Does DOL Rule Justify Bringing Annuities In-House?

Financial advisors currently working with independent broker-dealers have the ability to sell annuities under a suitability standard that has been followed for years. That all changes in June (2017) thanks to a new Department of Labor (DOL) rule that will apply a fiduciary standard to annuity sales. The pending rule already has some independent broker-dealers thinking about bringing annuities in-house so as to more tightly control how they are sold. But is such a move justified?

The consensus seems to be that the DOL rule is designed to eliminate profit as the main driving force behind selling annuities. Attaching the fiduciary responsibility forces financial advisors to make sure a particular annuity is in the best interests of the client prior to recommending it. Such a high standard puts more responsibility on advisors and brokers alike.

Independent broker-dealers have long treated annuities as outside products with sales that do not have to be cleared through the brokerage. Financial advisors who sell annuities are compensated by field market organizations or the insurance companies behind the annuities themselves. Broker-dealers are understandably concerned that continuing such a practice raises at least a few questions of fiduciary responsibility.

Better Monitoring and Control

We have not heard a lot from broker-dealers to this point. However, the little information we do have points to a situation in which bringing annuities in-house would allow for better monitoring and control. Independent broker-dealers like Western International Securities could very well force advisors to clear annuities through them as a means of ensuring those advisors are meeting their fiduciary responsibilities.

As a bonus, the broker-dealers would earn a little more revenue themselves. Whether this would sit well with their advisors or not remains to be seen. We suspect that advisors who make a tremendous amount off annuities at this point would be none too happy with independent broker-dealers taking a cut of the commission simply for acting as a clearing house.

As a side note, the rule does not apply just to annuities. It applies to all tax-qualified retirement accounts – such as 401(k)s and IRAs. It is quite possible that independent broker-dealers who choose to bring annuities back in-house will also do the same with both qualified and non-qualified retirement products. As long as you are bringing one product into the fold, you might just as well bring them all in.

Creating a Potential Boondoggle

Putting the questions of broker-dealer compensation and monitoring to the side for just one minute, the new rule creates a potential boondoggle depending on how the DOL treats insurance in the future. Under current rules, annuities can be sold based on suitability standards because they are not technically considered investments. They are insurance products. The new rule changes that. Maybe not by a legal standard, but at least by a standard of perception.

If annuities can be treated as investments requiring fiduciary responsibility, what is to stop the government from deciding later that other forms of insurance have to be sold with that same fiduciary standard? Though it is unlikely, it is possible that one day we will see insurance brokers having to apply the fiduciary standard to everything from life insurance to the homeowner’s policy.

This is not to say that the new DOL rule is either good or bad. Rather, it is simply to raise the question of whether the rule is actually necessary. And if it is, is it necessary for broker-dealers to bring annuities in-house in order to monitor and control them? Financial advisors would probably tell you no. But then again, they do not make the rules.

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