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DOL Rule May Cause BDs to Sell More Fixed Income Annuities

May 9, 2016

The Department of Labor’s fiduciary rule may cause a drop in sales of fixed indexed annuities by independent insurance agents, with the slack getting picked up in part by broker-dealers, InvestmentNews writes.

The best interest contract exemption clause in the DOL rule, designed to force retirement brokers to put clients’ interests first and released last month, allows for commission-based product sales by certain financial institutions such as banks, insurance companies and broker dealers provided they sign a contract with the client first, the publication writes.

But independent marketing organizations – which sold around six in 10 annuities in the last quarter of 2015, according to Wink data cited by InvestmentNews – are not included in that group, according to the publication.

Under the new rule, insurance companies would be obligated to sign such a contract with policyholders and in turn be held liable, InvestmentNews writes.

Broker-dealers, meanwhile, are able to determine when a product is in the best interest of a client and block sales that don’t meet the qualification, Steven Schwartz, an insurance analyst at Raymond James & Associates, tells the publication.

That means sales could be shifted to banks and broker-dealers, he says, according to InvestmentNews. Banks accounted for nearly 17% of fixed annuity sales in the last quarter of 2015, while independent broker-dealers sold 13.5% of the product in the same time period, according to Wink data cited by the publication.

Both channels were growing sales of fixed income annuities even before the rule came out, with banks increasing sales 30% in 2015 year-on-year and independent broker-dealers growing sales by 6% in the same time period, according to Limra data cited by InvestmentNews.

On the other hand, independent marketing organizations can apply for individual exemptions from the DOL, the publication writes.

In addition, they can create a broker-dealer or an RIA to meet the “financial institution” designation necessary for the best interest contract exemption, and some of the larger independent marketing organizations already have, Schwartz tells InvestmentNews.

By Alex Padalka
  • To read the InvestmentNews article cited in this story, click here.