The Insurance Industry’s Latest Battle Against Consumer Protection

How opposition to the fiduciary rule puts your retirement at risk 

Ric Edelman: It's Tuesday, August 13th, and I want to share with you a question that I received from Alan in West Virginia because this is one of the most fundamental issues that you will ever face as an investor. Here's Alan's question: 

“Ric, please comment on the most recent efforts by lobbyists to block regulations that help ensure financial advisers are fiduciaries. Is there language in the regulations that hurt consumers? Or is this just insurance salespeople protecting themselves?” 

Yeah, Alan, you've obviously been following what's been happening with this saga. Let me bring folks up to speed. The Biden administration has put forth a regulation from the Department of Labor that would require all financial advisors to act as a fiduciary. What's a fiduciary? A fiduciary is somebody who is, by law, obligated to serve your best interests. Now, that might seem to be a rather strange legal obligation. I mean, who wouldn't want to serve your best interests? Okay, fine. That was sarcastic. That's the issue, isn't it? Is that too often we encounter people in the business world who are not looking out for our best interests. They're focusing on their best interests. We see this in virtually every environment. Whenever you're in a sales scenario. When everybody from the waiter who recommends a far more expensive wine than you need to be paying, to a car sales rep who jacks up the price of the automobile or lowballs the offer for your trade-in, to the plumber who overcharges you, to the surgeon who recommends unnecessary surgery, the list goes on and on and on. And of course, I've just done a pretty good job of besmirching the reputations of so many people in so many industries right there. But nevertheless, we know there are bad apples in every profession. We know that although most people are honest, hardworking, dedicated folks serving properly their customer base, there is unfortunately too much scenario of too many abuses. 

And this is particularly true in the financial services industry. And to the shock and surprise of many consumers, many investors, you don't even realize that the financial advisor you're dealing with isn't required to serve your best interests. They aren't a fiduciary.  There are, in fact, three categories of people operating as financial advisors. They are stockbrokers. These are the folks who work for the, typically the big wire houses. These are folks who are licensed by FINRA, the Financial Industry Regulatory Authority. These are generally commission-based sales reps. When you buy an investment, when you invest money into something, whether it's a mutual fund or a stock or a limited partnership or what have you, they earn a commission based on the amount of money you've invested. 

Then there are insurance agents. These are state regulated. They hold state insurance licenses and the vast majority of insurance agents, almost all of them really, are also paid by commission. If you don't buy that life insurance policy, they don't earn any money.  

And then there's the third category, RIA, Registered Investment Advisor. These folks are licensed by the SEC, and these folks, the RIAs, are the only ones, by virtue of their SEC registration, who are obligated to serve your best interests. Stockbrokers are not required to do that. They simply have to provide you investments that are appropriate, that are suitable based on your circumstances, but not necessarily best for you. And insurance agents, they only have to serve utmost good faith, which is sounding pretty lofty, but in fact, a standard far below the fiduciary standard. So as a result, since insurance agents and stockbrokers don't have to act as fiduciaries, they don't have to serve your best interests, they're free to serve their own best interests. They're free to serve their firm's best interests. And as a result, many of the investment and banking products that you see in the marketplace are, frankly, abusive. They charge extremely high commissions, they have very high fees, they have limited liquidity, they have underperforming returns, and in many cases, consumers aren't fully aware of these details. I mean, after all, this is a personal relationship business. You tend to deal with a stockbroker, financial advisor, or an insurance agent based on the relationship you develop with them. And people tend to trust in those relationships. So when your friendly neighborhood insurance agent says to you, I think you ought to take your retirement assets and put them into this annuity because it's going to guarantee a return, it's going to be helping you avoid taxes, it's going to be guaranteed – all that sounds pretty good, doesn't it?  

What there may not be fully disclosing to your need is the fact that there's limited liquidity. The fees are extremely high. Those returns that are guaranteed are actually very low. And the commission that they're earning is 10X more than if they had sold you a mutual fund or ETF. So, the issue here is that this lack of understanding among consumers is so pervasive and the broad ability for insurance agents and stockbrokers to behave in manners other than the client's best interests.  

This is so common that for, frankly, decades, the federal government has been trying to raise the bar. Federal government has been trying to require that everybody in the financial services industry, regardless of how you are licensed, who licenses you, what state you're in, what product it is you're selling, everybody, everywhere would be required to act as a fiduciary. George Bush tried to do it. Barack Obama tried to do it. Bill Clinton tried to do it. And more recently, Joe Biden has been trying to do it. And the result is, is that each of these administrations have put forth a new set of regulations coming from the Department of Labor that would institute this requirement. 

Now, the first question you probably are asking is, the Department of Labor? Why them? It's because of a law called ERISA. ERISA is the governing law for all retirement accounts. Your 401k and 403b, your pension plan, all of those operate under ERISA. And the Department of Labor administers regulates ERISA. ERISA applies only to those retirement accounts. It doesn't apply more broadly to IRAs because IRAs, that key letter there, I, individual, your IRA is an individual retirement account. The ERISA law only applies to organizational retirement accounts, such as your 401k, 403b and so on.  

We know that most Americans have most of their savings in retirement accounts, either IRAs or 401ks. And since ERISA doesn't cover IRAs, Those IRA accounts are a big opportunity for sales reps and insurance companies and brokerage firms and elsewhere to sell those expensive, egregious products that are not in your best interest. They can't sell them to you in a 401k, but they certainly can sell them to you in an IRA.  

So, the government has issued proposed regulation changes to ERISA that would bring those IRAs under the umbrella of government regulation and protection requiring that anybody anywhere recommending an investment for an IRA, they must be a fiduciary, they must be giving you a recommendation that serves your best interests. And those egregious products that have been historically sold to you for your IRA would no longer be able to be sold to you. Sounds good, right? Who would object to this?  

Well, who would object? Well, Alan, you hit the nail on the head – insurance sales people. We know that annuity products, which are, in essence, retirement investments. These are investments that you were supposed to buy and hold until you reach retirement. They give you a tax deferral until you reach retirement. And then once you're in retirement, they often provide you a guaranteed lifetime income. Which is what a lot of retirees are looking for. And therefore, people often gravitate toward these products, often based on the sales pitches from insurance companies and their insurance agents and brokers who are saying, we're going to give you a guaranteed income, we're going to give you income for life, we're not going to charge you any direct fees, and you're immune from stock market crashes. I mean, what's not to love, right?  

Well, there's a lot of stuff not to love with these products. As I mentioned, limited liquidity, often you can only liquidate only 10% per year, extraordinarily high commissions, as much as 10% for selling this product compared to a 1% commission for selling a mutual fund, or in many cases, zero commissions because the advisor will charge a fee instead.  Often these products are redundant because they offer you tax deferral, but you already enjoy tax deferral in your IRA or 401k, so the annuity is not giving you anything you don't already have. And very low returns in exchange for the guarantee of the annuity contract. They're willing to guarantee you the return because the return they're guaranteeing you is very, very low. Far lower than what you are very likely to earn in a stock fund or a bond fund offered by a mutual fund or ETF provider. So, these products have a lot of issues. And ERISA would basically say to those insurance agents, you can't sell that product if it's not in the client's best interest, and everybody knows they aren't in the client's best interest, which means the sale of those products would dry up. Well, that's a good thing, right? That's the whole point. In other words, when the FDA takes a food product off the market because it's poisoning people, that's a good thing, right? We don't want anybody to be able to sell us food that's going to kill us. Why would we want anybody to be able to sell us an annuity that's going to leave us in poverty and retirement? 

So who would object? Well, the people who manufacture those products, the people who market those products, the people who sell those products for a living, the people whose livelihoods are dependent on the sale of those products would object. The fact that those annuities aren't as profitable as alternative investments. The fact that they aren't as tax effective as alternative investments. The fact that they aren't as cheap as alternative investments. So what? It's not my problem. My job is to make an income for myself and my family. And if I can do that by selling you a product, you frankly don't need to be buying or shouldn't ought to be buying, it's not my problem. It's your problem. Caveat emptor. That's what the insurance industry says. It's not my job to be your babysitter or your mama. It's your job. I'm going to recommend a product. If you're stupid enough to buy it, that's your problem. Not mine. Meantime, I get a big commission. I earn a big fat fee. I'm happy. That's the problem here.  

So, as you would expect, the insurance industry has filed lawsuit against the Biden administration over its proposed revision to the ERISA regulations regarding fiduciary duty of these products. And by the way, the insurance industry is not new to this. Not only are they currently suing the Biden administration to stop the implementation of the fiduciary rule regarding these annuity products, the insurance industry has filed similar legislation against every other presidential administration for the very same thing. Every president that has offered regulation that would require everybody on Wall Street acting as a fiduciary, the insurance lobby has filed lawsuits against every one of them, and in every single case, the insurance lobby has won. And this is why, although I've been arguing for the fiduciary standard to be the law of the land for decades, as have many other consumer advocates, it has never survived legal challenges, and here we are again.  

So, what are the arguments that the insurance industry is offering in their legal case to explain why the fiduciary standard should not be the law of the land? Okay. Buckle your seatbelt because their legal argument, while it sounds astonishing, is actually rather fascinating. The insurance industry, in their legal brief, arguing why this new proposed regulation should not be allowed to survive is the following. 

The insurance industry acknowledges that these annuity products are not very good. These annuity products are not as good as other products that are available in the investment marketplace, but the insurance industry says those other products that are available in the investment marketplace, they are generally only available from financial advisors who only work with rich people. You have to have a very high account minimum, often a million dollars or more to become a client of one of those firms. They aren't going to serve the middle market, mass affluent Americans who don't have enough money to hire one of those people who actually happen to be a fiduciary. And therefore, if you don't allow us in the insurance industry to sell these high priced, low performing annuities to these Americans, these folks are not going to have access to any advice from anybody. They're not going to have access to any investment products anywhere, because we're the only ones willing to serve them. In other words, the insurance industry says, better to provide these people with bad investment products than to have them get no investment products at all.  

Really? It's better to give them food that makes them sick than to not give them any food at all? I don't know, what do you think about that? I can tell you what prior courts have thought. Prior courts have said, okay. They've also cited additional reasons. The bottom line is this, the insurance industry is not trying to claim that annuity products are in your best interest. They're not trying to suggest that you really ought to buy annuities for your retirement savings. What they're arguing is, you ought to buy them from us, because we're the only ones willing to sell you anything. Now, I don't know, 20 years ago, maybe that argument had a little bit of rationale to it. But not today, not with the internet, not with the ready availability of do-it-yourself investments, with robo advisors and online services and apps on your phone, the ready availability of mutual funds and exchange traded funds, the remarkably increased level of knowledge and experience that typical investors and consumers have today compared to 20 years ago, is that argument really hold any water?  

I don't think so. And I certainly hope that the court doesn't think so either. But the bottom line is this, the new attempt, the latest attempt to establish fiduciary duty among everybody on Wall Street continues to be under question. I'm not particularly optimistic because I don't see any particular changes in the proposed rule that the Biden administration has proffered that is radically different from anything that the prior administrations have offered, which means I'm not so sure the court is going to have any particularly new reason to support the law as opposed to supporting the contention of the law. So, I'm not particularly optimistic that the court will uphold the Biden administration's argument, as opposed to upholding the claim by the insurance lobby.  

In short, what does it mean? It means as you've been for the last 20 years, you're on your own. You must not assume that you're dealing with a fiduciary when you're dealing with a stockbroker or an insurance agent or a financial advisor. You must ask the question. That's all there is to it. When somebody somewhere is recommending an investment to you, you simply ask the question, are you a fiduciary? The answer is either yes or no. If the answer is no, run away, go to someone else who is a fiduciary. It's really that simple. Second, if they say, yes, I am, simply say to them, prove it. Show me your ADV. The ADV is a federal registration statement that all RIAs, all fiduciaries, must file on an annual basis with the SEC. This is a public document. They are required by law to give it to you when you become a client. They're also required by law to give you an update annually. So simply say, oh, you're a fiduciary? I'm glad to hear it. Please give me a copy of your ADV. If they really are a fiduciary, they'll hand it right over. And if they're not a fiduciary, they won't have one, they won't be able to give it to you. If they hedge and hem and stall and obfuscate, oh, I don't have one with me. Oh, my computer is down. Oh, I'll send it to you next week. Nonsense. They're lying to you. They're not a fiduciary. So, it's really very simple. You want to deal with someone who is a fiduciary, and you want them to simply prove it by giving you a copy of their form ADV.  

These days, it's incredibly easy to find a fiduciary who is willing to work with people, even of modest means. You'll find them all over the country. You'll find them all over the internet. Do not fall as a sucker to the insurance lobbies argument that you either are going to accept bad advice or suffer no advice. That's nonsense. And remember, your future retirement security, your ability to generate income in retirement that you need is dependent on the advice you're getting, and the advice you're getting is going to be determined by the motivation of the advisor you're dealing with. You want to make sure that advisor, whether they work for an insurance company, a brokerage firm, or an advisory firm, you want to know that they are serving your best interests. That means you want a fiduciary. Don't wait for the government to institute a law saying so. You don't have to wait. You can do it right now. Your future will thank you. 

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Ric Edelman: Hey financial advisors, are you fluent in crypto, blockchain, bitcoin, Ethereum, stablecoins, tokenization – and most importantly, crypto taxation, estate planning, and asset allocation? Take the online course, become Certified in Blockchain and Digital Assets. Thousands of financial professionals in 37 countries have enrolled. Become fluent in crypto so you can help your clients and build your practice. Enroll today and get your CBDA designation. 

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