For at least the past three decades, the financial services industry has been steadily, even aggressively, moving toward low-cost products with transparent pricing and no sales loads. During that time, financial advisors have migrated en masse from largely commission-based compensation to fee-based or fee-only compensation.
The transition from commissions to fees changes a financial professional from being a salesperson for a product manufacturer to a financial advisor being paid for advice. All of these things are nearly universally regarded as a very positive evolution for individual investors.
Puzzlingly, though, one part of the financial services industry hasn't evolved with the rest — insurance. The annuity industry remains steadfast in its opposition to fiduciary standards when it comes to the use of its products, instead establishing "best interest" standards that are a far cry from "fiduciary" despite the naming.
In fact, the recent release of the Department of Labor proposal to implement a fiduciary standard has served almost as a call to arms for insurance industry trade groups.
What would it mean for the industry to embrace — instead of reflexively fighting — a fiduciary standard?
It would mean creating more products without commissions that could be used by fiduciary advisors like RIAs. It also would mean that carriers' own advisors could offer and be paid for fiduciary advice on a fee basis, rather than by commission.
Change can be worrisome. However, defending the status quo of relying heavily on commissioned sales is generally not serving insurance carriers well and will limit broader adoption of annuities by people who need the benefits they provide.
Among the reasons:
- Every sale and exchange requires rigorous compliance scrutiny to prevent bad actions by salespeople due to obvious conflicts of interest;
- Products are often built around illustrations that will help drive sales but not necessarily improve performance, causing dissatisfaction with purchases;
- Expensive pricing is required to recoup commissions, limiting sales;
- Purchasers often don't use the benefits they pay for because the commissioned salesperson is long gone, leaving the purchaser without guidance on how to trigger certain benefits; and
- Lock-up periods are required to recoup commissions, deterring purchases.
The irony is that by embracing changes that put clients first rather than protecting commission-based distribution, industry growth could be exponential.
