Labor Department has indexed annuities in its crosshairs
With any Wild West situation, eventually an enforcer comes to town to instill law and order. To the annuity industry’s surprise, it’s the Department of Labor (DOL) who is the one wearing the indexed annuity sheriff’s badge, and riding the white horse of regulation.
Department of Labor to the rescue?
The recently proposed fiduciary rules introduced by the Department of Labor is rumored to also include the grouping of the too often overhyped indexed annuity product with more regulated variable annuities.
This would be a true game changer if this comes to fruition, and would most likely mean higher education standards for the agent to sell indexed annuities along with stricter oversight of advertisements and the overall sales message.
Industry self-inflicted wounds
The indexed annuity industry has no one to blame but themselves for this heightened scrutiny. For years, too many carriers and distributors have purposely ignored an unregulated agent sales message in order to not disrupt those almighty premium dollars coming in the door. It seems like their perceived strategy of “it’s not a problem until it eventually is” has finally caught up with them. It’s a shame because if indexed annuities were properly and factually branded, the DOL wouldn’t be sticking their regulatory nose into the product.
It’s not a duck, but certainly promoted like one
The ironic and actually sad part of the DOL getting involved in regulating indexed annuities like a security is the fact that structurally, the strategy is not a security. Indexed annuities are a form of fixed annuities with a call option on an index (typically the S&P 500) for very limited CD-type potential returns. Indexed annuities were designed in 1995 to compete with CD returns, not the stock market.
Unfortunately, that is not how it is typically promoted by most indexed annuity agents. “Market upside with no downside”, “hybrid market returns”, “never lose a penny and share in market growth,” and “market lock” are just some of the many
misleading sales pitches used to sell indexed annuities to the uninformed masses. The problem with all of these examples is the word “market,” and the reference to stock-market returns. That’s why the DOL is getting involved, in my opinion. I’m assuming that they are saying if the product is being promoted as a market strategy, then it needs to be regulated like one.
The golden revenue goose is in trouble
Sales of indexed annuities continue to grow, but a DOL ruling lumping the product in with variable annuities will severely hurt sales numbers in my opinion.
If more regulation happens, the number of selling agents will decrease dramatically because of higher qualification standards to sell the product. In addition, the anything goes and misleading advertisements will end and be strictly enforced like FINRA and SEC regulated variable annuities.
One unregulated ad at a time
Death by a thousand advertising cuts is the main reason the indexed annuity industry finds itself at the regulatory crossroads. The product is currently classified as a life-insurance product requiring only a life-insurance license to sell (yes … that’s true), and loosely regulated at the state level. In my opinion, that’s where the ball has been dropped.
Because the states are supposed to regulate the sales message, the large indexed annuity (one size fits all) promoters have focused all of their advertisements on a national level. Cable television, radio and the Internet are the unregulated platforms are used to pitch a too-good-to-be-true sales message to the uninformed masses. State oversight seems to be non-existent with these national ads, even though the misleading sales messages negatively affect their residents.
NRA without the guns
For everyone who assumes this increased regulation of indexed annuities is a done deal, then you are underestimating the undeniable power of the insurance lobby. If you think the National Rifle Association (NRA) is the most powerful lobbying force, think again.
The insurance lobby is not going down on this indexed-annuity issue without a serious fight. Keeping the status quo means that the money keeps flowing into the carriers. Always follow the money, right?
At the end of the day, the annuity consumer is the one that needs to be protected at all costs because people’s retirement decisions depend on a clear and transparent sales message. I’m not a fan of the DOL filling this regulatory role, and wish the annuity industry would have been more proactive. Unfortunately, it might be too late for that.
It will be interesting to see what eventually happens with the controversial indexed annuity strategy over the next few months. For the record, I’m betting on the all powerful insurance lobby to win one again for the old status quo.
Originally published 11.24.15 by MarketWatch.com – http://www.marketwatch.com/story/labor-department-has-indexed-annuities-in-its-crosshairs-2015-11-24