So What is the fiduciary standard and why is it important to discuss in relation to how structured settlements are sold, marketed and explained to personal injury victims?
I’ll place a link to the definition of The Fiduciary Standard in the blog post or video description, but for purposes of this commentary lets just go with the most basic of explanations, that being a standard in which the adviser, broker or agent is required to put the needs of the client, in this case the personal injury victim, ahead of their own financial or professional interests, ensuring that compensation, sales trips, production requirements or other factors don’t interfere with the type of recommendation they are making when it comes time to allocate their settlement dollars into a plan which designs and income or future needs plan.
As it stands now there is really no clear duty as to what the adviser is recommending, as the sale of annuity contracts that fund structured settlements seem to fall into some great gray area where we don’t do suitability studies and there is no expectation or legal requirement for us to act in a way that our recommendations comport with those of a fiduciary standard.
It is my theory that this is going to change and change soon, due to pressures and outside requirements which to date, the structured settlement profession has been largely exempted from.
So if structured settlements are not sold under the fiduciary standard, than what standard are they in fact sold or recommended? Essentially all annuity and life insurance agents are held to what is known as the “suitability standard” in which the recommendation of the product only needs to be considered generally suitable, regardless of whether or not it might meet the stricter test of a fiduciary. As I mentioned last week in my discussion on transparency in pricing, if I am writing a non-structured annuity contract I am required to do an exhaustive suitability interview and questionnaire with the client to make sure my recommendation is suitable to their age, needs, investment risk and future requirements. No such requirement is imposed on structured settlement agents and brokers. Why that is the case is a big part of why I’m raising the issue in this commentary.
So, why is the fiduciary standards “ a thing” to even talk about, why not just keep on as we have been for decades? Why make this a problem when the profession hasn’t needed to address it previously? Well, you only need to look to the massive changes facing the annuity and mutual fund profession as a result of the Department of Labor deciding that in 2017 any advisor working on an IRA, KEOGH, 401K or pension plan MUST adhere to the fiduciary standard in their recommendations and offer dramatically expanded disclosure on commissions, fees and potential conflicts of interest. This trend is accelerating, whether or not that particular regulation stands under the new administration or not. Many of the largest fund, bank and investment managers elected to stay under that standard as they feel ultimately it is pro consumer and will be the de facto legal and administrative law standard going forward. In short the big bad world of compliance and law is catching up with the annuity profession and it is only a matter of time before structured settlements are swept into that category or agents are required to meet that standard in order to be licensed or appointed.
So what happens if structured settlements move to a fiduciary standard? Personally I think it would elevate the profession but it would also disrupt many of the current sales practices that are under examination, such as the AIG structured settlement program, approved lists, sales contests, trips, daily rate pricing and underwriting disclosure, adherence to HIPA standards and other elements that are currently common but not generally disclosed to clients in every case and situation, as there is no legal requirement to do so. None of these are big deals to fix or get rid of, but a lot of people in our profession object.
So why all the objections? In short because our profession has a history of preferring minimal disclosure, compliance and visibility. The Spencer vs Hartford case, The Weil vs Manufactures Life case and now the AIG class action all illustrate an unfortunate history of changing when forced by court order or some other outside agent or event. The objections against a higher professional standard will increasingly sound like the death rattle of a profession that is fighting a necessary change. Hopefully we as a profession elect to change before it is once again forced upon us from the outside and at great cost.
To learn more, contact Mark Wahlstrom at Wahlstrom & Associates.