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Changes to Indexed-Annuity Sales Ahead of DOL Rule

As the implementation date of the new Labor Department fiduciary rule approaches, several brokerage firms are changing how they handle indexed-annuity compensation. Currently, many broker-dealers do not require advisors to clear indexed annuity sales through the brokerage, like they do with mutual funds and variable annuities. Alternately, these sales are reported as “outside business activity,” according to a recent article from InvestmentNews, with advisors collecting commissions either directly from the insurance company or field marketing organization. But now, under the DOL fiduciary rule, brokerage firms will likely bring these sales under their roof to better monitor their brokers and control risk.

“In my opinion, with the DOL rule, especially as it was initially rolled out, you’re going to see a lot more firms bring that under house,” said Judson Forner, vice president of investment marketing at ValMark Securities Inc.

Both Sigma Financial Corp. and Parkland Securities, two broker-dealers, have planned to make such changes for indexed-annuity sales, in addition to those of fixed, single-premium-immediate and deferred-income annuities.

“Representatives will no longer receive commissions directly from the insurance carriers for these policies,” stated an internal company memo sent to InvestmentNews by the director of case planning for Sigma Financial and Parkland Securities, Tony Bacarella. “Rather, the broker-dealers will receive compensation, and then pay the representative through their grid.”

This change was scheduled to be effective April 1, but with the recently announced delay in the fiduciary rule’s implementation, now June 9, it is assumed that they may have been pushed back.

Because indexed-annuity sales are regulated as insurance products, unlike variable annuities, broker-dealers have been able to treat them as outside business activities. However, broker-dealers do have to approve and monitor their advisors’ outside business activities. Still, some first have started treating indexed annuities as securities, requiring sales to be submitted through the broker-dealer in response to warnings from the Financial Industry Regulatory Authority Inc., which regulates brokerage firms. They have suggested that because indexed annuities are complex, they may require heightened supervision.

“There are still a lot of broker-dealers out there who say they’re not responsible for fixed insurance product sales,” stated president and CEO of Moore Market Intelligence, Sheryl Moore. “It causes a lot more headaches for brokerage firms to do otherwise from a due diligence and monitoring standpoint,” she added.

But as the DOL rule is written, it will be difficult for business to continue as usual. The DOL as included indexed annuities in the best-interest contract exemption, a provision of the rule allowing advisors to receive commissions for selling indexed annuities if certain conditions are met. One of these conditions is the execution of a contract between a “financial institution” and the investor, stating that a product is in the customer’s best interest, among other things. Most insurance companies are reluctant to take on the associated risk, including the possibility of class-action lawsuits.

Some industry experts believe that many broker-dealers have been putting their plans to change the process on hold, mainly due to the recent rule delay. While indexed annuity sales will have a fiduciary duty attached beginning in June, the delay gives firms until the start of 2018 to begin selling them under a BICE, which means the current sales method is permissible. Some are hopeful that the rule will be amended between now and January, easing up on the treatment of indexed annuities.

“Given the delay in the DOL rule, lots of people aren’t doing anything. They’re saying maybe we’ll get fixed-indexed annuities removed [from the BICE],” said Joan Boros, counsel at law firm Stradley Ronon Stevens & Young.

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