For at least the past three decades, the financial services industry has been steadily, even aggressively, moving toward low-cost products with transparent pricing and no sales loads. During that time, financial advisors have migrated en masse from largely commission-based compensation to fee-based or fee-only compensation.
The transition from commissions to fees changes a financial professional from being a salesperson for a product manufacturer to a financial advisor being paid for advice. All of these things are nearly universally regarded as a very positive evolution for individual investors.
Puzzlingly, though, one part of the financial services industry hasn’t evolved with the rest — insurance. The annuity industry remains steadfast in its opposition to fiduciary standards when it comes to the use of its products, instead establishing “best interest” standards that are a far cry from “fiduciary” despite the naming.
In fact, the recent release of the Department of Labor proposal to implement a fiduciary standard has served almost as a call to arms for insurance industry trade groups.
What would it mean for the industry to embrace — instead of reflexively fighting — a fiduciary standard?
It would mean creating more products without commissions that could be used by fiduciary advisors like RIAs. It also would mean that carriers’ own advisors could offer and be paid for fiduciary advice on a fee basis, rather than by commission.
Change can be worrisome. However, defending the status quo of relying heavily on commissioned sales is generally not serving insurance carriers well and will limit broader adoption of annuities by people who need the benefits they provide.
Among the reasons:
- Every sale and exchange requires rigorous compliance scrutiny to prevent bad actions by salespeople due to obvious conflicts of interest;
- Products are often built around illustrations that will help drive sales but not necessarily improve performance, causing dissatisfaction with purchases;
- Expensive pricing is required to recoup commissions, limiting sales;
- Purchasers often don’t use the benefits they pay for because the commissioned salesperson is long gone, leaving the purchaser without guidance on how to trigger certain benefits; and
- Lock-up periods are required to recoup commissions, deterring purchases.
The irony is that by embracing changes that put clients first rather than protecting commission-based distribution, industry growth could be exponential.
Eliminating the systemic problems caused by commissions will open the doors to vast new pools of assets managed by fiduciary advisors who can leverage the structural benefits of annuities (risk pooling and tax deferral) at a time when record numbers of retirees need these benefits.
Sales will be driven by new money into the industry rather than the exchanges between annuity products that drive sales now.
Fiduciary approaches to products and processes will position the industry to push for policies that would give fiduciary advisors discretion to allocate client assets to annuities rather than having to go through rigorous suitability reviews necessitated by commissioned sales incentives.
Simplifying the account-opening process will do wonders for attracting new users.
I’m not suggesting that there aren’t people who simply need one-time advice in purchasing an annuity, but because commissions are so high, and drive up product costs so much, commissioned products may make sense only in the narrowest of cases.
It’s widely misunderstood that purchasers of commissioned annuities don’t pay a one-time, upfront commission; they pay through elevated product costs for the lifetime of the product.
In a world where costs are being driven out of most financial services products, it’s time for the insurance industry to do the same. Commissions make annuities controversial and contribute to broad negative perceptions, which is a shame because they are valuable products.
Annuity purchasers should have the comfort of knowing they are working with a fiduciary for this important product need rather than dreading, or avoiding, having to work with a salesperson.