Considerations for Deciding Between an Advisor Fiduciary and an Annuity Sales Professional

In the investment world, anyone who calls themselves a fiduciary must make recommendations and provide guidance solely for your benefit. They cannot be required to sell certain products or to meet a sales quota. This is an important consideration when deciding between an investment advisor fiduciary or annuity sales professional.

There are some key differences between investment advisors and annuity sales professionals such as insurance agents and securities representatives. One clear difference is how they get paid. An investment advisor is compensated by an ongoing advisory fee that is paid by you, the client. An annuity sales professional, however, receives a sales commission that is paid by the product provider — an insurance company or broker-dealer.

The investment advisor must disclose the terms of that advisory fee. The annuity sales professional must provide a disclosure under a State Best Interest Suitability regulation or SEC Regulation Best Interest, whichever applies to the annuity sales professional. When it comes to annuity sales specifically, the regulatory framework can be a bit confusing due to the different products. For example, fixed annuities are considered insurance products, not securities. Therefore, they’re regulated at the state level by insurance departments.

The NAIC Suitability in Annuity Transactions Model Regulation, which has been adopted by most states, was revised in 2020 to include a ‘Best Interest’ standard. It requires annuity sales professionals to act in the consumer’s best interest, disclose any conflicts and compensation, and document suitability.

Variable annuities are the opposite. These products are securities, because their value is tied to underlying investment subaccounts. If they’re sold by a broker-dealer or a registered representative, they fall under SEC Regulation Best Interest. Additionally, they’re regulated by FINRA, which enforces suitability rules and SEC Regulation Best Interest.

If the annuity sales professional is selling a fixed annuity only, the State Best Interest Suitability Regulation applies. If they’re selling a variably annuity, or another type of security, SEC Regulation Best Interest applies. Now, if they are licensed to sell both, regulation will depend on the type of product being sold.

There are some legal differences, as well. For an investment advisor, legal liabilities may be broader than they are for the sales professional. They have more legal requirements, and the investment fiduciary’s advisory firm supervises the advisor representative. The annuity sales professional, on the other hand, has a Best Interest Suitability requirement that also requires that they put the interests of the client first, though it works a little differently.

Traditionally, annuity sales were held to a suitability standard that required the sales professional to recommend a product that was suitable based on a client’s age, income, financial situation, risk tolerance, and future goals. The caveat, however, was that suitability didn’t exactly mean it was the best option for the client. In other words, the product determined ‘suitable’ could also be the product that paid the sales agent more, so long as it wasn’t inappropriate.

However, the updated NAIC Model Regulation in 2020 changed that. The new standard requires sales agents to make a recommendation that is in the client’s best interest. They are not allowed to put their own financial interest ahead of the client. Under these new revisions, they were also required to meet four obligations: take care with their client by thoroughly gathering and evaluating their information; provide disclosures about conflicts of interest and compensation; identity and manage material conflict; and provide documentation by showing how their product recommendation meets the client’s best interest. ‘Best Interest Suitability’ requires the sales professional to show the client how their product recommendation was made solely in the client’s best interest. It goes beyond just meeting suitability requirements.

While compensation disclosure is more general for annuity sales, the client can request the full terms of any sales compensation. A financial institution, such as an insurance company or broker dealer, also has some liability for the annuity agent’s work, as the agent is their representative.

Choose the Option That Fits Your Needs

When choosing who to work with, it is important to understand your financial needs. If you are looking for guaranteed income in retirement, you might call an annuity professional to evaluate the benefit an annuity solution. That would be a commissionable sales transaction, if completed.

If you are looking for advice and management of your investment portfolio, you’ll likely call an investment advisor. The advisor would charge you a fee for their services after you agree to hire them. It’s important to note that an investment advisor and an annuity sales professional can wear both hats. When working with either of these types of professionals, ask yourself, “Will this be advice or a product purchase?”

You also have a right to know which duty of care applies to which service or product—Fiduciary or Best Interest. Don’t be afraid to ask.

When it comes to managing your finances, it is rare to find an expert in everything. Many professionals are part of a broad-based team that can include tax professionals, investment advisors, retirement planners, financial planners, and estate planning attorneys. If you are searching for professional retirement and financial guidance, the most important thing is working with professional people who understand your needs and can help you in achieving your specific goals.

How might you determine compatibility? If you encounter poor communication, confusing or vague explanations, avoidance of compensation and cost questions, or high-pressure sales tactics, these may be signs of friction in the future. Do your research and ask as many questions as you need to when meeting with potential financial professionals. It is okay to decide based on what you see and hear — and what your intuition tells you. Your financial future matters, and you deserve to work with professionals who make that a priority.

Ray Kathawa is the vice president of practice development at M&O Marketing and afounding member of the Independent Excellence Group. During the past 20 years, Ray has worked with some of the nation’s most successful financial service professionals inthe fixed annuity, life insurance, and securities marketplaces. He has also been recognized as the number one wholesaler in the country for multiple insurance carriersand distribution channels.

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