The upcoming Presidential election has the country divided politically, both in party and between Republicans and Democrats. There is a similar division in the financial industry over the Department of Labor’s impending fiduciary rule. In the Insurance News Net article “The Commission Conundrum: How Are UK Consumers Doing?“, Kim O’Brien looked at the current situation in the UK after a similar rule took effect back in 2013. O’Brien is currently the vice chairman and CEO of Americans for Annuity Protection, a position she held at NAFA for 12 years. She is a strong opponent of the DOL’s fiduciary rule. She said that while the UK had three good intentions in changing their policies, they experienced three negative, albeit unintentional, outcomes.
Here’s what the Department of Labor wants to implement. Fixed annuity sales will have to comply with the Impartial Conduct Standards and variable annuities and mutual funds will be subject to the Best Interest Contract. The DOL believes that selling annuity products with commissions attached is a conflict of interest. In 2010, the Fiduciary Rule that they introduced completely eliminated commissions. Their new rule allows commissions if they meet these three guidelines: they have to be reasonable, they must be paid by either the product provider or a legal affiliate, and the commission must be disclosed. Now the problem with this is that everyone has a different interpretation of the word “reasonable”. What is reasonable to one consumer, advisor or insurance company very well may not be reasonable to the other. This opens up the industry to a whole slew of legal issues and IRS interventions for products deemed “prohibited” for not meeting one of the three criteria. O’Brien foresees a time when up-front commission based annuity sales no longer exist, which is exactly what happened in the UK just a few years ago.
The UK’s Retail Distribution Review (RDR) banned commission-based sales and required the insurance sector to switch over to a fee-for-service compensation model. They had three main goals with this commission ban. They wanted financial clients to receive better investment management services, they wanted to improve advisors’ standards of professionalism, and they planned to make it clear how advisors would be paid for their services. O’Brien reviewed The Financial Advisor Market: In Numbers, a study done by the UK’s Association of Professional Financial Advisors to determine the results of this commission ban.
She says that consumers’ access to advisors actually went down. The number of overall advisors and the number of advisors in each firm dropped significantly. Also, non-advised sales accounted for 67% of all product sales compared to 40% before these changes. A non-advised sale doesn’t include any personal recommendation for a client based on their individual situation. Advised sales, where a customer is given a product recommendation to suit their needs, dropped significantly in favor of non-advised sales. The second result that O’Brien found was that the costs for advice actually increased. Discretionary managers, who take control of your money and make changes without asking you first, are being used much more than before the RDR took place. These managers allow financial advisors to make changes faster and in an easier manner, but cost more for everyone involved. Finally, the overall savings in the UK have actually declined since commissions were banned. UK savings peaked in 1997 when households were saving 13% of their discretionary income. That number went down to 6% in 2008 during the financial crisis, but rose back up to 11% by 2010. This savings hit a steep low of 4.7% during 2015, which O’Brien says is likely due to the RDR.
Kim O’Brien’s Americans for Annuity Protection is fighting Congress to remove the DOL Fiduciary Rule because they believe that the insurance industry and consumers alike will be negatively effected. There will be a lot of changes in the industry if annuities are subjected to the new Fiduciary Rule standards and many are worried that the effects will be negative and devastating.
Written by Rachel Summit
