reps agreed.
All advisors also agreed that the National Association of Insurance Commissioners “best interest” standard “creates confusion about the role/obligation of the professional making an annuity recommendation,” the survey of 230 advisors found.
The DOL’s proposal, which was slated to go live in late September, was stayed by federal courts in response to lawsuits from the annuities, insurance and brokerage industries. While DOL has indicated it will appeal, the fate of the rule may depend on who wins the presidency.
While advisors surveyed agreed the rule is needed to close regulatory gaps, they’re far from certain it will survive. When asked, “What do you think the chances are of the Rule ultimately making it through the courts in substantially its current form?” the average response was 4.7 on a scale of 1 to 10.
Over 230 fee-only advisors, hybrid RIAs, and broker-dealer registered representatives participated in the DPL survey.
Lau said during a webcast to introduce the findings that a recent study by the American College of Financial Services gave older Americans a score of just 12% out of a possible 100% when it comes to understanding annuities.
While commission-based annuities sold by non-fiduciary salespeople have both high commissions and numerous fees layered fees layered in often pitting producers and their annuities companies against consumers, significantly less expensive no-commission annuities can incent fee-only advisors to use annuities and provide ongoing advice within their ongoing assets-under-management fee structure, Lau said.
Advisors who sell commission-based annuities are “PINOs or planners in name only,” Chuck Failla, founder and CEO, Sovereign Finance Group, said during the webcast. Failla said insurance brokers and agents provide prospects with elaborate financial plans, but they all lead to the same solution: pricey, commission-based, proprietary annuities and insurance products.
“I’ve heard the argument before, that if you make everyone a fiduciary, the insurance industry says agents won’t give advice to the client with $100,000 to invest. In my opinion that’s garbage,” said Failla.
“What will happen is they won’t be able to charge a $100,000 annuity client a $10,000 commission and never talk to that person again,” he said. “That would stop. And I think that’s a good thing.”
Micah Hauptman, direct of investor protection at the Consumer Federation of America, said during the webcast discussion, “It’s not about commissions. It’s about the differential compensation that rewards bad advice. … It’s not about bad people, it’s about compensation. That’s human nature, which is why we need strong protectins.
Hauptman said companies pay too many incentives and kickbacks on commission-based annuities sales, including the opportunity to win Ipods, international travel and significant bonuses, citing a report on annuities conflicts and fees from Sen. Elizabeth Warren.
