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Muddled Middle Ground

Idaho Insurance Commissioner Dean Cameron made the unusual call for a break before a National Association of Insurance Commissioners group voted on applying best-interest annuity sales rules to in-force policies.

The commissioners and representatives from industry and consumer groups had spent the previous 90 minutes in a fierce debate over the issue. Any middle ground seemed elusive and the good will built over months was evaporating.

Commissioners huddled in small groups around the large Marriott ballroom in Chicago in an October special meeting of the annuity suitability working group. Committee Chairman Cameron joined New York Deputy Superintendent for Life Insurance James Regalbuto in a cordial discussion with representatives from Jackson National.

The 10-minute break became 20, then longer. Finally, Cameron called the meeting back to order and delivered a somber assessment of where the working group was with its difficult task.

The NAIC planned to meet Nov. 15-18 in San Francisco with the goal of presenting a finished annuity sales rule by then. Actually, the goal had been to complete the work by the NAIC August summer meeting in Boston.

But things had slowed to a crawl. Some compromises had been reached between conservative and liberal factions on the working group, but many other contentious topics had been set aside to be revisited later. The in-force policy issue was one of those topics.

Cameron seemed to recognize the futility of the exercise when he told the group he will give its parent committee an update in San Francisco, but otherwise, the rule might never be finished.

“The work will sort of be left open, but it will provide a framework as a draft the NAIC can use in talks with the SEC, and other states may want to use as they move ahead,” he added quietly.

The NAIC’s attempt to reshape annuity regulation tells the story of where the industry is heading into 2019. Regulators of all stripes are looking at annuity sales and tougher rules are coming — nearly everyone acknowledges this fact.

But while insurers, intermediaries and big producers are able to adapt and roll with the changes, independent agents are left with a lot of questions crucial to their livelihoods.

Will new rules be closer to fiduciary, or strengthened suitability? Will commission-based products survive in some recognizable form? Will the Securities and Exchange Commission supersede state regulators?

Iowa Insurance Commissioner Doug Ommen acknowledged the difficulty establishing a “best-interest” standard that applies fairly, and legally, across the spectrum of agents, brokers and registered representatives.

“When I look at the market that we regulate, I just don’t see that best interest is going to be the answer,” said Ommen, a vocal leader of the conservative faction.

Holistic Planning

It’s one thing for regulators to fumble their way to new rules, fighting turf battles all along the way. But the timing of that movement could not be worse for financial professionals who also need to adapt to the new realities of investing and retirement planning.

The statistics tell a very clear story on where the advice game is heading:

  • Ten thousand baby boomers reach retirement age every day.
  • The plan rollover market involved more than $600 billion in assets this year, about three times what it was 15 years ago, according to LIMRA. About half of plan owners discussed their rollover with a financial professional.
  • Seventy-two percent of Americans say Social Security will not provide enough money in their retirement, a TD Ameritrade survey found.

The days of the insurance agent selling random life insurance policies and annuities to customers he or she might never see again are fading. Momentum is growing for an ongoing advice model that strategizes financial planning over the long term.

Consumers seem to favor that change. Surveys consistently show that working with an advisor gives consumers greater confidence about their finances and less stress about retirement.

“Financial wellness is about being able to meet one’s financial needs as they evolve throughout a lifetime,” said Kent Sluyter, president of Prudential Annuities. “The retirement planning model is now adopting this holistic approach — ensuring that retirees don’t simply reach their retirement but can maintain financial security throughout retirement.”

Health care costs are the big unknown in retirement planning. And it is a big reason why advice and holistic planning with a professional are crucial.

The specter of long-term care brings the potential to wreck even the best-laid plans.

The annual median cost of care now ranges from $18,720 for adult day care services to $100,375 for a private room in a nursing home, according to the Genworth Cost of Care Survey. Between 2017 and 2018, the cost of assisted living facilities increased the most at 6.7 percent, followed by the cost of a semiprivate room in a nursing home at 4.1 percent.

“The year-over-year cost of any kind of long-term care is rising quickly, with no sign of slowing down,” said Gordon Saunders, Genworth senior brand marketing manager, who manages the Cost of Care Survey. “Increasingly, people and their loved ones are finding that the cost of long-term care services is staggering and often they are unaware of it in advance.”

Bye-Bye Commissions?

The long-expected impact of regulation on advisor compensation revealed itself in 2018. A Cerulli Associates report captured the accelerating trend of declining commissions and increasing fee structures. The report found that by 2019:

  • 66 percent of advisors will derive their income from asset-based fees, up from 58 percent in 2017.
  • 23 percent of advisors plan to derive income from commissions, down from 33 percent.
  • 5 percent of advisors will rely on a fee for a financial plan, up from 4 percent.

Commission-based models have suffered in the face of new regulation, and the popularity of low-cost, commission-free investing and more fee-based product options for advisors.

In short, the industry momentum is all moving toward a fee-based process and advisors are feeling the brunt of it in their compensation.

No one expects commission-based models to disappear. Commissionable products can sometimes be less expensive than fee-based cousins.
But the commission-versus-fee battle has “largely been put to rest,” the Cerulli researchers wrote, and much of the debate seems to have moved on to what kind of fee — AUM, hourly, retainer or menu fees — advisors should charge.

Very few firms went back to a pure commission model, and not even the final death of the dreaded Department of Labor fiduciary rule slowed the march to fees.

Merrill Lynch had gone completely fee-based, but the company said in September it will again accept commission-based individual retirement accounts, but not commissioned annuities.

Only fee-based annuities will be allowed, but Merrill Lynch said there was a reason for that. Annuities are complex, and a fee-based advisory platform is the best way to serve advisors who have clients with annuities in their IRAs, the company said.

“Big broker-dealers would rather keep it simple,” and move forward with fee-based advisory platforms, said Danny Sarch, founder and owner of advisor recruiting firm Leitner Sarch Consultants.

New Products Galore

That means plenty of creative new fee-based products hit the shelves in 2018.

At Allianz, developing fee-based products that fit various platforms that allow  the company to take insurance into the RIA world is “one of our top initiatives,” said Jason Wellmann, senior vice president of life insurance sales.

The company is one of many insurers who are trying to walk a fine line between maintaining their sales bulk through traditional commission annuities, while simultaneously creating new fee-based products to meet the demands of the future.

Jackson National teased how future distribution arrangements might work when its October partnership agreement with State Farm went public. The deal allows Jackson to distribute variable and indexed annuities through State Farm agents beginning in the second half of next year.

State Farm has 19,000 independent contractors fanned out through nearly every Main Street in the United States. Jackson will provide them with commission- and fee-based versions of both its variable and fixed indexed annuities.

“State Farm is big,” said Bob Garofalo, vice president and senior credit analyst with Moody’s Investors Service. “State Farm is very big.”

Still, although the trend is clearly with fee-based products, those sales are still small. Total annuity sales were $111.3 billion at the midpoint of 2018, 5 percent higher than the first half of 2017, LIMRA reported. Of that, the percentage of fee-based sales is in the low single-digits.

On the VA side, 17 consecutive quarters of sales declines finally bottomed out in the first quarter. Second-quarter sales of VAs rose — if ever so slightly — 2 percent to $25.8 billion compared with the year-ago period, LIMRA reported.

Registered index-linked annuities are credited by analysts for spurring the VA rebound. RILAs, which are referred to as structured annuities, tend to be sold without guaranteed living benefits.

They are on track to sell about $10 billion this year, up from $9.2 billion last year.

The outlook for interest rates and regulation improved, which contributed to improved VA sales. However, complex VA products remain on the outs with insurers wary of attracting unwanted attention from regulators, said Todd Giesing, annuity research director for the LIMRA Secure Retirement Institute.

“Despite introducing new products and making changes to enhance their existing products to make them more competitive,” Giesing said, “companies are not having the same success with VAs as they are with fixed annuities.”

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. Follow him on Twitter @INNJohnH. John may be reached at [email protected].

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