The array of financial products is truly enormous and each individual’s financial situation is unique. At the same time, the Department of Labor (DOL) has proposed the so-called Fiduciary Rule that requires financial advisors to only provide financial products to clients when it is in their best interest. The rule was proposed under the Obama Administration and now that Trump is in office, the ruling will possibly be overturned or modified. There are a few important considerations on this topic, especially related to annuities.
The proposed rule, which was originally enacted a year ago requires that financial agents provide the best possible advice to clients and not sell them products based on their own commission structure. Basically, the ruling opened up financial advisors to lawsuits if clients prove that the products they purchase are unsuitable and provide large compensation for the advisor.
While the ruling was sure to go into effect under a potential Clinton administration, the more conservative Trump administration has delayed the implementation several months while it continues to study the effects. Many outside consultants believe the new administration will eventually strike this ruling down and allow fiduciaries more flexibility in the products they provide to investors.
While the DOL Fiduciary Rule might sound good to investors in theory, there are many secondary considerations. Most importantly, there are literally millions of different financial products. It is truly impossible to find and provide the very best one for each person in their unique situation. Secondly, all financial products are subject to risk. If a product defaults or loses value it probably has nothing to do with the financial advisor. They should not be placed in a lawsuit because the principle issuing the debt, equity or insurance product fails. If the Fiduciary Rule is indeed enacted, many analysts believe that financial advisors will greatly restrict the products they actually sell. They will provide much more conservative options to people which will inhibit returns and also the flow of capital to worthy products in the economy.
Annuities are a particularly tricky instrument. These insurance products provide a steam of income in the future in exchange for upfront payments. The product is designed to create a reliable stream of income in the future when the buyer is in retirement. The buyer can discount the expected future income based on their life expectancy to estimate the potential return on their investment. However, this is just an estimate that will take many, many years to play out.
Comparing the annuity to another financial product that has more regular payouts is therefore extremely difficult. For example, suppose you discount the payments to discover a 3% expected rate of return on your annuity purchase and it is lower than the 8% you are getting in the stock market. Does that mean you have the right to sue your financial advisor for poor advice? What if you end up living an additional ten years and the rate of return rises to 10%? You will only discover that on your death bed. That makes comparing the two investments nearly impossible. For that reason, the fiduciary rule can be quite complex and hard to evaluate when it comes to annuities.
In addition, annuities themselves have different profiles. The main types include single premium, multi-year guarantees and differed income annuities. While it is possible to estimate which product would be best for an individual based on their current situation, the end result may be quite different based on how their career and financial fortunes play out.
The Annuity Consultants are a leading FMO that helps agent and registered reps provide annuities and other insurance products to end clients. The California based firm has helped many agents and registered reps get the best products, with the ideal financial considerations to their clients. For more information, please contact us.