The Best Interest Misconception

A GUEST ARTICLE BY KIM OBRIEN

As the National Association of Insurance Commissioners considers amending the model suitability regulation, and as the U.S. Securities and Exchange Commission considers adoption of a parallel best interest proposal, the FACC Campaign finds certain misconceptions have taken root that must be addressed to ensure the ongoing debate is conducted based on facts and sound reasoning rather than preconceived notions or inaccurate assumptions.

Misconception Number 1: Best Interest is a lower standard than fiduciary duty.

Neither “fiduciary duty” nor “best interest” are defined terms as such. However, there seems to be a perception that the best interest standard being proposed for agents or brokers would be a lesser standard than the fiduciary obligation imposed on investment advisers or other established fiduciaries such as corporate directors, lawyers, and guardians. The fact is that best interest is at the heart of fiduciary duty and the two concepts are inseparable.

The SEC’s own website states that “as an investment adviser, you are a fiduciary to your advisory clients. This means that you have a fundamental obligation to act in the best interests of your clients and to provide advice in your client’s best interests.” SEC Chair Jon Clayton is quoted as saying “we’ve called it the best interest standard, but I want to be clear — for broker dealers there are core fiduciary principles embodied in that best interest standard. In fact, those fiduciary principles are, I believe, the same as fiduciary principles that are embodied in the investment adviser standard.”

Best interest does not lie somewhere between suitability and fiduciary duty as some suggest. Best interest is a fiduciary standard, embodying concepts of loyalty and prudence which the Labor Department (DOL) sought unsuccessfully to apply to agent and broker recommendations.

(Related: Annuity Regulation: NAFA’s Kim O’Brien on the Coming Storm)

The SEC best interest proposal would have the same effect of turning brokers into quasi-fiduciaries contrary to decades of common law as explained in the 5th Circuit decision striking down the DOL rule. While it is true the SEC proposal recognizes that agents and brokers provide transaction-based services whereas advisers have ongoing monitoring obligations, that is merely a functional difference, separate and apart from the legal standard applicable to recommendations which is the core substance of fiduciary duty.

Semantics do not alter the analysis. The SEC refrains from defining best interest in its proposal, inviting debate over whether best interest equates to fiduciary duty, but in the end canons of construction dictate the words “best interest” will mean the same thing whether applied to advisers or brokers. Meanwhile several NAIC proposals avoid the term “best interest” but say an agent must place consumer interests ahead of agent interests. These formulations boil down to “best interest” because mandating that consumer interests come first is the crux of best interest carrying with it duties of prudence and loyalty, all of which may seem appealing but would cripple agents from selling products under legal standards historically reserved for fiduciaries.

Misconception Number 2: More disclosure is not enough.

A common refrain in the best interest debate is more disclosure is not enough to address concerns about agent conduct. But the precise nature of those concerns remains elusive and nobody can say with certainty that better disclosure would be insufficient to address concerns about misalignment of agent and consumer interests. Increased transparency has always been a powerful weapon in addressing sub-optimal behavior in free markets and is especially relevant here where room exists for enhanced disclosure of compensation and conflicts of interest.

Concerns propelling the best interest debate began with the DOL fiduciary rule but remain ill-defined as applied to annuities. Other than general criticism about agent compensation and variable annuity product fees, nobody has openly stated which annuity sales are bad and which should be stopped by adoption of a best interest standard. Absent any identified wrongdoing, it is unclear how adoption of an abstract best interest standard would change agent behavior for the better or result in a different mix of product recommendations, whereas enhanced disclosure is a sure way to empower consumers and improve marketplace transparency.

Best interest is seen by some as a panacea for consumer protection, but its impact is untested and unknown. The one certainty is that it will arm plaintiffs’ lawyers with potent ready-made claims against any agent who sells any product which pays higher commission or fails to meet a subjective standard of best. Even regulators are reluctant to adopt a straight out best interest standard knowing it would go too far. Consequently, most best interest proposals contain seemingly incongruous provisions saying “best” does not mean “single best” and allowing agents to limit product offerings, all of which runs contrary to pure best interest in favor of existing practices.

The dilemma for regulators is that best interest is a poor fit for insurance agents. Fiduciary obligations like best interest have historically applied to services and not products. Fiduciary concepts are aimed at those who provide specialized services where duties of loyalty and prudence are paramount. This includes corporate directors, lawyers, trustees, and advisers. But seldom if ever are such standards applied to sales professionals or product recommendations where objective issues of cost and performance are paramount rather than undivided loyalty or conservation-oriented prudence. Best interest, as applied to products, only invites second guessing in search of “better” or “best” products that are ostensibly cheaper or perform better without regard for intricate choices that abound in a highly competitive marketplace.

Enhanced disclosure deserves a chance before adopting any new litigation-prone ill-fitting best interest standard of care for agents. If the real concern is conflict of interest and financial incentives of agents, disclosure can be designed that sheds light on agent motivations enabling consumers to judge whether agent recommendations are unduly influenced by self-interest. Today agents do not disclose compensation or conflicts. But with proper attention, regulators can come up with meaningful user-friendly disclosure requirements that empower consumers and sensitize producers to concerns over alignment of agent and consumer interests, which along with existing suitability regulation will ensure a well-functioning marketplace.

Misconception Number 3: Regulators need more tools to address improper sales activity.

Some insurance regulators see best interest as a possible new tool in the regulatory toolbox to contend with improper agent practices. But there is no evidence new tools are needed given the existing array of laws and regulations already at their disposal. Insurance regulators already have unfair trade practices acts, licensing requirements, suitability regulations, replacement laws, advertising rules, anti-fraud laws, investigatory powers, and much more. There is ample authority to deal with virtually any and all agent misconduct that is demonstrably improper or otherwise contrary to consumer interests.

The biggest concern identified in the best interest debate is the agent who sells products merely to make money at the expense of the client’s welfare. The scenario contemplates an agent selling inferior or unnecessary products to consumers merely to earn higher commissions. The situation is posited where the agent offers several products, all of which are suitable, but the agent recommends the product earning the highest commission even though it yields inferior results. While such unambiguous cases may be rare, regulators’ hands are hardly tied.

Insurance regulators have broad authority under existing insurance laws. These laws vary from state to state and every fact situation involves unique circumstances. However, as a general proposition, regulators have extensive authority to investigate and discipline agents and seldom hesitate to exercise such authority against agents engaged in self-serving conduct to mislead or injure consumers.

The suitability regulation itself is quite elastic and could be invoked to discipline agents who sell products to make money contrary to a client’s interests. Suitability is undefined which gives regulators considerable enforcement latitude. In a 2003 decision, the SEC upheld a FINRA (f/k/a NASD) enforcement action against a broker who sold Class B mutual fund shares rather than Class A shares, merely to earn greater commissions. The SEC ruled the agent had “put his own interest before that of his customer” and this constituted a violation of suitability under securities laws. The same enforcement authority would exist under insurance suitability laws.

The point here is not to say that enforcement in such situations would be easy. In fact, it would be difficult to show an agent was motivated purely by higher commission in selling products contrary to client interests because sales are often complex and based on many competing factors. However, that is the very reason suitability, rather than best interest, is the proper standard of care for insurance agents because consumers need freedom of choice and agents need flexibility to present alternative products, without paternalistic government interference, all of which in the longer run will serve the true best interests of consumers.

 


Kim O'Brien (Photo: Kim O'Brien)

Kim O’Brien is the vice chairman of Americans for Asset Protection and a member of the steering committee of the Fixed Annuity Consumer Choice Campaign.

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5 Myths of Retirment Planning

Myth 1: Your Expenses Will Suddenly Decrease

Removing your commuting, work wardrobe and business-related travel and dining costs could reduce some of the expenses to which you’ve grown accustomed, but your retirement expenses ultimately depend on the lifestyle you pursue once you stop working, as well as your saving and spending habits. In fact, the Center for Retirement Research’s data indicates that about half of workers in the United States are at risk for a retirement lifestyle of a lower quality than the one they were able to sustain while earning income.

Long before you plan to retire, track the amount of money you spend each month (and on what) to establish a sense of your average expenses. Given that some of those expenses will likely go away once you retire — like fuel costs related to your commute — your overall living costs could go down in retirement. But if you plan to exchange the work commute for world travel or buy a home on the beach once you’ve sold your current one, it’s less likely that retirement will leave more money in your pocket.

In addition, take note of outstanding debt like high-interest credit card balances or car loans. If you plan to pay them off while you’re still earning income, those expenses will be eliminated (along with the interest and fees that may come with them) and ultimately won’t affect your retirement spending.

Myth 2: No More Tax Concerns

You may no longer rely as much on your employer’s W-2 when filing your annual tax return in retirement, but that doesn’t mean taxes stop being part of your life. Once you turn 70 1/2, for example, you may be required to take annual minimum distributions from your retirement accounts — which are then included on your income tax return. Social Security and other retirement benefits are also generally subject to income tax.

You may also find that you’re newly eligible for some tax advantages in retirement, such as the tax law that allows taxpayers age 70 1/2 and older to make contributions directly from their individual retirement accounts (IRAs) to qualifying charities and count those qualified charitable donations toward their required minimum distributions. Some retirees find that they’re eligible for tax advantages they weren’t eligible for previously, like the ability to deduct un-reimbursed medical expenses that exceed a percentage of their adjusted gross income (AGI). The expenses must exceed 7.5 percent of the taxpayer’s AGI for the 2017 and 2018 tax years, or 10 percent of their AGI in the 2019 tax year.

Myth 3: Every Day Will Be Like a Vacation

Whether you dream of not waking up to an alarm each morning (like you have over the last several decades) or are simply looking forward to a day without professional commitments, common retirement misconceptions swirl around the myth that endless free time equates to joy or contentment. Retirees often find that a sense of purpose is more important than non-stop relaxation. In fact, your health could benefit: A study published in the Journal of the American Medical Association found a correlation between strength, vitality and one’s sense that they have a purpose and are giving back to society. You might consider seeking opportunities to volunteer with local organizations or mentor younger students and professionals.

Myth 4: You’ll Never Work Again

More than half of retirees who responded to a study conducted by the RAND Corporation said they’d willingly return to work if the right opportunity presented itself. Further, nearly 40 percent of respondents age 65 and older were currently employed, despite having retired previously. While their motivations for working (or wanting to work) after retirement aren’t defined in the study, their responses debunk retirement myths about older adults wanting to spend their golden years in a rocking chair or on a golf course.

Though the emerging trend of “unretirement” doesn’t mean you have to stay in the same profession in which you spent most of your working life, it does demonstrate that retirement doesn’t have to mean the end of your professional life — rather, it may simply be the start of a new chapter.

Myth 5: Social Security & Medicare Have You Covered

Whether you can live off of Social Security and Medicare in retirement depends on many factors, including the age at which you claim benefits, your current and future medical needs, and the possible future depletion of the Social Security trust. However, it’s important to know the role each will potentially play in your retirement finances in order to build the rest of your retirement savings strategy accordingly.

AARP reports that the average Social Security recipient now receives about $1,400 a month; the maximum payout for those who wait to claim benefits until full retirement age is now $33,456 a year. While Medicare Part A coverage can offset the costs of your hospital care in retirement, retirees should still be prepared to fund additional premiums for Medicare Part B, prescription drug costs and other healthcare expenses they may face related to vision, dental and hearing aid coverage.

Retirement misconceptions can make it challenging to know what your future will hold, but a little strategy and planning can help you prepare. Don’t let retirement myths prevent you from working towards the personal, financial or professional future you want.

 

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Long Term Care News

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Genworth Suspends All Individual Long Term Care Insurance and Income Assurance Annuity Sales Through the BGA Channel
Effective Monday, March 11, 2019, Genworth will temporarily suspend sales of individual long term care insurance and the Income Assurance annuity through the BGA channel in all states.  Genworth will continue to sell these products through other channels.

Effective Monday, March 11, 2019, the Genworth companies will no longer accept new applications from the BGA channel for individual long term care insurance or annuity products, including:

  • Privileged Choice® Flex
  • Privileged Choice® Flex 2
  • Privileged Choice® Flex 3
  • Privileged Choice® Flex 3 – Element
  • Income Assurance Immediate Need Annuity

This change does not affect the following:

  • Renewal commissions for in-force business
  • Pending business or related compensation
  • In-force policyholder servicing
  • In-force policy contractual provisions and benefits such as conversion rights

Existing customers and their benefits will not be impacted by this change, and Genworth’s commitment to them remains as strong as ever.

Transition Rules for New Applications and Pending Business Through the BGA Channel

Electronic Tools

03/08/2019 Last day to submit an eApplication (eSuite of New Business tools)

Quote it!

03/08/2019 Last day to quote individual long term care and Income Assurance annuity products

Applications

03/08/2019 Last valid Application Signed Date
03/11/2019 Last valid Home Office Receipt Date for applications, must be received by 8:00pm ET

Faxed applications must be sent to either: 434 948.5566 or 800 456.8329. Applications may be emailed to EMM-GNWLTCApps@genworth.com .

Note: Applications faxed or emailed to any fax number or email address other than those listed above may not make the 8:00pm ET cutoff.

Pending Business

04/12/2019 Last day to receive pending new business requirements
05/31/2019 Last day to place pending new business in-force
05/31/2019 Pending applications closed that have not been issued in-force

If you have application questions during the transition period, please contact ISN Network @ 800-338-1892 ext 1

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Selling LTC? Think Cash Imndeminity Plan

Cash indemnity benefits offer value to many clients compared to reimbursement plans — or even basic indemnity plans. Because the insurance company does not restrict how LTC benefits are used, and requires no monthly paperwork to collect benefits5 — cash indemnity policies may be more flexible and easier to use.

Cash indemnity plans do not discriminate against alternative care services, and no permission is required in order to use LTC benefits to pay for such care.

Reimbursement plans may have contract language to address use of alternative care services — but there are standards the alternative care service must meet to gain approval — thus the insurance company has the authority to decline benefit payments for these types of services.

Cash indemnity plans can be used to pay immediate family members or unlicensed caregivers that may be less expensive to provide 100% of the insured’s care.6 Reimbursement plans generally do not allow immediate family members to be reimbursed for providing care to the insured and often have limitations or deny reimbursement for unlicensed care providers.

Cash indemnity benefits can be used to pay for care services existing now as well as services invented in the future. This would include traditional care services as well as alternative or “boutique” care services.

One cannot predict if a reimbursement plan would pay for creative or alternative services invented in the future.

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“Yes, I Sell Life Insurance”

You know as soon as people discover you’re an insurance agent they immediately form an impression about you that is a stereotype. Unfortunately, that stereotype is often negative.For Life Insurance agents, where the stereotype can be strong, I recommend you address the stereotype head-on. Here is what I mean- suppose you are asking a potential client to do a policy review Here is how I meet the stereotype head on:

“If I tell you I sell Life Insurance you probably think “plaid jacket” guy who is pushy and sells policies to unsuspecting clients, right?”

Then I pause. I want to give the person time to move the stereotype from their unconscious mind to their conscious part. They might even want to chime in about a negative experience they have had about dealing with “people like you”. That is exactly what we want. Now they are ready for you to explain how your business, your service is different. How your approach fixes the problem that everyone else in your industry has created.

“When we do our policy reviews, we always come back with three possible outcomes. One, we tell you can get the same insurance for less money. Two, we tell you you can get more insurance for the same money. Or three, we tell you that the policy you have is the best for you. That is a win-win-win for you the client. Doesn’t that make sense?”

 

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Throwback Thursday – “No is Short for Next Opportunity”

Read a great book on the plane last week. Martin Limbeck is a sales trainer and author of “No Is Short For Next Opportunity.” His ideas reminded me of what I learned from one of my mentors. The most powerful words a great salesmen has in his repertoire is “next.” Don’t let the “no’s” get you down. If you are doing the right thing the next opportunity is right around the corner.

Limbeck has some other great ideas to share. Here are three of his tips for sealing the deal:

  1. Stand by what you sell: You have to believe in your product or company.
  2. Set goals every day for future prospects: To succeed, be sure your sales funnel is never empty. Make it a habit, like brushing your teeth.
  3. Prepare for anything: Write answers to every question or objection a potential client could dream up. Writing them down will help you commit them to memory.
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Clients Over 40? Smart Money Moves

3 Smart money moves for clients in their 40s

People in their 40s are likely to have achieved a certain level of financial freedom and have a better sense of their needs and expenses in retirement. This puts them in a better position to assess their retirement plans and act accordingly to secure their golden years. One smart strategy to consider is maxing out contributions to their retirement account, such as traditional or Roth IRA. Another is to save for their children’s education through a 529 saving plan. Finally, they should start thinking about what will happen to their assets when they die. Having a will in place is a good first step.

Economic anxiety extends to retirement

Government lawmakers should consider creating a retirement system that combines the flexibility of a 401(k) plan and the best features of a traditional pension to address the growing anxiety of American workers about retirement. This should mean making retirement saving easy for workers, boost transparency requirements for retirement plans, include lifetime income options for these plans, and provide financial planning tools for retirement savers, says the expert.

1 big expense retirees are more than willing to pay

Many Medicare beneficiaries are getting a Medicare Supplemental Insurance policy to cover out-of-pocket medical expenses, according to this article on personal finance website Motley Fool. Most of them are buying the most expensive plan despite the costs, as this would give them peace of mind that their future health care expenses will be taken care of. The American Association for Medicare Supplement Insurance says that two-thirds of seniors who get a Medigap plan opt for Plan F, the most comprehensive but most expensive plan, with monthly premiums ranging from $159 to $239, depending on the policyholders’ location.

This Roth IRA move can create a massive tax headache

Converting a portion or full balance of their traditional IRA assets into a Roth account could result in a heavy tax liability for clients, according to this article from Money. That is because the converted amount is treated as taxable income, unless the money involved is their nondeductible contributions. “I always tell clients to do a tax projection before they convert, so that they can see what the tax bill will be,” says a financial planner.

How high earners can set up a Roth IRA

Clients whose income exceeds the income threshold have the option to make nondeductible contributions to a traditional IRA, but not Roth IRA, according to this article on Kiplinger. Once the money is in traditional IRA, they also have the option to convert the funds to a Roth IRA. The Roth conversion of nondeductible contributions won’t trigger tax liability, except for the earnings portion of the converted amount. Clients will owe taxes on the entire converted amount if it involves tax-deductible contributions.

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