The annuity space has always raised red flags, from tax-free exchange rules, to suitability, to whether index annuities are securities, to the new fiduciary rule. At every turn, annuities are scrutinized. But as I see it, there are no bad financial products or good financial products – it is how a financial professional uses a product that matters.
Insurance companies are feeling the brunt of the new rule. I have attended many insurance company meetings and, at every one, executives have stated that they are addressing the rule and will come out with products that comply. Paul Garofoli, vice president of marketing at National Western Life said, “Win, lose or draw, the lasting effect of the regulation will be its impact on adviser compensation.”
In particular, we will start to see upfront commissions eliminated. You 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. I believe the insurance companies would 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 will push advisers toward a fee-based business model. Tim Smith, CEO 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 grow your business.
In the end, 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 will adapt its product offerings and trail options will be the only options left standing.
Advisers will be forced to build a fee-based business. Not only will their clients be in a better position to reach their retirement goals, but advisers will be better positioned to reach their own retirement goals by adding a fee-based practice component.