Morningstar - Q4 2021 - 37

EXHIBIT 1
Regulatory Landscape Depending on how and where an annuity is sold, different standards apply.
Product/Seller
Variable Annuity Sold by RIA
Variable Annuity Sold by Broker/Dealer
Variable Annuity Sold by Insurance Agent
Nonvariable Annuity Sold by RIA
Nonvariable Annuity Sold by Broker/Dealer
Nonvariable Annuity Sold by Insurance Agent
*Assumes ongoing relationship between RIA and client.
Source: Morningstar.
SEC
RIA Fiduciary Duty
Department of Labor (Only if IRA or Erisa Plan)
Fiduciary Rule*
State Law
Applicable
Regulation Best Interest Fiduciary Rule if Five-Part Test Is Satisfied; Amendments TBD Not Applicable
Security Fraud Rules
Not Applicable
Not Applicable
Not Applicable
Fiduciary Rule if Five-Part Test Is Satisfied; Amendments TBD Applicable
Fiduciary Rule*
Applicable
Fiduciary Rule if Five-Part Test Is Satisfied; Amendments TBD Not Applicable
Fiduciary Rule if Five-Part Test Is Satisfied; Amendments TBD
Applicable
overcome the challenges. Here is a breakdown
of the legal and operational barriers holding
GIPs back and what advisors can do to help clients
get around them.
Legal Barriers
There are three central legal barriers that advisors
can help clients solve:
Barrier: Liability risks.
Many investors lack easy access to annuities
because they are not offered in their
employer-sponsored retirement plan. Under the
Employee Retirement Income Security Act,
employers are potentially liable for selecting
annuity benefit providers for 401(k), 403(b), and
other sponsored plans. Annuities often
come with higher fees and are more complex than
mutual funds and collective investment trusts,
which increases the likelihood of litigation.
This greater risk level has deterred employers
from offering annuities in sponsored plans.
Solution: Advisors can help clients shop
for a high-quality GIP and help them determine
how much of their retirement portfolio
to allocate to it, even if it is not offered in an
employer-sponsored plan.
Barrier: No federal standard on annuity advice.
The standards that govern annuities advice
vary based on the type of account in which the
annuity is purchased, the individual through whom
the purchase is made, and the type of annuity
being purchased. This lack of standardization can
erode investors' confidence in annuities.
A brief summary of the varied regulatory landscape
is shown in EXHIBIT 1 .
Annuities that are offered through employersponsored
plans are subject to Erisa standards,
but employees do not typically receive
personalized advice regarding annuities in those
plans. People most commonly purchase
annuities by rolling over their 401(k) assets into
an annuity held in an IRA. The Regulation Best
Interest standard applies to rollovers into
variable annuities but not to annuities that do not
qualify as securities, such as single-premium
immediate annuities.
In some situations, investors also receive Erisa
fiduciary protections. For all annuities sold by
Registered Investment Advisors, Erisa protections
apply only if a five-part test for investment
advice is satisfied; the most limiting condition of
this test is that an ongoing relationship between
the RIA and the client must exist.
Annuities sold by broker/dealers and insurance
agents are also subject to the fiduciary rule
only if the five-part test is satisfied, a typically
much less common occurrence than in the case of
an RIA. Individuals making one-time annuity
purchases are not protected by the fiduciary rule,
though this could change depending on
amendments to a rule the Department of Labor
is expected to make later this year.
Accounts managed by RIAs containing annuities
benefit from the availability of advisors, who
can recommend an allocation toward a GIP.
Despite the absence of a uniform standard and
notwithstanding the regulatory gaps, RIAs
have often earned a Certified Financial Planner
designation as well. RIAs who have a CFP
designation are fiduciaries and must act in their
clients' best interests-even when recommending
products that do not qualify as securities. Because
of their CFP designation and the importance of
building investor trust, RIAs should abide by their
fiduciary duty in their interactions with their
clients regardless of the type of annuity at issue.
Broker/dealers and insurance agents should
watch for future Labor Department and
SEC guidance and enforcement of Regulation Best
Interest and the fiduciary rule. Some states
are also adopting fiduciary standards that could
be stricter than Reg BI.
Solution: By always following fiduciary duties,
or the SEC's Regulation Best Interest, advisors can
compensate for the lack of a uniform federal
standard by putting their clients' interests first.
Assessing whether purchasing an annuity is in
a client's best interest can be difficult-especially
when considering complex annuities that
are hard to compare. The Morningstar Annuity
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Morningstar - Q4 2021

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