The annuity industry has always raised red flags, from tax-free exchange rules, to suitability, to whether index annuities are securities, to the new fiduciary rule, assuming it doesn’t get rolled back under the Trump administration.

At every turn, annuities are scrutinized. But there are no bad or good financial products, and it is how a financial professional uses them that matters.

Insurance companies have been feeling the brunt of the proposed rule.

At many insurance company meetings, executives have said that they are addressing the proposed rule and will come out with products that comply.

“Win, lose or draw, the lasting effect of the regulation will be its impact on adviser compensation,” said Paul Garofoli, vice president of marketing at National Western Life.

In particular, if the rule stands, we will start to see upfront commissions eliminated.

One could argue that a 10% upfront commission is the same as a 1% upfront commission with a 1% trail on a product with a 10-year surrender charge schedule. Insurance companies would likely prefer to pay 1% per year rather than 10% upfront because they get to put the extra 9% to work for their bottom line.

More broadly, the rule would push advisers toward a fee-based business model.

Tim Smith, chief executive of Comprehensive Asset Management and of Artisan Advisors, an RIA firm in Parsippany, N.J., said: “Our industry is experiencing a compression of fees and selling commissionable products is becoming more and more difficult. The trend is moving toward fee-based planning and removing commissions from the equation.”

Many studies show happier clients are more likely to give more and better referrals, so advisers have an additional incentive to act in a client’s best interest. This increase in quality leads will ultimately build the business.

In the end, if the rule stands, everything will be the same but different. The annuity industry isn’t going anywhere, and there is definitely a place for an annuity in many clients’ portfolios.

The sector would adapt its product offerings, and trail options would be the only options left standing.

Advisers would be forced to build a fee-based business. Not only would their clients be in a better position to reach their retirement goals, but advisers would be better positioned to reach their own retirement goals by adding a fee-based practice component.

This story is part of a 30-30 series on smart strategies for RIAs. It was originally published on July 28.

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