DOL Fiduciary Rule Failure #222 – Did You Hear The One About The New Annuities?
DOL’s proposed exemption for Equity Indexed Annuity (EIA) providers will put true fiduciary advisors like myself at a disadvantage in working with clients who receive pitches from EIA providers for ‘new and untested’ products.
Academics who have been advising on the role of a ‘true fiduciary’ claim that we true fiduciaries can never make recommendations for a new product. After all, they’re ‘untested’ in the market.
EIA products are a creation of the market, but, they may get an exemption from this rule, and as such will have a great advantage over us advisors who don’t l̶i̶e̶ ̶a̶b̶o̶u̶t̶ ̶r̶e̶t̶u̶r̶n̶s̶ ̶o̶u̶r̶ ̶p̶r̶o̶d̶u̶c̶t̶s̶ ̶m̶a̶y̶ ̶h̶a̶v̶e̶ have the ability to advise on a similar product.
Let’s say that EIA provider Smidility decides to offer an annuity ‘based on the returns’ of their hottest mutual fund or perhaps a portfolio of their funds. Guaranteed to grow at 6% (̶t̶h̶a̶t̶ ̶i̶s̶ ̶s̶o̶m̶e̶ ̶f̶u̶t̶u̶r̶e̶ ̶i̶n̶c̶o̶m̶e̶ ̶s̶t̶r̶e̶a̶m̶ ̶o̶f̶ ̶5̶0̶%̶ ̶o̶f̶ ̶a̶ ̶c̶o̶m̶p̶a̶r̶a̶b̶l̶e̶ ̶i̶n̶c̶o̶m̶e̶ ̶s̶t̶r̶e̶a̶m̶ ̶w̶i̶l̶l̶ ̶g̶r̶o̶w̶ ̶a̶t̶ ̶6̶%̶ ̶l̶e̶s̶s̶ ̶f̶e̶e̶s̶)̶, if the t̶e̶r̶r̶i̶b̶l̶e̶ ̶f̶o̶r̶m̶u̶l̶a̶ ̶m̶e̶a̶n̶t̶ ̶t̶o̶ ̶r̶i̶p̶ ̶o̶f̶f̶ ̶i̶n̶v̶e̶s̶t̶o̶r̶s̶ fund does better, then you g̶e̶t̶ ̶a̶ ̶m̶e̶a̶s̶l̶y̶ ̶s̶m̶a̶l̶l̶ ̶p̶e̶r̶c̶e̶n̶t̶ ̶t̶h̶a̶t̶ ̶I̶’̶v̶e̶ ̶s̶e̶e̶n̶ ̶c̶a̶p̶p̶e̶d̶ ̶f̶o̶r̶ ̶2̶0̶1̶7̶ ̶a̶s̶ ̶l̶o̶w̶ ̶a̶t̶ ̶1̶.̶5̶%̶ participate in the fund’s growth i̶f̶ ̶y̶o̶u̶ ̶f̶o̶l̶l̶o̶w̶ ̶a̶l̶l̶ ̶o̶f̶ ̶t̶h̶e̶ ̶r̶u̶l̶e̶s̶ ̶i̶n̶ ̶t̶h̶e̶ ̶f̶i̶n̶e̶ ̶p̶r̶i̶n̶t̶ ̶o̶f̶ ̶t̶h̶e̶ ̶p̶r̶o̶s̶p̶e̶c̶t̶u̶s̶.
Creating exemptions to rules that everyone else has to live by will only mean that the DOL is encouraging firms to not work with true fiduciaries – and they may in find tie their hands in recommendations for new products – and, that firms will be encouraged to design new products to take advantage of investors with new products, creating massive confusion, for which they should be getting advice from someone that’s looking out for them… but… the DOL rule does what all government rules do – creates the opposite of the intended outcome.
In the next 5 to 10 years fiduciary financial advisors will be competing with Equity Indexed Annuities, Mutual Fund Indexed Annuities, Gold Indexed Annuities, Equity Indexed Annuity Indexed Annuities. Even if these were good products (which they won't be), there is no way we could recommend them since they're both untested and there will be no way for us to separate the good from the bad.
It's called an unintended consequence in economics. I call it an obvious outcome when you let some play according to different rules.
I don’t know who the joke is on, but if the DOL cared about protecting investors, they wouldn’t exempt anyone from their u̶n̶d̶e̶r̶m̶i̶n̶i̶n̶g̶ ̶o̶f̶ ̶t̶h̶e̶ ̶m̶a̶r̶k̶e̶t̶ ̶a̶n̶d̶ ̶t̶r̶u̶e̶ ̶f̶i̶d̶u̶c̶i̶a̶r̶i̶e̶s̶ rule.
And… I’m not sure if this mic is on, but I can keep the Fiduciary Rule criticism coming for years (at least until I'm the last advisor that's not exempt from this terrible rule left!).