The biggest problem with 2017 is that people have been too darn happy.
That is what Erin Botsford sees as she surveys the year. Her observation might strike some as odd because Americans seem to be anything but sedate and satisfied these days.
Botsford is a financial advisor for mostly high-end clients in her 20-person practice, Botsford Financial Group, based in Dallas and Atlanta. Her problem is recruiting more clients because everybody is doing well in the stock market.
“Getting them to change from whatever they’re doing to come with me has been a challenge,” said Botsford, whose firm has more than $700 million under management. “Mostly because everybody’s sort of fat, dumb and happy at this point.”
Such is the environment at the end of 2017. Amid the noise and angry division between Americans, things aren’t too bad for insurance and financial advisors.
The (rational?) exuberance of the stock market is lifting all boats in investment. But in the world of annuities, the bigger impact might have been the election of President Donald J. Trump and the loosening of what many felt was the noose of the Department of Labor’s fiduciary rule.
Before the election last year, agents and insurance distributors were facing a lockout from selling annuities with money from individual retirement accounts. The rule required the signature of a financial institution for a fixed indexed or variable annuity sale with IRA money. Insurance agents and distributors, such as independent marketing organizations, were not considered financial institutions.
But that rule turned out to radiate far beyond IRA rollovers. An agent talking to a client with an IRA could be considered offering advice on the retirement funds, even if the IRA money was not disturbed.
Lawyers also sounded alarm bells over agents and advisors applying two standards in selling annuities, even potentially with the same client. That perception of offering less protection could be subject to a plaintiff attorney’s withering questions in front of a jury.
The required documentation also rankled many in the industry. But perhaps the most galling for many was the sense that insurance agents and financial brokers were just not to be trusted.
Botsford, as a registered investment advisor, would not have been affected by the DOL rule but bristled at what she called the department’s overreach.
So, she was happy to see Trump’s election along with his push for deregulation, particularly against the fiduciary rule.
Trump ordered the DOL to reassess the rule under different metrics, with an eye toward changing the regulation if it did not meet the new standards. To do this, freshly confirmed DOL secretary Alexander Acosta pushed most of the rule’s implementation to July 2019.
Not all of Botsford’s fellow advisors rejoiced at the news. Many fee-only advisors supported the Obama administration’s regulation, although Botsford said the rule was a blunt instrument for the specific aim of ensuring that advisors acted in clients’ best interests. She said the goal was laudable but the rule was not.
Insurance and financial company executives breathed a sigh of relief when they reported third-quarter earnings that largely exceeded expectations. It was the first full quarter since the delay was announced and since the June implementation of a small part of the rule.
“I think this pause plus the distance from June 9 is beginning to ease the impact of the DOL from a sales standpoint,” said Dennis R. Glass, CEO of Lincoln Financial, during a quarterly conference call.
Glass and other executives said distributors such as IMOs were able to look away from the impending rule and back toward selling. In the first two quarters, things in the annuity world were not looking so rosy.
Early in the year, it was looking like total annuity sales might have their first down year since 2012. In the first half, fixed annuities dropped 11 percent year over year and variable annuities lost 8 percent, for an overall decrease of 10 percent, according to LIMRA.
Although analysts were pleasantly surprised by the third quarter’s earnings, the effect on the industry as a whole was not yet known at press time.
But LIMRA was encouraged enough to revise its initially dour forecast for 2018. The association was projecting a 5 percent drop in annuity sales next year, but reversed that after the rule delay. LIMRA is now predicting a 5 percent increase.
In contrast, life insurance did fairly well in 2017’s first half. Annualized premium and face amounts were up 4 percent year over year, although the number of policies dropped 3 percent. That dichotomy between the up premium and down policy count is a continuation of the industry’s trend of selling up-market — bigger cases for fewer people.
Part of the life insurance uptick had to do with a migration of business to indexed universal life from fixed indexed annuities, which faced significant pressure under the DOL rule.
Companies also indicated that they won’t be pulling away from commission-based products to the extent that they had planned. But many said they will continue developing fee-based annuities that were designed in response to the DOL’s rule, particularly the regulation’s best interest contract exemption requirements.
Botsford said that was a good outcome of the rule. Her practice has about $350 million in variable annuities on the books, but it is mostly “legacy.” She is looking more toward newer, simplified fixed indexed annuities these days because they have fewer fees than VAs.
Another advisor, Clifford Ryan of South Portland, Maine, also doesn’t like the DOL rule, but does appreciate its impact on products. He is a registered investment advisor focusing on retirement-age clients in his practice, Elder Planning Advisors of Maine, with $51 million under management.
Annuities are attractive for their guaranteed income for life, Ryan said, but the fees and restrictions are usually not so pretty. He became interested in VAs when some were shorn of commissions and other restrictions starting in 2008.
“The clients and public are looking for that kind of stuff,” Ryan said. “There are several VAs that can be transacted and managed by investment advisors where they really stripped away all the commissions. No surrenders, no penalties, no holding period and a very, very low cost of doing business.”
Now a few new FIAs offered this year by companies such as Lincoln Financial and Athene really caught his attention.
“Once they dropped the service fees and commissions, they could take a commissionable product with a 14-year surrender charge and bring that to five years,” Ryan said. “And because they’re not taking money out on a regular basis to pay service fees, the caps are going from 2 percent up to 5 percent.”
Ryan considers the annuity as AUM but charges a lower fee than other assets. His three-person agency usually charges 1 percent, but some hit a breakpoint where the fee drops to .25 percent overall. If clients have not hit the breakpoint, he will charge about a half percent.
“The products are becoming more viable,” Ryan said.
That is exactly what Robert Kerzner wants to hear. As CEO of LIMRA, he has been preaching for fundamental shifts in the insurance industry. He has been encouraged by the new products and hopes they can chip away at the icy reception that annuities have been getting in the financial advisor world.
“They’ve never become a fundamental asset class and that’s part of the issue,” Kerzner said. “Those in the RIA community have avoided them because of all the bad press — real or imagined — but also because of the fee structure.”
Not only is it important for the industry but also for the growing number of Americans retiring without a secure future. Kerzner said annuities need to catch on as a viable option in financial advisors’ tool box and as a new rule of thumb.
“We need to get that community thinking about annuities, especially as we move to the income phase,” Kerzner said about annuities as an asset class. “I specify that because you know advisors allocate by formula. And if we start saying and people start believing that 20 percent of your total ought to be in guaranteed income, then I think it starts to catch on. But it’s got to be a fundamental change.”
Merging and Acquiring
Botsford found another welcome consequence of the DOL rule. It pushed her to rethink her agency’s business and she subsequently merged with two others to expand her services. She was one of many in the industry looking to diversify their practices and take advantage of economies of scale as regulators demand more processes and documentation.
The merger helped her develop a program to place new financial school graduates on a career track. She noticed that younger financial advisors may be excellent at the planning aspect of the business, but not so much on the business development.
“We’re creating more of an institutional situation,” she said. “It’s kind of like a law firm. You come in and you are an associate and then you can move up and become a partner. They don’t have to excel in prospecting. They don’t have to go out on their own and sink or swim.”
The program helps grow Botsford’s practice, but it also addresses the insurance and financial industries’ long-standing problem of high attrition rates among young advisors.
The recruiting effort fortifies the infantry in the battle against another trend of companies turning to automation in response to a declining advisor force. But Botsford is not too worried about the automation trend.
“In my humble opinion, I think all of that’s going to work out just great until the next market crash,” Botsford said. “Then I think robo-advisors are going the way of the dodo bird. Everything’s fine as long as the market’s going up.”
DOL Rule Takes A Stumbling Journey Through 2017
BY: JOHN HILTON
The political winds shifted abruptly during the early morning hours of Nov. 9, 2016, when Donald J. Trump declared victory over Hillary Clinton.
In the world of financial services, the winds of change were very positive throughout 2017. Barack Obama-led regulations were reversed, or stymied, and Trump appointees worked tirelessly to enact a broad, pro-business agenda.
By far, the controversial Department of Labor fiduciary rule was, and remains, the biggest item on the minds of distributers and producers. The fiduciary rule began taking effect June 9 with the impartial conduct standards requiring advisors and agents to act as fiduciaries, make no misleading statements and accept only “reasonable” compensation.
Phase two of the rule is expected to be delayed until July 1, 2019.
Phase two deals with exemptions that regulate the sale of annuities sold with retirement funds — in particular, the Best Interest Contract Exemption, which requires a financial institution to accept liability for each contract and gives clients the right to sue over investment advice.
While the fiduciary rule timeline seems somewhat normal on paper, in reality it has been anything but, said Andrea McGrew, chief compliance officer for USA Financial, based in Ada, Mich.
“Because the political climate is so divisive right now, I feel like nothing is really going the way it would go with a president who has full support,” she said. “It’s brought more of a Wild West feel to this process than would have ordinarily been there.”
USA Financial is a broad-based financial services firm with a broker-dealer and a registered investment advisor force. Like many competitors, the company struggled with its response to the ever-changing fiduciary rule, McGrew said.
“There were lots and lots of rabbit holes that this rule went down, with unintended consequences,” she said.
The cost of complying with the fiduciary regulation is pegged at $2 billion to $3 billion by the DOL. But the Securities Industry and Financial Markets Association, a Wall Street trade group, said its studies put the number at closer to $4.7 billion.
USA Financial certainly saw expenditures rise, McGrew said.
“It was an expensive year,” she said. “We put a lot of money into technology. We put a lot of money into procedures — a lot of manpower and time.”
The DOL rule is creating problems that financial services are already dealing with, executives say. The most obvious, and predicted from the start, is the potential declining access to financial advice to smaller accounts.
USA Financial is not dropping accounts, but other firms are, according to an Insured Retirement Institute comment letter to the DOL.
“In a July 2017 survey of IRI members, a number of IRI distributor members reported that approximately 155,000 of their clients have already been orphaned, with far more accounts expected to be impacted as implementation of the rule proceeds,” according to the comment.
The awkward delineation of qualified and nonqualified accounts continues to be an issue. Of course, DOL can only regulate qualified money, per the Employee Retirement Investment Security Act of 1974.
Still, it is an issue, McGrew said.
“This bifurcated standard that we have, or could potentially have, is really, really clunky, especially for a firm like ours, where we work in both spaces — qualified and nonqualified,” she explained. “It makes it really, really difficult because how are you going to say to a nonqualified account ‘Well, we treat your assets differently?’”
Once the rule is fully in place, USA Financial will treat all accounts the same, McGrew said.
More Cooks in the Kitchen
While the Trump victory was a clear sign to financial services that the DOL rule was not going to survive, the road to change was a bumpy one that left many firms in an uncomfortable limbo.
Problems came quickly after inauguration. Trump’s nominee for secretary of labor, Andrew Puzder, twisted in the wind for weeks while damaging personal information leaked.
By the time it was revealed that Puzder had once employed an undocumented housekeeper and he withdrew his nomination, valuable weeks were lost. Alexander Acosta was quickly nominated and confirmed, but it was already late April.
“The amount of indecision and/or ambiguity around the rule was exacerbated by the lack of leadership at the DOL for a while,” said Brendan McGarry, an attorney specializing in financial services issues for Kaufman Dolowich & Voluck. “Industry participants were left waiting for specific guidance.”
While Trump delayed the fiduciary rule implementation for 60 days until June 9, Acosta said he could find no legal basis to prevent the impartial conduct standards from taking effect.
From there, he zeroed in on delaying the second phase of the rule.
In the meantime, the delay created a void that state regulators and the Securities and Exchange Commission rushed to fill.
Several states are pursuing fiduciary style regulations, with Nevada being the first to put such a law on the books. This push makes financial services execs nervous.
“From my perspective, as a compliance officer, it is really challenging when you work in virtually every single state to then have to maintain, review and comply with 50 different standards,” McGrew said.
SEC efforts, on the other hand, are welcomed by an industry that sees better potential for a consistent and workable standard. Chairman Jay Clayton has refused to put a timetable on when the agency might complete its fiduciary standard.
It all contributed to a big year of uncertainty swirling around the fiduciary rule. And that doesn’t appear to be changing anytime soon.
“We’re in a holding pattern. We’re just waiting to see,” McGrew said. “We put in place procedures and processes in order to make sure that we’re complying with the current state of the rule.”
In Attempts To Kill ACA, Obamacare Becomes Trumpcare
BY: SUSAN RUPE
President Donald Trump promised to “immediately repeal and replace” the Affordable Care Act on Day One of his presidency in January. But nearly a year later, the ACA is still law.
The Washington swamp-drainers’ battle cry of “repeal and replace” turned to “maybe next year” as 2017 came to a close.
So far, the only changes made to the Affordable Care Act in 2017 were changes that came through executive order, as Congress was unable to get enough votes to pass a bill that would replace the law. House Speaker Paul Ryan, R-Wis., said in late October that his fellow Republicans won’t make another attempt to tackle health care reform until 2018.
But although Congress was not able to get rid of the ACA, President Donald Trump used the pen of executive order to chip away at parts of it. Trump’s executive orders weakened the ACA by:
Pulling funding for enrollment education and outreach efforts, particularly for the health care navigator program.
Instructing federal agencies to “minimize the unwarranted economic and regulatory burdens” of the health law.
Cutting the open enrollment period to six weeks from the previous 12 weeks.
Tightening the rules that enable consumers to buy coverage outside of the open enrollment period.
Ending cost-sharing reduction (CSR) payments to insurers to offset subsidies provided to low- and moderate-income people that enabled them to buy health insurance on the exchanges.
Easing the rules that allow small businesses to band together to buy health insurance through association health plans.
Allowing employers to set aside pre-tax dollars so workers can use the money to buy an individual health policy.
Easing current restrictions on short-term policies that last less than a year.
Meanwhile, health insurance carriers as well as agents and brokers were left to sit back and wonder how to survive amid the turbulence and uncertainty.
Actually, fewer agents and brokers wondered about how to survive because evaporating commissions led to fewer of them being authorized to sell health insurance on the federal marketplace this year. Only about 43,000 health agents and brokers were certified to help consumers shop for coverage on the federal exchanges for 2018, a drop of 43 percent over last year, the U.S. Department of Health and Human Services (HHS) reported.
And there are fewer offerings on the federal exchanges this year than there were last year, HHS reported. A total of 132 health insurance plans were offered on the federal exchanges for 2018, down from 167 offered for 2017.
Premiums on the federal exchange took double-digit rate increases for 2018. The average premium for a benchmark silver plan rose 37 percent for next year, according to a study by Avalere Health. Average premiums also are going up by double digits for different levels of coverage, including bronze (18 percent), gold (16 percent) and platinum (24 percent).
Avalere attributed those premium hikes to market instability driven by the end of CSR payments to insurance, continued uncertainty over the future of the ACA and the executive order that could lead to lower-cost health plans outside of the law.
A See-Saw Effect
But not all consumers will feel premium hikes equally.
Low-income people in about half the counties in the U.S. will be able to get a taxpayer-subsidized policy for free on the federal exchanges, according to a Kaiser Family Foundation study. The study found that in 1,540 counties, a hypothetical 40-year-old making $25,000 a year can get a basic bronze plan under the ACA next year for zero monthly premium.
A see-saw effect is the reason. The end of CSR payments to insurers led to increased premiums, which led to more consumers being eligible for subsidies to pay for exchange coverage.
For consumers who don’t qualify for subsidized coverage, premiums continue going up. In particular, families with children will see a premium spike for 2018 as a result of an Obama administration rule that allows insurers to recalculate the health risks of children within a family’s premium bill. The rule allows insurance companies to assign more of a family’s overall premium cost to children in individual and small-group policies, starting in 2018.
It also allows insurers to charge higher rates for teens beginning at age 15 than it allows for younger children, because teenagers typically rack up bigger medical bills. Up until now, the ACA has not allowed any difference in the amount charged for children from birth to 20.
2017 a Turning Point?
Did the ACA reach its turning point in 2017? Chris Sloan thinks so. He is senior manager focusing on individual market and ACA-related work for Avalere.
“I think right now, unless there’s some legislation to stabilize the market or to repeal and replace ACA, it’s pretty clear that the individual market is on a downward trajectory in terms of enrollment,” Sloan said. “We are seeing lower enrollment, higher premiums, less competition. Obviously less opportunity for agents and brokers.”
This year was the first that had a drop in individual enrollment, which is not a good sign, according to Sloan.
“It was the first year where we saw a substantial number of counties with limited insurer participation on the exchanges,” he said. “Obviously, we have a president who took office this year and who is opposed to the ACA, and the party that controls both houses of Congress is also opposed to the ACA.”
Where Do Brokers Fit In?
This year has been a bad year for brokers, Sloan said.
“The whole ACA has hastened a trend away from agents and brokers,” he said. “I think what’s happening now is that the individual market is increasingly becoming a market of subsidized individuals and those subsidized individuals have to purchase their coverage through the exchanges. So that hurts the opportunities for agents and brokers.”
If health insurance becomes a product people don’t want to buy, or find too expensive, there’s a limit to how much assistance an agent or broker can provide if the price is too high, Sloan said.
“And that happened a lot in 2017 and will happen next year.”
The Last Shrimp Boat
Despite what he called the “turbulence” that marked the health insurance world in 2017, Michael Z. Stahl said there’s a silver lining for health insurance brokers. Stahl is an executive vice president at HealthMarkets in North Richland Hills, Texas.
“We see all this as an opportunity to be like Forrest Gump’s last shrimp boat,” he said. “As a lot of brokers are exiting the business, there are still going to be a similar amount of consumers who need help.”
Health commissions have come down, which spells trouble for brokers who are used to selling health insurance but not building a true client relationship, Stahl said. “In that case, you’re in trouble and if you haven’t exited the market, you probably will.”
As the government cuts the navigator program, consumers can turn to brokers as a source of help — not only in obtaining health coverage but also in obtaining other products, such as life insurance, dental or vision benefits, or critical illness or accident coverage, Stahl said.
“Within turbulence, someone still can win,” he said. “There’s a lot of need out there, a lot of people who need someone to help them. Why not you? And while you’re doing that, why not do it in a more complete fashion? And in so doing, you will do better by your client and you will earn the income to support yourself as a professional.”
It’s Trumpcare Now
Although the Affordable Care Act — or Obamacare, as it is commonly known — is still in force, the law has evolved to the point where we now have “Trumpcare,” Stahl said.
“We have Trumpcare in the sense that what we have now is not what we had a year ago,” he said. “But it’s still wet cement. It’s not cured as to what it will be in the final sense.”
One thing that’s certain is that the consumer and the health insurance broker are entwined as the market challenges continue, Stahl said.
“When it’s tougher for the consumer to afford to buy, it’s tougher for the agent to make sales,” he said. “When it’s tougher for the carriers to make money, we see the continued pressure on agent commissions. All of that is the environment we are in today.”