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Insurance Industry Battles Back Against Fiduciary Standard

The three leading insurance and agent associations are working in tandem to support a state “standard of care” proposal for agents that rejects fiduciary responsibility for agents and advisors. At stake, they say: Cyber Insurance 580x387middle-class investors.

By avoiding a fiduciary standard, more insurance companies and agents will be able to continue to offer “small and moderate balance savers and typical buy-and-hold investors who rely on commission-based advice for their retirement needs,” the American Council of Life Insurers, the Association of Advanced Life Underwriting and the National Association of Insurance and Financial Advisors said in a joint statement supporting the National Association of Insurance Commissioners’ (NAIC)’s “Suitability in Annuity Transactions Model Regulation.”

The NAIC’s draft model—years in the making and still a proposal—would require an agent to act with reasonable diligence, care, skill and prudence on behalf of clients and to disclose conflicts of interest as well as cash and non-cash compensation. The proposal relies heavily on a consumers’ ability to decipher myriad legal disclosures.

“We support rules requiring all financial professionals, when making a recommendation, to act in the consumer’s best interest—with care, skill, prudence, and diligence—based on the consumer’s financial needs and objectives. Financial professionals also support requirements to avoid or reasonably manage conflicts of interest through increased transparency,” the three insurance associations said in their joint statement.

Industry groups have much at stake when it comes to controlling variable annuities regulation. Total annuity sales hit $59.5 billion for the second quarter of 2018, after the insurance and securities lobbies successfully overturned the Department of Labor’s fiduciary rule in court, according to the Limra Secure Retirement Institute. Sales had not been as high since early 2015, just before the DOL rule was being put in place.

“Experience with the Department of Labor’s now appropriately vacated investment advice fiduciary regulation showed that when faced with a fiduciary standard, many financial firms moved to a fee-for-service-only model, eliminating choice and access for small and moderate balance savers and typical buy-and-hold investors who rely on commission-based advice for their retirement needs,” the groups said in their joint statement.

“As a product that is designed as a long-term retirement solution, most annuities are sold on a commission basis. According to a LIMRA survey, if the Labor Department’s fiduciary regulation had remained in-force, 54 percent of advisors might have dropped or turned away small investors, resulting in as many as four million middle-class households losing access to information they need to ensure a secure retirement,” the group continued.

According to the latest available data, the median annual household income of annuity owners is $64,000. Eighty percent have total annual incomes below $100,000 and 35 percent have household incomes less than $50,000.

Will the NAIC’s proposed model be eclipsed by initiatives in states such as Maryland, which has introduced legislation that would apply a fiduciary standard to all agents and brokers? If successful, such a state standard could force VA issuers and agents to eliminate commissions altogether and sell only no-load variable annuities or at least more standardized, low-load products.

Even without the NAIC model—which would need to be approved by all 50 state legislatures—the domino effect of individual state fiduciary bills, as well as Securities and Exchange Commission and Finra initiatives, are sure to add a sober note to insurer and agent practices nationwide.

Federal regulators are using enforcement, tougher proposals and investor alerts to crack down on high-commission variable annuity sales, including “replacement” sales that generate high commissions and replacement penalty fees.

The insurance industry is battling back. In a self-published op-ed published on, ACLI President and CEO Susan K. Neely came out swinging against the Maryland fiduciary standard for brokers and agents.

“The problem comes with the fact that the bill in Maryland would make every financial professional who sells an annuity a 'fiduciary' of the customer. This would end commission-based sales because fiduciaries are generally not allowed to represent both the buyer and seller in the same transaction,” Neely said.

"If financial firms are forced to move to a model where the only way a consumer can get financial advice is if that consumer pays a fee to a financial professional year after year out of their own pocket, then lower- and middle-income consumers—everyday Americans—are far less likely to be able to consider all their options for their own retirement needs. It’s also unfair to consumers who don’t want a fee-based arrangement where the annual charges can become costly over time,” she added.


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