States Continue Push For Annuity Commission Disclosure

February 18, 2013

By Linda Koco
InsuranceNewsNet

A few state insurance regulators are continuing to push for increased disclosure of annuity agent commissions.

That became clear during a very brief exchange at a phone conference of state insurance regulators and industry experts last week. So did awareness that commission disclosure remains a dicey topic to broach. 

The session had been called to continue revising the old Annuity Buyer’s Guide from National Association of Insurance Commissioners (NAIC).

It was a work session, with regulators and industry representatives going through the draft section by section, deciding on what to say here and say there. Then one of the participants pointed out that the California Department of Insurance had sent in some suggested revisions, too.

One of those suggestions turned out to be a proposal to amend a sentence on commission disclosure that had seemed to be squared away. Specifically, California Senior Staff Counsel Jodi S. Lerner had written, in a comment letter, that the sentence should say: “You [the consumer] have a right to ask how much the individual selling you the annuity will earn from the sale."

In addition, Learner wrote, “I also suggest raising this as a question in [the] section [of the Buyer’s Guide] titled ‘What Questions Should I Discuss with the Annuity Salesperson?’”

Her explanation: “Disclosure of this information is beneficial to consumers,” Learner wrote.

Objections

Those were simple enough words, but within a matter of seconds, Kim O'Brien, executive director for National Association of Fixed Annuities, objected. So did Gary Sanders, vice president of securities and state government relations, for National Association of Insurance and Financial Advisors.

The current version of the document does disclose that annuity sales persons do typically earn money from the sale of an annuity and that the buyer can ask about how this happens, O’Brien pointed out.  

But both O’Brien and Sanders opposed seeing the question that California suggested being added to the question list. They didn’t elaborate. They just said “no.”

Their objection is understandable. Such a question would encourage annuity buyers to ask the agent, point blank, how much money the agent would make from the sale. Proposals to allow this have been a sore point among insurance agents for several years, especially among agents who work primarily on commission.

Many of these agents do not believe their customers have the “right”—in the sense of a legal right—to ask. Some also maintain that giving out “the number” will confuse the client, take the focus of discussing insurance protection needs, and provide clients with information that most don’t want anyhow. Others resent the not-so-veiled implication that, by working on commission, they are hoodwinking consumers into buying products that pay the most commission, even when other products would do the job as well or even better.

On the other hand, some insurance advisors have told InsuranceNewsNet that they don’t mind disclosing what they make from insurance commissions. These tend to be dual-licensed advisors. They work on both fee and commission, often through a registered investment advisory firm. They figure that since they disclose their fees anyhow, disclosing insurance comp is just part of their business model. They resent critics who say that their business model makes it so that they gravitate towards serving only higher net worth individuals, leaving mid-market customers who can’t afford high fees in the dust.

Keeping equilibrium between these opposing views will be a challenge for regulators and industry, as everyone seeks to find a common ground that is fertile for all concerned.

Regulation 194

To date, New York is the only state that has moved to bridge the divide. Two years ago, it implemented New York Regulation 194 on Producer Compensation Transparency, a regulation that requires insurance producers to provide consumers with compensation disclosure information.

It defines compensation as “anything of value, including money, credits, loans, interest on premium, forgiveness of principal or interest, trips, prizes or gifts, whether paid as commission or otherwise.”

This regulation does not say that consumers have a “right” to learn how much money the sales agent makes from an insurance sale. But it does require the producer to provide disclosure regarding compensation in a proscribed manner.

For instance, Regulation 194 says “…the purchaser may obtain information about the compensation expected to be received by the producer based in whole or in part on the sale…by requesting such information from the producer.”

If the buyer wants to have more detail before policy issue, Regulation 194 says the producer shall disclose “a description of the nature, amount and source of any compensation to be received by the producer….” There is a lot more to it than this, but that’s the gist.

Must a producer in New York initially disclose how much compensation the producer will be paid for the sale of the policy? No, says the New York State Department of Financial Services in a Frequently Asked Questions section of its website. A producer “need only disclose the amount of the compensation if the purchaser asks for additional information.”

By the way, this regulation did not go into effect without a fight. The Independent Insurance Agents and Brokers of New York, the Council of Insurance Brokers of Greater NY, and some insurance agencies, did challenge it, but the State Supreme Court in Albany upheld it, and then, last March, the New York State Supreme Court Appellate Division upheld the lower court’s ruling.

Current Buyer’s Guide language

What about the Buyer’s Guide pointer on agent disclosure and commissions? Here is the current language:

 “Insurance companies usually pay the annuity salesperson after the sale but the payment doesn’t reduce the amount that goes into the annuity.  You also can ask your salesperson how s/he earns money from the sale.”

The NAIC Annuity Disclosure (A) Working Group will have another conference call on March 5 to comb over the entire document, so this and many other sections of the document could change. It’s all part of the process of bridging that divide.

Linda Koco, MBA, is a contributing editor to AnnuityNews, specializing in life insurance, annuities and income planning. Linda can be reached at [email protected].

© Entire contents copyright 2013 by InsuranceNewsNet.com Inc. All rights reserved. No part of this article may be reprinted without the expressed written consent from InsuranceNewsNet.com.


Comments

financial Professional

2/22/2013 5:30:56 PM - Chicago

I agree with Richard and the San Diego Broker It does not make any difference what I receive for compansation of an anuuity because it does not come out of the client original principal. No loss for the client. However, a securities lisence person or firm gets compensated from the clients total asset value (whether he/she makes or losses money) then, YES the client has the right to know because it costs him/her. The fee comes out of the clients money automaticaly every quarter. Hello....what

Tony

2/22/2013 8:22:03 AM - Baltimore

Lets face it, the number one reason producers resist the idea of commission disclosure is due to having to justify a $32,500 commission on $500,000 annuity sale. If the advisor spent three hours in face time with the client, the advisor made $10,833/hr. Good luck in getting a client to understand your rationale.

2/22/2013 8:19:48 AM -

Lets face it, the number one reason producers resist the idea of commission disclosure is due to having to justify a $32,500 commission on $500,000 annuity sale. If the advisor spent three hours in face time with the client, the advisor made $10,833/hr. Good luck in getting a client to understand your rationale.

Robert Klein - Continued

2/21/2013 6:21:14 PM -

Until this happens across the board, consumers aren't being fully informed when it comes to purchasing financial services and products.

Robert Klein - Continued

2/21/2013 6:20:45 PM -

Not only should the consumer have a right to ask how much the individual selling you the annuity will earn from the sale per Jodi Lerner's quote, it should be the obligation of the insurance agent to voluntarily provide this information prior to completion of any sale. Anyone who provides financial services to the public should be required to disclose all compensation, including fees and commissions. It makes no difference. Until this happens across the board, consumers aren't being fully inform

Robert Klein

2/21/2013 6:19:44 PM - Newport Beach, CA

As a CPA, I've been required to disclose in writing all commissions received, including those from sales of insurance products, for years. I'm a firm believer that this should be required for anyone who sells insurance products in the interest of full and fair disclosure. Not only should the consumer have a right to ask how much the individual selling you the annuity will earn from the sale per Jodi Lerner's quote, it should be the obligation of the insurance agent to voluntarily provide this in

San Diego Broker

2/21/2013 4:55:14 PM - San Diego, CA

What a great idea! Next thing they should do is require my grocery store disclose how much money they make when selling me bananas. They could hire more state representatives with good salaries and outstanding pension and medical benefits to enforce the disclosure. Hey, why stop at bananas? It is not fair that those good for nothing teenagers at the baseball games don't disclose their compensation when selling me a box of crackerjacks. I mean, those kids earn a 20% commission on the sale... that

San Diego Broker

2/21/2013 3:23:20 PM - San Diego, CA

What a great idea! Next thing they should do is require my grocery store disclose how much money they make when selling me bananas. They could hire more state representatives with good salaries and outstanding pension and medical benefits to enforce the disclosure. Hey, why stop at bananas? It is not fair that those good for nothing teenagers at the baseball games don't disclose their compensation when selling me a box of crackerjacks. I mean, those kids earn a 20% commission on the sale... that

Jack Marrion

2/21/2013 10:13:47 AM - St. Louis

(Continued) and two recent ones done by academics, that buyers had more positive feelings about their agent when compensation was disclosed (because buyers tend to overestimate what the agent receives and because trust is increased).

Jack Marrion

2/21/2013 10:11:57 AM - St. Louis

Agent compensation is very relevant for the annuitybuyer. Commissions are a cost to the contract and are recaptured in future years by lowering the renewal rate that could be paid. Ceteris paribus, if one annuity has a 4% commission and one has an 8% the 8% one will provide a lower future return to the annuitybuyer until the costs are recaptured. I disagree that disclosure should be mandatory and believe it should be left up to the agent. But I will mention that based on a real world study I did

Terry

2/21/2013 8:58:17 AM - Atlanta

To Stephen in Fla: the main difference in the examples you highlight, is that each involves a fee for service, wherin the purchaser of said services anticipates a charge out of their assets. the sale of annuities does not result in any sort of payment by client for services. the entire amount of principle is invested in the chosen product, with numerous options of performance available. subject to contract specifics, the entire deposit accrues interest from inception, with no reduction or c

Bruce

2/20/2013 6:10:07 PM - California

To Stephen in Florida: It's NO-ONE'S business how much I make. Not your's. Not anyone's. Do you ask....or want to know....about my expenses? Or all of my UNcompensated work related obligations? I could continue, but, to someone like you, it would be 'beating a dead horse'. Stephen, by the way, how much do you make? Oh.....it's none of my business you say. To Elaine & Richard: Congratulations on your professionalism.

Stephen

2/20/2013 3:33:58 PM - Florida

If you're a professional and worth what you are paid, you shouldn't mind disclosing your compensation. Every registered rep and RIA discloses commissions and fees. Your lawyer and accountant both bill you. Morgage brokers give you a breakdown of fees. Insurance is one of the last few areas of significant non-disclosure by a professional group and this is why agents suffer from a commission mentality stigma by consumers.

Elaine

2/20/2013 1:06:03 PM - New Jersey

I agree with Richard. What relevance does the commission have? If the product is appropriate and will accomplish what the representative and customer set out to accomplish that is all that matters. Consumer protection is "over the top." Adivsors are going to be foreced out of the business and then consumers will have to rely on their own planning, investing, etc. and that usually proves to be not such as good idea and sometimes even disastrous!

richard

2/20/2013 12:36:43 PM - tulsa ok

It's inappropriate to force anyone in any business to disclose what their compensation is and how it is paid. The questions a consumer should ask are, Is this product appropriate? Will it accomplish what I want accomplished? Given my due diligence, Do I want to purchase it? Compensation is irrelevant, especially in the case of annuities where 100% (or more with a bonus) of premium is applied to the contract. Let's talk about mutual fund class A shares. Do clients understand how those work and is

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