Dear Mr. Maurer,

Clearing up the confusion that can surround the subject of commissions and compensation on financial services products is very important.  At NAFA, the National Association for Fixed Annuities, we represent all fixed annuities – indexed, declared rate and income (a.k.a. immediate). These annuities are sold by insurance agents, who in some instances are also securities licensed. They all share a common goal of creating lasting and trusting client relationships.

In the above referenced article, you compare how stock brokers, fee based advisors and insurance agents are compensated. However I think it is important to note that, stock brokers, advisors, and insurance agents have different licenses to sell different products. It isn’t uncommon for insurance agents to be securities licensed in one way or another or vice versa but the type of product the consumer is purchasing will dictate what type of “advisor” they need to work with.  If an “advisor” is only securities licensed then they cannot offer their client a fixed annuity or any other insurance product just as someone who is only insurance licensed cannot offer their clients a security product. How an agent is compensated might be something that a consumer takes into consideration but ultimately they need the right type of product to meet their need.

There is another very important issue we need to clear up.  In the above referenced article, you comment, “…once a product has been approved for your state, the agent is not even held to a suitability standard of care.”  That is not true. While your article doesn’t specifically discuss fixed annuities because they are sold by insurance professionals they are subject to the strict National Association of Insurance Commissioners (NAIC), Suitability in Annuity Transactions Model Regulation.  The Model has already, been approved in 26 states with many more pending. As a result of the large number of adoptions (and pending adoptions), most companies have already instituted these standards nationwide.

The NAIC Suitability Model was modeled after FINRA’s Suitability Model for broker-dealers.  However, the NAIC model has three key improvements over FINRA’s model:

  1. TRAINING – each agent is held to a product training standard that doesn’t exist for those with investment advisory security licenses. Licensed insurance agents must take product-specific training on each and every product they recommend.  The insurance company must ensure that agents are taking this training, and that they are re-trained when any product changes, enhancements, or additional features are introduced.  Those selling security products are not required to take training on every mutual fund, bond index, or stock they sell.
  2. INSURANCE COMPANY REVIEW OF EVERY SALE – Each and every sale must follow the suitability standards set forth, and each and every sale is reviewed a second time by the insurance company.
  3. COMPANY LIABILITY – Ultimately, the insurance company is held accountable and is liable for the suitability of every sale; not a broker-dealer, fiduciary or supervisor.  This accountability lies with an insurance company, who is permitted to do business only at the approval, and under the authority of, the state insurance department.  This is a much stronger protection for the consumer, than merely holding a licensed individual, an individual investment advisor (fiduciary standard), or broker-dealer (FINRA suitability) responsible.

Understanding these three strong consumer protection rules, it is clear that the agent who is selling the annuity cannot be motivated by anything other than what is best for their customer, their financial plan, and their current financial status.  However, if the state insurance department determines that an unsuitable sale is made, they seek correction from a licensed insurance company who is holding that insurance contract as well as the money paid into that insurance contract.

Similar protections do not exist for consumers who are sold an unsuitable security or who are victims of fiduciary violation or fraud.  A security purchase may be unsuitable, based on the risk tolerance or investment horizon of the customer, and the product may lose value from its original purchase price.  Money paid to a fiduciary into a fraudulent mutual fund or investment scam can disappear in such scenarios.

Departments of Insurance are required by law to hold the licensed producers in their states accountable to the highest sales standards. You mislead your readers to suggest otherwise.  The success of the state-based regulation and consumer protections is evidenced by the NAIC reporting of the lowest number of indexed annuity complaints in 2011, since 2004.  This latest figure is six times lower than in 2007 (the year when most indexed annuity carriers voluntarily adopted suitability standards).[1]

This evidence makes it rather clear that the existing oversight of the insurance industry is quite effective. The insurance industry works hard to ensure that the regulations governing insurance and annuity sales are anything but “buyer beware.”  Visit any insurance department website, and you will personally discover how easily and quickly you can file a complaint with your state regulator.  More importantly, the regulator works directly for, and with the complainant, to resolve the complaint directly with the insurance company and/or insurance agent in question.

It is extremely unfortunate that fraud and misconduct are a part of our society; problems that no industry in our nation is exempt from. However, despite the most recent economic crisis, no indexed annuity insurer has gone out of business. The number of consumer complaints on these products has trickled-down to a handful. The complaint/resolution process continues to ensure that the customer with a legitimate complaint is “made whole.” It is clear that the insurance industry is an industry where consumers are well-served and protected.

NAFA works very hard to assist our sister trade associations in the pursuit of protecting consumers. We encourage you to learn more about NAFA’s efforts to educate consumers, producers, and the media- by visiting This is NAFA’s consumer-friendly website, which enables consumers to research what they need to know about fixed annuities.


Kim O’Brien
President & CEO
The National Association for Fixed Annuities

[1] Jack Marrion, President of Advantage Compendium, a research consultancy resource to the annuity industry, April 2011

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