Commentary
If you are like us, and we suspect you are, you are reading everything you can about the DOL fiduciary rule. You are probably trying to figure out how to change or adapt your business model to prepare for the rule.
Particularly what does it mean to truly be a fiduciary and make recommendations that adhere to the rule’s “Impartial Conduct Standards.” Even while we wait for positive legislative or litigation outcome, you need to start planning today. That is why we both read articles written by advisors who are licensed or designated fiduciaries.
We were recently drawn to two articles with headlines extolling the benefits of annuities. We were beyond giddy, only to find that both authors were bias against fixed indexed annuities. Not just some fixed indexed annuities – ALL fixed indexed annuities.
Before you jump to the conclusion that we are biased only in favor of indexed annuities, hit the pause button. At Americans for Annuity Protection (AAP), we have an insatiable appetite for all things annuity. We believe in the basic promise of all annuities – reliable and certain income payments that will last as long as you do!
The beautiful thing about the annuity marketplace is the wide selection of products that can meet the individual and unique needs of every American. Immediate, qualified longevity, deferred income, fixed rate, fixed indexed are all different categories of annuities in the fixed annuity family.
Fixed annuities provide the added protection from market losses. Variable annuities come in many flavors, too, and can be a very good fit for individuals who have more of a risk tolerance for market losses with the upside potential for market gains. Bias against any one particular type of financial product is harmful to the client’s best interest.
Psychologists Daniel Kahneman, Paul Slovic, and Amos Tversky introduced the concept of psychological bias in the early 1970s. In 1982 they published their findings in "Judgment Under Uncertainty." They found that there are three types of psychological bias – confirmation, anchoring, and overconfidence.
Confirmation bias is when you look for information that supports existing beliefs, and reject data that go against beliefs. Anchoring bias is the tendency to jump to conclusions – that is, to base your final judgment on information gained early on in the decision-making process.
Over-confidence bias happens when you place too much faith in your own knowledge and opinions. You may also believe that your contribution to a decision is more valuable than it actually is.
Now, back to our reading. The first article appeared in Forbes and was written by Erik Carter. Erik Carter is a JD and CFP as well as a senior resident financial planner at Financial Finesse. The second article appeared in the Chicago Tribune and was written by Terry Savage, a registered investment adviser and the author of four best-selling books.
Both are quite obviously under a fiduciary obligation to deliver advice that is in the best interest of the investor. Psychological bias by these two fiduciaries is not only harmful to their unsuspecting clients, but especially dangerous for any consumer reading either of these publications.
That is because their very position as a contributor to these well-respected news outlets is a tacit acknowledgement that they have superior expertise and training.
Ms. Savage warns readers to beware because “thousands of annuity salespeople are hoping to grab your money and steer you toward their high-commission indexed-annuity product before Jan. 1, 2018, [sic] at which point they will be required to act honestly under the fiduciary standard and undergo background checks.”
Never mind the fact that the information she provides is inaccurate. The rule requires adherence to the fiduciary standard on April 10, 2017, NOT January 1, 2018. Any advice given on April 10th or later must adhere to “impartial conduct standards” and only “reasonable” compensation is may be received.
Also, there is no “background check” explicitly required by the rule. (For clarity: January 2018 is the final end-all date that everyone must be in full compliance with disclosures and practices and procedures of the financial institution must be in place.)
It appears Ms. Savage’s may be suffering from confirmation, anchoring and/or over-confidence bias and ignoring the reality of today’s indexed annuity marketplace. Today’s commission rates are between .50 and .70 a year if measured over the surrender period alone.
If the product is kept beyond the surrender period (and many are), whether to be used as income for living expenses or legacy income after death, the commission rate drops precipitously and is well below most 401k or AUM fees.
Mr. Carter, on the other hand, tells us that “an income annuity (as opposed to the fixed or variable deferred annuities that are more commonly sold) is a way to get more income from your assets.” (emphasis added) Fortunately, he gives us a specific example so that we may demonstrate his bias.
Using a 65-year old female in California, he tells us that her assets of $300,000 would provide $17,880 a year in income based on a calculation he completed at immediateannuities.com. He also explains if she could defer her income for a few years, she could get about the same amount of income if she bought a deferred income annuity (DIA).
Both are good choices and might be the perfect fit for someone but, as he points out, both come with their disadvantages, too.
AAP requested a fixed indexed annuity with an income rider from Living Benefit Calculator and by deferring income for five years, our client would have a choice of multiple products from A-rated carriers paying between $23,000 and $25,000 a year. Isn’t that getting more income for your assets, Mr. Carter?
Most of the FIA choices also offered an annual 5 percent free withdrawal and remaining account value at death. The withdrawal will obviously change the payment amount, but access to emergency cash of 5 percent is quite a helpful benefit, especially with today’s uncertain health care costs. The disadvantage, of course, is 10 years of surrender charges. So, the client must be willing and able to stick to the plan.
In a robust and competitive market, all choices come with pros and cons and what’s a pro for one client may be a con for the next. Carelessly discarding a viable product line is not serving consumers best interests.
We did not even begin to tap the many guaranteed income options in the variable annuity space.
The point is not to highlight fixed indexed annuities over any of the others. The point is, to be a true fiduciary and serving your client’s best interest, you have a duty to understand everything about your client’s needs, objectives, time horizon, and risk tolerance and look at ALL product solutions that could address as many data points as possible.
Just one more bad outcome for consumers under the DOL rule – the rule’s own bias against annuities forces customers to languish in underperforming, high-fee 401ks or move to only products the rule deifies. Since bias is the opposite of measured judgment, it can only lead to missed opportunities and poor decision making that harms consumers.
AAP simply asks that advisors, in particular, advisors who are writers, identify consumer’s needs first before any product solution is considered or rejected. To eliminate products because of existing and outdated beliefs, rejection of new information or too much faith in self, is not a best interest practice.
Kim O’Brien is the vice chairman and CEO of Americans for Annuity Protection. She has 35 years of experience in the insurance industry. O’Brien served The National Association for Fixed Annuities (NAFA) for almost 12 years and led the organization to defeat the SEC’s Rule 151A.
Contact Kim at kobrien@innfeedback.com.
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Thank you for this well written commentary. Bias is probably inherent in all transactions so your point about these two writers and their potential influence on their readers is well taken.
GREAT job, as usual, Kim. I tell attendees to my workshops on annuities that an index annuity is neither the Greatest Thing Since Canned Beer nor a Satanic Device; it’s just a tool. For some jobs, it’s an appropriate tool; for others, it’s not. But when a fiduciary refuses even to CONSIDER a recommendation of ANY tool for meeting her client’s needs, she’s on very thin ice, with respect to her fiduciary duty to that client. What if that annuity were to be shown to be at least as suitable as the alternatives she doesn’t reject?
But one problem with the DOL’s “Best Interest Contract” remains to be resolved, with respect to index annuity sales.
FACTS:
1. Most index annuity sales are made to IRAs.
2. Such sales will, as of next April, require completion of a “Best Interest Contract” (BIC).
3. The BIC is a contract between the investor and a “financial institution” (through which the advisor is working)
4. Most index annuity sales are made by agents through Field Marketing Organizations (FMOs).
5. FMOs are NOT “financial institutions” under the DOL, though an FMO may become same by petitioning the DOL and meeting certain requirements
The DOL’s decision, in the Final Rule, to place index annuity sales under the BIC Exception (to the rules forbidding “variable compensation”) rather than Exception 84-24 (which requires fiduciary status and adherence to the “impartial conduct standards”, but not completion of a Best Interest Contract) while leaving FMOs out of the “financial institution” category practically guaranteed a sharp reduction in index annuity sales going forward.
Moreover, whether the usually “heaped” front-end sales commissions paid on index annuity sales will qualify as “reasonable” under the “impartial conduct standards” is problematic. I doubt seriously that double digit commissions will be defensible. I expect insurers to roll out new products with lower commissions and surrender charge schedules or “no commission”/”no surrender charges” variants, to attract those advisors who will choose to operate as “flat fee fiduciaries”.
In any event, your observations are on point: If you’re REALLY a fiduciary, failing to consider any particular investment type for your clients is something you should do only after a lot of thought and study.
I’m writing to clarify a couple of your comments about my blog post on Forbes.com about retirement income. First, you wrote that I am “obviously under a fiduciary obligation to deliver advice that is in the best interest of the investor.” However, as unbiased providers of workplace financial wellness programs, the planners at Financial Finesse do not provide any investment management or advice at all. We even had to give up any investment licenses we had. Instead, we offer information, guidance and coaching with no sales pitch or ulterior motive, in order to inform and empower employees to take charge of their personal finances and make wiser, more confident choices.
You also claimed that my refusal to consider fixed index annuities is an indication of confirmation bias. However, the reason I didn’t discuss them in my article is because it was only about ways to produce immediate income for someone already retired as opposed to the future income that fixed index annuities can provide. (I mentioned deferred income annuities since they require a much smaller upfront payment, allowing the remainder of a retiree’s assets to be invested in investments like stocks, bonds, and…fixed index annuities.)
In your example, someone could indeed have more income in 5 years by purchasing a fixed index annuity. That could also be true had they decided to invest that money in a mutual fund or variable annuity (albeit with more risk). Any of these options may be a solution for an investor looking for future income, but that’s just not what the article was about.