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Whither Variable Annuities After the DOL Rule?

For a regulation that has not even been finalized, the DOL’s conflict-of-interest rule is already causing significant changes in the market.

This impact was highlighted by the recent sale of MetLife’s advisor network to MassMutual. While the primary motivation for the sale was probably to escape the Fed’s too-big-to-fail law — which likely drove the AIG BD divestiture as well — the anticipated impact of the DOL rule was also blamed. One of the issues is that commissioned-based products, especially the sale of proprietary VAs, will be in conflict with the DOL rule unless they qualify for an exemption.

The exemption to sell variable annuities for retirement plans will likely go away under the rule. Big upfront commissions might be replaced by level comp, even under a Best Interest Contract Exemption (BICE). A lot of brokers, especially those within insurer networks, may have a hard time even staying in the business under those circumstances, a fact highlighted recently by the former head of the SEC’s Division of Investment Management.

So perhaps one factor driving the BD mergers, especially the insurer BDs, is the reality that a significant percentage of these brokers may actually be forced out of the business or decide to exit on their own. And though there will be fewer advisors in their network, the insurance BDs might actually be better off retaining their higher-level advisors.

Which raises a couple of interesting questions: Will the surviving career agencies actually be better positioned after they get rid of some of their “deadwood” and get bigger because of mergers? And will they be able to take advantage of the convergence of benefits in the workplace? Those career agency advisors are much more comfortable selling benefits and insurance products alongside 401(k) plans than wealth management advisors are.

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