The Department of Labor today released its new rules governing investment advice for people who are investing to retire. The new rules impose a fiduciary standard on investment advisers (see SMFN’s earlier story on the new rules). However, the new rules contained a surprise for investment advisers: the new rules apply the fiduciary standard to advisers who recommend indexed annuities to their clients. The indexed annuity provision was a shock to the investment community.
Indexed annuities are somewhat complex products. Basically, indexed annuities are insurance contracts that earn money for the annuity holder based on the performance of stock market indexes. The contracts provide guarantees against losses if the market falls. Indexed annuities are recommended for investors who are risk averse to still get into the market. Applying the fiduciary standard to sales of indexed annuities means that investment advisers must act in the “best interests” of their clients and avoid conflicts of interest. One conflict could be the commission rate. Indexed annuities, like variable annuities, usually carry a higher commission rate for the investment adviser than fixed annuities.
The Department of Labor says that the increased regulation of the sale of these annuities to retirement investors needs to be stricter “given the complexity, investment risks, and conflicted sales practices” associated with them. Law professor Mercer Bullard of the University of Mississippi has said that indexed annuities “needed to be under the contract more than any other product because they are not subject to securities regulation and they are extremely complex, costly and often unsuitable.”
The new rule was not greeted enthusiastically by everyone. American Equity Investment Life, the second biggest seller of fixed indexed annuities in the U.S. by market share, fell 14 per cent in early trading on news of the change, according to analysts at Keefe, Bruyette & Woods.
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