The insurance lobby is against the imposition of the fiduciary standard by the DOL, as it will lower the excessive commissions often paid on the sale of Fixed Index Annuities (and other annuities) – and lead to less sales for the insurance companies. In essence, it will upend the distribution channel, as you transform annuities from being sold on a commission basis, to being purchased with the aid of fiduciary advisors who charge far less for the better advice that will be provided and who truly act as the representative of the client (purchaser), not as a product salesperson.
Already an increasing amount of annuity and life insurance products are available on a no-commission basis, directly from insurers in some instances, and otherwise via firms such as DPL Financial (which works with fiduciary advisors, as well as directly with consumers, to provide lower-cost, higher-return insurance and annuity solutions).
In essence, the DOL’s rule proposals will reduce insurance company profits, and reduce the amount of annuity sales (and the high commissions often associated with same). Rather than insurance companies competing – via sales contests, incentive compensation, and higher commissions – to sell their wares, the end result of the DOL proposal, after its adoption as a final rule, would be a shift toward annuity and insurance products being subjected to a much higher degree of scrutiny – and comparative analyses – by fiduciary advisors.
As has already happened in the mutual fund and ETF space, once a greater proportion of financial advisors act as purchaser’s representatives, not as product distributors, the cost of such products will fall. This has been seen in the dramatic fall of mutual fund and ETF fees over the past decade. In essence, disintermediation results.
Consumers will benefit from the DOL rule, as a result. This is the economic reality the insurance companies – and insurance agents – are fighting against.
And the DOL Rule, while initially only applicable to ERISA-covered accounts and IRA rollovers – will cause a shift to occur in which the adoption of fiduciary duties continues to accelerate. Once fiduciary duties are more broadly applied to all ERISA-governed and IRA accounts, it is easier for a firm, or individual, to accept the reality that all accounts should be managed pursuant to a fiduciary-client relationship. This is especially true given the ongoing duty that dual registrants face in providing recommendations as to the better form of account for the consumer.
The end result will be that individual Americans receive better investment and insurance advice, and better long-term investment returns. They will be much better off in retirement. And older Americans will require less support from federal, state and local governments as a result. Moreover, as greater capital accumulation occurs (due to lower fees and costs being extracted via expensive products), there exists greater fuel for the U.S. economy as a whole.
While the economic reality that the DOL rule will foster is favorable for the vast majority of our fellow American citizens, and for America’s economic growth and prosperity, the insurance industry lobby will continue to fight against the DOL rule with all of its might. Yet, I find many of the insurance lobby’s arguments disingenuous. Please permit me to explain.
FALSE CLAIM #1: “ROBUST” PROTECTIONS ALREADY EXIST TO PROTECT RETIREMENT SAVERS
The Insured Retirement Institute in its comment letter states that there already exist “robust best interest standards that protect retirement savers.” (IRI Cmt. Letter, 1/2/2024, p.11.) If this were true, however, then the imposition of the fiduciary standard by the DOL would not be much of a burden on the insurance industry. Stated differently, the IRI’s position – that the high fiduciary standard is unworkable – just proves the DOL’s posture – that current insurance market conduct regulation by state insurance commissioners does not consist of “robust standards” at all, and that retirement savers need greater protections.
The fact of the matter is, the insurance industry’s redefinition of the term “best interest” (which for centuries in over 9,000 U.S. court decisions was a means of describing the fiduciary duty of loyalty) as a far lesser standard – and not even close to a fiduciary standard – has increased (not decreased) the need for DOL rule making. The NAIC’s Model Rule, now adopted by most of the states, is deeply flawed in many respects. For example, under the NAIC’s model “best interest” rule, the receipt of compensation is deemed not to be a conflict of interest. This is patently absurd. The CFP Board did a nice comparison of its own fiduciary standard to the NAIC Model Rule, and identified several other material concerns.
In my view, the biggest problem with the NAIC Suitability in Annuity Transactions Model Regulation (#275) (and Regulation Best Interest, applicable to broker-dealers and their registered representatives) is that insurance and securities salespeople, permits product salespeople to hold themselves out as “acting in the best interests” of the consumer. Consumers are being misled. This is why I remain opposed to both Reg BI and the NAIC model regulation. In essence, both the SEC and the NAIC have empowered a massive and intentional misrepresentation of the nature of the relationship by brokers and by insurance agents to their customers.
Neither Reg BI nor the NAIC model rule come close to imposing a bona fide fiduciary duty of loyalty – which consumers rightfully expect when told someone is acting in their “best interests.” In essence, in my view, both the SEC and the NAIC have committed huge frauds upon consumers, through the misappropriation and misuse of the term “best interests” to describe the limited obligations imposed by Reg BI and the NAIC.
“The relationship between a customer and the financial practitioner should govern the nature of their mutual ethical obligations. Where the fundamental nature of the relationship is one in which customer depends on the practitioner to craft solutions for the customer’s financial problems, the ethical standard should be a fiduciary one that the advice is in the best interest of the customer. To do otherwise – to give biased advice with the aura of advice in the customer’s best interest – is fraud.” – James J. Angel, Ph.D., CFA and Douglas McCabe Ph.D., Ethical Standards for Stockbrokers: Fiduciary or Suitability? (Sept. 30, 2010).
Given the increased consumer confusion resulting from the SEC’s Reg BI, and the NAIC’s model regulation, there exists a further compelling need for the DOL to move forward to strengthen the protection for retirement savers. Even though the DOL can’t counter all of the transgressions by the SEC and the NAIC, the DOL’s rule can at least protect retirement savers
FALSE CLAIMS #2 AND #3: THE DOL RULE WOULD “STIFLE PRODUCT INNOVATION AND PRICE COMPETITION.”
The IRI further states that “The Proposal would stifle product innovation and price competition …” (IRI cmt. ltr., p.13). In reality, the opposite occurs.
Already product innovation is occurring. New annuity and life insurance products are being manufactured without costly commissions. Some are purchased directly by consumers. Many others are purchased following expert scrutiny by knowledgeable financial advisors.
In essence, the DOL’s proposed rule will substantially result in product innovation. Fiduciary advisors will carefully scrutinize the risks, fees, costs, and other attributes of annuity and other products, and the financial strength of the insurance companies issuing them. (For immediate annuities, other fixed annuities, and fixed index annuities, the financial strength of the insurance company is a very significant factor in the selection of the best product for the consumer. While state guarantee programs exist, they possess dollar limits. The resiliency of such state guarantee programs (nearly all unfunded until claims occur) is suspect, should another Great Depression-like event or other occurrence take place that leads to massive insurance company defaults. Experience has shown (as with AIG and other companies) that state oversight of insurance companies’ financial stability is insufficient, given the risks that are inherent in the complex financial world that exists today; regulators often fall behind new developments (and new risks) that appear in the finance world.
Price competition would greatly increase under the DOL’s proposed rule. Once you apply fiduciary standards of conduct, in a bona fide manner, you have trained experts stepping into the shoes of the their clients – the consumer. But these fiduciaries truly act as their client would act, only armed with the depth of knowledge about complex annuity and insurance products that consumers cannot hope to master.
FALSE CLAIM #4: CONSUMERS SHOULD BE “FREE” TO CHOOSE
The IRI further states (p.13 of their cmt. letter): “Retirement savers should be free from regulatory interference when selecting a financial professional.”
Yet, regulation exists to protect consumers from harm. And the DOL Rule does this, as well. As was well-stated by Alexander Hamilton or James Madison nearly 250 years ago, in Federalist Papers #51: “If men were angels, no government would be necessary.”
The imposition of fiduciary standards, at its core, acts to negate greed. In situations in which consumers, in this increasingly complex society, cannot protect herself or himself or theirselves, and are ill-prepared to acquire the knowledge and experience needed to protect themselves, and where the public interest is strong (here, the need of citizens to possess secure retirements), the fiduciary standard is applied. The need for protections is very evident in the insurance marketplace of today, where highly complex annuity products exist with strange terminology that often varies from one insurance company to another within complex riders and policy/contract provisions.
No longer is an annuity a relatively straightforward product for lifetime income protection. There are many different forms of annuities today – immediate and deferred, fixed and variable, fixed index annuities, and registered index-linked annuities. Many of these products possess complex and costly riders, and are marketed with various “guarantees” that have numerous restrictions and costs that make such guarantees often illusory in nature. In essence, the complex products the insurance industry has developed over the past several years (and decades) has increased the need for fiduciary protections.
The asymmetry of knowledge and information between the insurance producer and the consumer is vast, and it cannot be overcome by financial literacy efforts.
In fact, the decision to annuitize part of one’s nest egg is one of the most complex financial planning decisions that exists today. Considerations in the annuitization decision involve:
- health and genetics – essentially the need to estimate longevity of the retiree (and spouse);
- the presence of debt;
- both present and future anticipated cash flow needs;
- the interplay with the participant’s (and spouse’s) strategy to maximize the utility of Social Security retirement benefits and/or pension benefits;
- the desire or need of the retiree (or couple) to provide support to other family members (including by means of inheritance);
- the presence of other assets or resources;
- the risk tolerance and capacity of the client, and the need to take on risk;
- the current interest rate environment;
- whether inflation adjustments occur over time with annuitization and the nature (size, or method of computation) of any such inflation adjustments;
- the current expected returns of various asset classes given valuation levels in the capital markets;
- what portion of the nest egg to annuitize;
- whether to annuitize in stages (some one year, some during a later year);
- whether to consider, for any portion of the sums to be annuitized, a deferred income annuity (DIA) (or whether, in contrast, to choose a term-certain annuity for a period of years (such as 20), followed by increased withdrawals from an investment portfolio, which in a fashion minimizes some forms of risks; and
- Other considerations, not listed above, some of which may be unique to a client’s situation.
In other words, deciding whether to annuitize is a complex FINANCIAL PLANNING decision. The decision deserves the attention of a trusted, expert investment and financial adviser – i.e., a fiduciary. And such fiduciary protections empower the consumer. As stated in the CFP Board’s Jan. 2, 2024 comment letter: “The asymmetry of information and knowledge increases a financial professional’s opportunity to maximize their own compensation at the expense of the retirement investor.”
Hence, it is necessary to restrict the “freedoms” of those who would take advantage of the retirement investor today. The consumer should be free to choose advisors – but only among those advisors who will provide the trusted and expert advice necessary to provide guidance on these complex investment and annuitization decisions. Consumers should be served, as a matter of public policy, not from persons trained who are “free” to sell costly products to unsuspecting consumers. Rather, consumers should be “free” to place their trust and confidence in their financial advisor.
FALSE CLAIM #5. NO RELATIONSHIP OF TRUST AND CONFIDENCE EXISTS WITH PRODUCT SALESPEOPLE, TO WHICH FIDUCIARY DUTIES SHOULD ATTACH.
The insurance industry previously argued before the 5th Circuit Court of Appeals that the fiduciary standard should only apply when a relationship of trust and confidence exists. The 5th Circuit found that the 2016 Fiduciary Rule was inconsistent with the “touchstone of common law fiduciary status—the parties’ underlying relationship of trust and confidence” that is incorporated into ERISA’s text.
Now the insurance industry appears to not like this test … whether a relationship of trust and confidence exists. The insurance lobby argues that the relationship of trust and confidence is “extremely rare in the context of sales activity ….” (IRI cmt. letter, p. 27.)
But, to the contrary, it is not “extremely rare.” There are many cases that apply the fiduciary standard to broker-dealers and their registered representatives, and to insurance sales activities as well. See, e.g., my discussion of a few of these cases in my own comment letter to the DOL and my associated testimony.
Moreover, many insurance agents today use titles, such as “estate planner,” “financial consultant,” “retirement plan consultant,” and the like, that in essence announce an acceptance of the fiduciary relationship, as also discussed in my comment letter. Titles such as these represent to the consumer that the placement of the consumer’s reliance in the individual, and firm, is justified.
It should also be noted that on June 30, 2023, in the U.S. District Court for the Northern District of Texas, in the case of FEDERATION OF AMERICANS FOR CONSUMER CHOICE, INC. v. U.S. DEPARTMENT OF LABOR, the judge issued a decision on the validity of PTE 2020-02, stating in pertinent part:
- “[T]he New Interpretation is directly within the core competencies of the DOL. Since ERISA’s enactment, the DOL has been expressly granted the authority to issue PTEs for Title I plans; and, in 1984, the President and Congress granted the DOL the ability to issue PTEs for Title II plan ….”
- “Utilizing facts and circumstances to determine fiduciary status is not a novel concept. Courts routinely review the underlying record to determine whether a fiduciary relationship is established, regardless of whether one party attempts to contract out their fiduciary status.”
- “ERISA expressly authorizes the DOL to impose fiduciary duties on those who provide recommendations concerning Title I assets, if that investment advice is given ‘for a fee or other compensation.’ While a regular, ongoing relationship may be indicative of one based in confidence and trust, the length of the relationship itself is not dispositive of whether the recommendation is investment advice … First-time advice may be sufficient to confer fiduciary status and is consistent with ERISA ….”
- “The 1975 regulation expressly stated that fees for advice ‘may include, for example, brokerage commissions, mutual fund sales commissions, and insurance sales commissions’—if investment advice is rendered. 40 Fed. Reg. at 50842; see 29 C.F.R. § 2510.3–21. This reasoning aligns with the full text of ERISA, which holds that a party is a fiduciary if it ;renders investment advice for a fee or other compensation, direct or indirect.’ ERISA § 3(21)(A)(ii), 29 U.S.C. § 1002(21)(A)(ii) (emphasis added). The expansive choice of investment advice ‘for other compensation’ indicates an intent to cover any transaction where the financial professional may receive conflicted income if they are acting as a trusted adviser.”
- “[P]ublic policy demands that when a financial professional acts in a relationship of trust and confidence with retirement investors, the financial professional is a fiduciary.”
While the District Court’s decision was a mixed bag for the parties involved, the DOL has taken the lessons learned from that decision in crafting the proposed rule promulgated thereafter, for which the comment period has recently expired. In the interim, the language of this decision, indicative that fiduciary duties are, in fact, applied to sales relationships, as has been done for nearly five decades, where investment advice is rendered. Even in instances where the compensation is in the form of a commission.
MORE FALSE CLAIMS
I could continue on, to analyze other insurance lobby arguments and to refute many more of them, but I will choose to stop here – at least for now.
THE TRANSFORMATION OF FINANCIAL SERVICES CONTINUES. ARE YOU JUST RESISTING … OR ARE YOU ADAPTING?
Fear. It currently exists in every insurance company that markets annuities to retirement savers, as the DOL proposed rule is considered. It exists in most insurance agents that sell these complex products to individual retirement investors. Change is taking place. The business models of the past increasingly don’t fit into the evolving landscape of fiduciary advice.
Yet, this change is taking place not strictly because of the greater importance of the application of the fiduciary standard to protect retirement savers and the need to foster greater retirement savings, less reliance on government, and U.S. economic growth.
Rather, the change is also taking place because the insurance industry has itself changed. Its annuity products are far more numerous and complex, increasingly requiring a vast amount of expertise in order to make an informed decision.
The insurance companies, over the past several decades, also transformed their salespersons through “relationship-based” sales training. This further evolved into “trust-based selling.” Did anyone remember that “relationship-based” and “trust-based” selling leads to relationships of trust and confidence, upon which fiduciary duties are rightfully imposed?
Moreover, the marketing of annuities and other insurance products has changed. Many insurance companies, or their offices, no longer use the word “insurance” in their names, but have instead turned to using company or firm names which involve “financial” or “wealth management” or “retirement consultant.” Many insurance agents I have met try to avoid using the term “insurance agent” to describe themselves, preferring to use titles and marketing materials that evoke the existence of a relationship of trust and confidence. Some have admitted to me, verbally, the misrepresentations of their ro
The DOL’s proposed rule, once finalized, will (no doubt) again be subject to numerous court challenges. But, given the history of the litigation to date, and the modifications undertaken by the DOL, I suspect that – this time – the DOL’s final rule has a good shot at surviving intact. Especially if an appeal can eventually occur to the U.S. Supreme Court – which has shown a bent toward apply fiduciary standards, and keeping them strong.
The insurance industry will continue to fight hard. The insurance lobby is one of the most powerful on Capitol Hill, and in the halls of the many state legislatures. In fact, for publishing this blog post, I fully expect (as they have before) that they will embrace the tactic of “attacking the messenger.” Bring it on.
But my message to those firms and individuals who sell annuities, or engage in the sale of any investment or insurance products for product-derived compensation – remains. There is no need for product-based compensation anymore. Every single commission could easily be replaced with a (transparent) flat or fixed fee paid directly by a client. Every annuity trail or 12b-1 fee could be replaced by AUM fees, paid directly by the client. It is altogether possible to minimize conflicts of interest in financial services.
The world has moved on in the past two decades. The majority of investment-related compensation is now fee-based, according to several studies. The transition away from product sales commissions, and toward compensation paid directly by the client, will continue.
Most advisors would prefer to be “on the same side of the table” as the client.
Most new entrants into financial services don’t desire to cold call (or “warm call” as some insurance companies tout). Nor do those graduating from universities (or undertaking internships) desire to subject their 50 or 100 closest friends and acquaintances to sales pitches disguised as financial plans.
Advisors desire to work in professional firms, in which the focus is on holistic advice truly provided with the client’s interests remaining paramount at all times.
And, most importantly, Americans absolutely desire not to be served by insurance salespeople, but rather to receive guidance from expert advisors in whom the consumers can place their faith, trust and confidence.
For those insurance companies, and their producers, who continue to resist this change, I urge them all to read that classic short text, “Who Moved My Cheese?” You can continue to spend your time fighting against this inevitable change, losing market share with each passing year to those who provide financial planning, investment and insurance advice in a fiduciary capacity. Or you can choose to evolve, and in so doing reaping the benefits of greater customer retention, greater firm growth, and the recurrent revenues that are in turn rewarded with higher firm net worth valuations.
Regardless of the various rules that have now been proposed, or will be proposed in the future, and regardless of the numerous court cases and other clashes in the fiduciary battlegrounds of the future, the marketplace has spoken, and continues to speak. Ignore the marketplace – and its transformation toward the fiduciary business model – at your peril.
Ron A. Rhoades, JD, CFP(r) serves as Director of the Personal Financial Planning Program, and Associate Professor – Finance, within the Gordon Ford College of Business at Western Kentucky University, Bowling Green, KY. He is also an investment adviser representative with Scholar Financial, LLC, a fee-only investment advisory firm. This submission represents the individual views of Ron, and such views are not necessarily those of any institution, organization, firm, gang, motley crew, or cult to whom Ron now belongs or has ever been kicked out from.