The Department of Labor’s fiduciary rule has been the talk of the annuity and financial industries for months now. With the requirement timeline approaching, the talk will likely be heating up even more through the rest of the year. LifeHealthPro’s Jane Wollman Rusoff wrote about a recent interview with “annuity guru” Moshe Milevsky regarding the impact of the DOL’s rule. In “Milevsky: Big flaw in DOL fiduciary rule; annuities take early hit,” Rusoff highlighted the interview that Milevsky did with ThinkAdvisor. Milevsky’s main concern is with the emphasis that the DOL put on annuity fees. He also wishes that financial economists had been consulted before the rule was finalized. Milevsky expects the annuity industry to take a hit over the next two years or so while confusion and lawsuits against the rule are sorted out. Although he is pessimistic about the near future when it comes to annuities, he does believe that the industry will sort itself out and climb out of the hole.
There has already been an impact on variable annuity sales in anticipation of the DOL fiduciary rule. Although fixed and fixed indexed annuity sales increased over the past year, that is partly because no one expected indexed annuity products to be subject to BICE guidelines when the rule was finalized. Milevsky forecasts a decline in indexed annuity sales once they have to meet this Best Interest Contract Exemption. Those working in the annuity industry are uncertain about the future and worry about working in a difficult and confusing environment over the next few years. Milevsky thinks that 2017 will be a tough year for the annuity industry with both the DOL fiduciary rule taking effect in April and the effects of the Presidential Election. He does believe that 2018 will be better than 2017 for the annuity industry and thinks it will continue to see improvements from there.
It’s hard to predict exactly what will happen in terms of product changes, but we may start to see variable annuities that are sold without commissions. A fee-only variable annuity will look very different than traditional variable annuities, but will eliminate the need for BICE contracts which are required if commissions are included. Milevsky worries that the rule’s goal of bringing more transparency and better annuity design will not actually be the outcome once the rule is in place. He thinks that the requirements will bring about longer prospectus’, more paperwork, and less client interest in reading documents they often perceive as boring. An economist’s take on the rule would take a transparent cost/benefit analysis to see which annuity products should be sold as a security versus insurance. This is something Milevsky believes would improve the current standing DOL rule.
One of Milevsky’s biggest complaints is the rule’s focus on fees as being bad. Fees are charged for a reason and they often get you the benefits that you desire. While variable annuity products list their fees up front, they are sometimes seen by consumers as too high. Indexed annuities don’t necessarily have fees, but Milevsky equates the loss of a dividend payout to a fee with an indexed annuity product. Taking away fees goes into the rule’s “reasonable compensation” guideline. It’s really difficult to determine and prove what reasonable compensation really is. The lawsuits against the DOL’s fiduciary rule argue that because an annuity is more complex than something like an index fund, advisors take more time to explain them and should be compensated for such. NAFA and other organizations with lawsuits against the DOL say that it’s confusing why some products like indexed annuities were included and others like deferred income annuities don’t have to follow the BICE guidelines.
The rule is basically saying that you are subject to extra regulations if you are selling products that are superior to income annuities, which unfortunately will turn some advisors to sell the lesser products and avoid the regulations. The rule makes everything more time consuming for advisors. They have to show proof of why any annuity is in the best interest of the consumer and this includes the general product (variable annuity) and the chosen carrier (insurance company). So the advisor must know about competing insurer’s products as well to say why they didn’t choose those. Many experts are saying this will actually hurt consumers as some advisors don’t want to deal with all of the extra headache or prices will actually start to rise.
Milevsky worries about the negative connotation that comes with the word annuity. He said that he chooses to call these products personal pensions, which is essentially the same thing. Annuities must be distinguished by their type and unique differences and the bad, high commission products of the past need to be forgotten. Annuities in general are more transparent and very valuable to consumers looking to create an income stream. When you buy an annuity, you are managing your future financial risk in retirement. Annuities are important today because we don’t have traditional pensions and have to create our own stream of guaranteed lifetime income. It’s is also important to use annuities as part of a financial portfolio; no one is saying to use all of your savings to buy an annuity product. If you set up an annuity before retirement and plan to turn on your income stream at some point in the future, you don’t have to worry about this income when you are older and may have some cognitive decline. It’s a no-brainer for those who need guaranteed income.
Annuity products will be around for the long term, despite some expected hiccups over the next few years. The DOL’s fiduciary rule is flawed according to many financial experts, but if it stays as is the industry will adapt and move forward from there. Milevsky mentioned that he owns annuities and plans to finance his retirement with annuity income and pensions. He chooses to avoid giving advice after that term has been questioned with the DOL rule and works to educate consumers on the longevity of their savings through his Portfolio Longevity Extension Corps. Milevsky doesn’t agree with the fee focus of the DOL fiduciary rule and thinks the annuity industry will have a tumultuous couple of years, but he sees the benefits of annuity products coming out on top after the dust settles.
Written by Rachel Summit