Some broker-dealers changing indexed-annuity compensation due to DOL fiduciary rule

Some firms that currently allow advisers to report indexed-annuity sales as outside business are considering bringing it in-house to better monitor their brokers, control risk and potentially take a cut

Apr 24, 2017 @ 12:13 pm

By Greg Iacurci

Brokerage firms are evaluating how they and their advisers get paid for indexed annuity sales to clients, as the start date of a new Labor Department rule governing investment advice in retirement accounts inches closer.

At present, many broker-dealers don't require their advisers to clear indexed annuity sales through the brokerage, as they would with products like mutual funds and variable annuities. Instead, firms allow advisers to report sales as an "outside business activity," and receive commissions either directly from the insurance company or field marketing organization, an intermediary that helps market and distribute insurance products.

Now, though, the Department of Labor's fiduciary rule is creating a dynamic whereby brokerage firms, to better monitor their brokers and control risk, are bringing those sales under their roof.

Broker-dealers that make such a change will likely receive more revenue from those sales, because they can take a cut of the commission they weren't receiving previously, and brokers may see a change in their compensation as well.


"In my opinion, with the DOL rule, especially as it was initially rolled out, you're going to see a lot more firms bring that under house," said Judson Forner, vice president of investment marketing at ValMark Securities Inc.

Sigma Financial Corp. and Parkland Securities are two related broker-dealers that had planned to make such a change for indexed-annuity sales, as well as those of fixed, single-premium-immediate and deferred-income annuities.

"Representatives will no longer receive commissions directly from the insurance carriers for these policies. Rather, the broker-dealers will receive compensation, and then pay the representative through their grid," according to an internal company memo reviewed by InvestmentNews that was sent by Tony Bacarella, the director of case planning for Sigma Financial and Parkland Securities.

The change applies to both qualified and non-qualified retirement assets, even though the fiduciary rule, which attempts to rein in conflicts of interest for investment advice to retirement savers, only applies to tax-qualified accounts like IRAs and 401(k)s.

In most cases, brokers should "not experience serious negative net compensation on these products," according to the memo, and in some cases "may realize a positive compensation effect."

That change was scheduled to be effective April 1, but it's not clear if executives pulled back on implementing these strategies due to the recently announced delay in the fiduciary rule's implementation date to June 9. The original start date was April 10.

Mr. Bacarella didn't return a request for comment.

The reason broker-dealers can treat indexed-annuity sales as outside business activities is because, unlike their variable-annuity cousins, they are regulated as insurance products rather than securities products. Broker-dealers still have to approve and monitor their reps' outside business activities, but Mr. Forner said firms often will review general activity at a higher level, not individual cases.

His firm, ValMark Securities, treats indexed annuities as securities and requires these sales to be submitted through the broker-dealer.

Some firms have taken this approach due to past notices from the Financial Industry Regulatory Authority Inc., which regulates brokerage firms, expressing that indexed annuities are complex products that may require heightened supervision.

"There are still a lot of broker-dealers out there who say they're not responsible for fixed insurance product sales," said Sheryl Moore, president and CEO of Moore Market Intelligence, a market research firm. It causes "a lot more headaches" for brokerage firms to do otherwise from a due diligence and monitoring standpoint, she said.

As currently written, though, the DOL rule makes it difficult for advisers to continue doing business this way.

(More: The latest news and resources on the DOL fiduciary rule)

The DOL included indexed annuities in the best-interest contract exemption, a provision of the rule allowing advisers to receive commissions for selling indexed annuities and other products if certain conditions are met.

One condition is execution of a contract between the investor and a "financial institution," which among other things certifies a product is in the customer's best interest. Insurance companies have been loath to take on the associated risk (which includes the possibility of class-action lawsuits), and observers say many FMOs wouldn't be able to meet the DOL's standards to qualify as a financial institution.


So, for reps to be able to continue selling some indexed annuities, their broker-dealers would likely have to step in as the financial institution for the transaction. Broker-dealers want to mitigate their risk as much as possible, and are upping their monitoring and due diligence on product sales as a result, observers say.

Bringing indexed annuity business in-house would probably net broker-dealers commission revenue comparable to those of field marketing organizations, Ms. Moore said. If an annuity pays a 7% commission, for example, an FMO generally keeps 2% and passes the remaining 5% to the insurance agent, she said.

But, as Mr. Forner pointed out, greater revenue doesn't necessarily mean more profit for the B-D, if bringing the sales in-house means taking on additional fixed costs to service that business.

Some observers believe many broker-dealers may be putting plans on hold given the recent fiduciary rule delay. Although indexed annuity sales will have a fiduciary duty attached to them beginning in June, the delay allows firms to hold off on selling indexed annuities under a BICE until the start of 2018, which means the current sales structure is still permissible.

Some firms may be holding out hope the rule is amended between now and January to ease up on treatment of indexed annuities.

"Given the delay in the DOL rule, lots of people aren't doing anything. They're saying maybe we'll get fixed-indexed annuities removed [from the BICE]," said Joan Boros, counsel at law firm Stradley Ronon Stevens & Young.

Mr. Forner, though, believes the DOL was simply a catalyst for the longer-term trend of broker-dealers wanting to "have a better handle on what their reps are doing in total," and that more firms will stop treating indexed annuities as outside business activities as a result.


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