As baby boomers continue to move away from the workforce and into retirement age, they’re coming to a realization regarding their finances: There just isn’t enough money in the bank to support them through the rest of their lives. To secure their future, many of these individuals are switching their focus from traditional savings options like social security benefits and 401(k) plans to alternative methods of retirement income.
Because of this, security products like annuities are gaining traction as a significant choice for retirement planning. These products are complex and deal heavily with an individual’s life savings and retirement funds. To protect consumers and stop brokers from taking advantage of investors, there are a slew of laws and regulations surrounding these products. Two of the most notable are the SEC Regulatory Best Interest Rule and the Annuity Best Interest Rule.
What is the SEC Regulatory Best Interest Rule?
The SEC Regulatory Best Interest Rule (Reg BI) sets an obligation for financial professionals to act in the best interest of their clients and to avoid placing their own interests ahead of investors. Reg BI goes beyond the Financial Industry Regulatory Authority (FINRA)’s existing suitability standards and is intended to help investors make more informed decisions.
Reg BI Vs. The DOL Fiduciary Rule
If the basis of Reg BI sounds familiar, you may be thinking of the Department of Labor (DOL) Fiduciary Rule, which was proposed back in 2017. The DOL Fiduciary Rule, had it passed, would’ve required all financial professionals who work with investor retirement plans, including unpaid advisors, to be legally bound by the fiduciary standard.
This rule would have required brokers to provide full transparency by disclosing any conflicts of interest as well as all fees and commissions to their clients. It also would have required financial professionals to present their clients with investment options that would not only be suitable, but also beneficial to them.
Ultimately, in 2018, the rule was struck down under the Trump administration due to its “unreasonabless” and infringement on the jurisdiction of the U.S. Securities and Exchange Commisison (SEC). With the Fiduciary Rule officially out, consumers’ best hope for a more transparent investment landscape fell to the SEC Reg BI Rule, which was put into place in 2020.
Reg BI includes four main broker obligations:
1. The Disclosure Obligation – No surprise here, the Disclosure Obligation requires brokers to disclose all the facts related to the scope of their relationship with an investor. At a minimum, these disclosures must include:
- Written confirmation that the broker is acting in a broker-dealer capacity for the consumer
- Any fees or costs that may apply to the investors transactions, holdings, and accounts
- The type and scope of any services provided along with any limitations
- All “material facts” related to conflicts of interest associated with a recommendation
2. The Care Obligation – The Care Obligation requires brokers to exercise reasonable care when recommending a product to a client. At a minimum, the Care Obligation dictates brokers must:
- Understand the potential risks, rewards, and costs, associated with any recommendation they make and communicate them with the investor
- Reasonably believe the recommendation is in the investor’s best interest based on their current investment profile
- Believe that a recommendation isn’t excessive in light of the client’s investment profile
3. The Conflict of Interest Obligation – This obligation dictates that a broker must identify, disclose, and, if possible, eliminate any conflicts of interest that could put their own best interests above those of the investor. The Conflict of Interest Obligation requires brokers to have written policies in place to:
- Monitor, mitigate, or remove conflicts that may incentivize a broker-dealer to put their own interest ahead of the investor’s interest
- Prevent limitations on offerings from causing the firm to place their own interests ahead of the investor’s interest
- Eliminate sales contests and any other compensation dependent on meeting sales quotas in a set period of time
4. The Compliance Obligation – Last but not least, the compliance obligation requires brokers to establish and maintain policies and procedures to help achieve compliance with the rule.
While the SEC Reg BI Rule applies generally to all financial products and securities, there are further regulations regarding a specific category of investments: Annuities.
The Suitability in Annuity Transactions Model Regulation
In 2010, the NAIC created the Suitability in Annuity Transactions Model Regulation. This regulation, sets standards and procedures for brokers recommending annuity products to ensure they’re appropriately addressing investor’s insurance and financial goals and to protect investors from life insurance and annuity producers’ abusive or predatory practices.
Since its initial approval, nearly all 50 states have adopted the Suitability in Annuity Transactions Model Regulation. It’s also undergone various updates including a revision in 2020 that included the Annuity Best Interest Standard.
What is the Annuity Best Interest Standard?
The Annuity Best Interest Standard asks brokers to consider the best interest of an investor when recommending annuities. The standard dictates that brokers can exercise greater care when recommending an investment by avoiding conflicts of interest, clearly communicating disclosures, and maintaining accurate documentation of all transactions.
Any broker who’s new to selling annuities is required to complete a four-hour training course on the details of the Annuity Best Interest Standard. The course covers the basics of each type of annuity as well as their use cases and a detailed breakdown of the standard of care a broker must follow when recommending products to an investor.
Brokers have an obligation to protect investors
While insurance transactions can be purely transactional, and there’s no law preventing a consumer from buying a policy they don’t need or isn’t really right for them, insurance products that involve an investment component are different. When it comes to annuties, which deal heavily with a consumer’s life savings, the stakes are much higher.
These transactions often come with high commissions, an incentive that could lead brokers to make recommendations that serve their own financial interests over those of the investor. Regulations like the Suitability in Annuity Transactions Model and the annuity best interest standard are put in place to provide investors with an extra layer of protection. The bottom line is, when sold responsibly, annuities could offer consumers a solution to their retirement savings woes, but they can also be tempting for less scrupulous broker-dealers.
Standards like these are only a handful of an entire host of rules and regulations insurance producers and variable lines brokers must follow to stay in compliance and prevent regulatory violations. If your carrier, agency, or MGA/MGU is still managing producer, variable lines broker, and adjuster licensing and compliance management by hand, see how AgentSync can help revolutionize your processes. Contact us or schedule a demo today.