In April, 2017, the Department of Labor’s new rules go into effect. Essentially, the regulation will require the financial sector to act as a fiduciary when advising consumers on their retirement plans and accounts. For those who sell annuities, this will fundamentally change their industry.

Let me first state that I am not a fan of annuities (whether fixed or variable), and have written several columns over the years warning investors away from these instruments. I have received a great deal of hate mail from the insurance industry as a result. So be it. I think they are expensive, illiquid, the sales materials misleading and not appropriate for most investors.

The crux of the matter is that thanks to the DOL ruling, brokers (insurance or otherwise) will no longer be able to sell these investments to retirement plans and accounts based on suitability alone. Next year, in order to sell these products, a broker must prove that their purchase is in the client’s best interest.

That is going to require a comprehensive client analysis similar to one that is usually performed by a financial planner. Issues such as whether a broker is giving “prudent” advice (as opposed to simply acceptable advice) will come into play as will loyalty to the client. Most consumers are not aware that the sale of annuities was not governed by Federal suitability rules. Instead, individual states regulated annuity products and what was suitable varied from state to state.

Now a whole host of factors will need to be examined. Questions such as the desire of a client for income and how much and at what age, the client’s likelihood of staying in the product for the life of the agreement (since most annuities have steep penalties for selling early), the client’s life longevity is also important, as will any potential gap between covering one’s expenses in retirement and the promised income stream of the annuity.

Issues such as the amount and percentage of fees a client will pay over the life of the contract will now have to be explained clearly, as will the exact amount of baseline guaranteed income promised. Questions that are normally seldom addressed, such as provisions that give the insurer the right to increase fees and/or what are the income step-ups based on market performance, must be answered.

Another issue that is usually glossed over by the selling agent is the insurer’s financial health. You see, annuities are not insured by the FDIC, but solely by the credit worthiness of the insurer issuing the annuity. There are some who question whether the variable annuity side of insurance will be able to survive this additional scrutiny.

The Insured Retirement Institute, which monitors annuity sales, reported that revenues in the third quarter of this year have dropped 8.2% to $51.3 billion and 12.3% from the $58.3 billion in sales in the third quarter of last year. That’s not the end of the world. I don’t underestimate the ability of insurers to bounce back. But if annuities are to survive, then the game plan must change dramatically and in favor of the consumer. It will be interesting to see how the industry handles the change.

Bill Schmick is registered as an investment advisor representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM.  Direct inquires to Bill at 1-888-232-6072 (toll free) or e-mail him at email hidden; JavaScript is required