Insurers threatened by annuity reform
President Obama's plan to clarify the fees that agents collect and the risks that savers take when they buy annuities continues to rile the life-insurance industry, which manages more than $5 trillion in annuity accounts, nearly a quarter of U.S. retirement money.
President Obama's plan to clarify the fees that agents collect and the risks that savers take when they buy annuities continues to rile the life-insurance industry, which manages more than $5 trillion in annuity accounts, nearly a quarter of U.S. retirement money.
"Assuming that the proposal was adopted and implemented as is, we would guesstimate that annuity sales might be as much as 70 percent lower" at Lincoln National Corp., the Radnor-based life insurer that is a leading annuity-sales and retirement-account provider, stock analyst Steven D. Schwartz, of Florida-based Raymond James & Associates, told clients in a report Friday.
Obama's year-old Labor Department proposal would put more teeth into reforms envisioned by the 2010 financial-services reform law.
Lawmakers wanted to see insurance agents who sell annuities held to the same fiduciary standard as investment advisers who sell stock and bond accounts. Agents, many of whom sell annuities only part time, fear that means they will be more likely to be sued or punished by regulators for recommending investments that a saver complains about years after a sale. Insurer pushback helped derail earlier rules proposed in 2010; the administration hopes to enact this version in its final year.
Lincoln is "definitely among the most exposed" annuities-sales companies under the Labor Department proposal, Schwartz told me. MetLife, Prudential, and other big companies also face a drop in annuity sales if the rule is adopted this winter, as observers expect.
The idea is to reduce conflicts of interest, so an agent feels less tempted to push products that give the fattest markups.
Annuities - tax-protected insurance accounts linked to stock or bond investments - generally "take a lot more education and create a lot more paperwork" to sell than securities or mutual funds, Schwartz said.
But agents and other advisers often like to sell annuities, thanks in part to the attractive commissions they often offer.
The proposed rules will mean extra work, even if popular market-indexed annuities are partly exempted, as insurers have proposed.
Schwartz said the proposal would likely push brokers away from selling annuities and toward mutual funds and other fee-based investments.
"Or they can just buy no-load annuities, with no back- end charges," avoiding most fees and commissions, suggests Robert Costello, head of Costello Asset Management in Huntingdon Valley.
"The complexity, potential liability and costs associated with the proposed regulation will drive many dedicated financial advisors from the market," the American Council of Life Insurers, which represents Lincoln and other insurers, wrote in a statement.
Analyst Schwartz isn't predicting doom for Lincoln if the rule is adopted: The company has other profitable products, and its stock already trades at such a discount to its profit stream that Schwartz labels Lincoln shares a "strong buy" at recent prices below $40 a share, down one-third from last year's highs.
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Correction: In earlier versions of this column the value of U.S. annuities was misreported.