Now that the dust is settling on the recent DoL ruling, some advisors will have to start planning where their career will be heading next — especially those whose income relies heavily on commissioned variable insurance products.
In reading various government articles and talking with advisors in various fee models, it’s become apparent that an advisor earning a high single-figure commission from a variable annuity product should become a thing of the past. As variable annuities now fall under BIC exemption, the disclosure requirements have become stricter, as have the contracts and accompanying compensation structures. All income derived from these products sales will need to be made clear and transparent for the client.
That’s not to mean that the product will go away completely, but the sales and servicing of it will change. For those advisors who have a book of annuities already and can survive this change in direction, they will be able to sell new annuities on a fee-based arrangement, or an adjusted compensation structure.
It will mean giving up the initial bump in income to satisfy the reasonable fee statute, with this possibly looking like a long trail of income versus the initial commission. Having an advisor receive compensation for regularly reviewing a client and their products is a better fit anyway, so this should benefit both the client and advisor in the long term.
For younger advisors, or those looking to enter the industry, this is great news as it eliminates the kill what you eat mentality and will move to training them to be well-balanced advisors rather than salesmen. The allure of a large income from selling annuities to friends and family will become a thing of the past as the commission model changes, or even becomes a fee-based model. The impetus will become building relationships with clients, versus treating the interactions as transactions.
Variable annuities will still have their place in high-net-worth communities due to their tax-deferral strategies, but the mass affluent market may find fewer traditional product offerings at their disposal. This trend will allow lower-priced variable annuity products, like those offered by Vanguard and Jefferson National, to come to the forefront. This will allow those who still want these products to use them at a more reasonable cost.
One issue that concerns me is how the DoL ruling didn’t cover all retirement accounts, notably those that fall outside of ERISA governance. The 403(b) market, already laden with expensive variable annuity products and predatory practices from some agents, may become an overflow for agents not wanting to change their practices or product offerings.
As the 403(b) market is exempt from this ruling, many advisors will still be able to sell variable annuities with the high commissions and expenses to a segment of the population who rarely needs them. As a leader of a network of advisors who already work under a fiduciary standard with members of the teaching population, we’re already sharpening our tools to fend off any increase in activity from these select agents.
Dave Grant, a Financial Planning columnist, is founder of Finance for Teachers, a planning firm, and the Finance for Teachers Network, in Cary, Ill. He is also the founder of NAPFA Genesis, a networking group for young, fee-only planners. Follow him on Twitter at @davegrant82.
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