Key Takeaways
- A fiduciary has a legal and ethical obligation to act in the best interest of their client, avoid conflicts of interest, and ensure transparency in their recommendations.
- Fiduciaries can recommend and sell annuities if they are licensed and the product is suitable for the client, with the requirement to disclose any compensation received.
- The NAIC’s Suitability in Annuity Transactions Model Regulation mandates that annuity agents adhere to a best interest standard, similar to fiduciaries, including disclosure of compensation and conflicts of interest.
What Is a Fiduciary?
A fiduciary is someone who has legal and ethical responsibilities to act solely in the best interest of someone else, typically a client. People need to be able to trust that financial advisors are selling or recommending investments that are really best for them and not because the advisors receive high commissions or conflicts of interest that could cloud their judgment.
According to the Institute for the Fiduciary Standard, fiduciaries have six key duties:
- Serve the client’s best interests
- Act in utmost good faith
- Act prudently – with the care, skill and judgment of a professional
- Avoid conflicts of interest
- Disclose all material facts
- Control investment expenses
An example of a fiduciary is a “fee-only” financial planner who charges only for advice and does not get commissions.
Advisors who are fiduciaries can manage clients’ finances without advance approval of every transaction because they are held to the fiduciary standard.
Can Fiduciaries Sell Annuities?
A fiduciary can sell annuities, provided they are licensed to sell insurance in the state they operate in. For a fiduciary to recommend or sell the product, the annuity must also be the most appropriate choice for the client.
Because annuity sales often provide commissions for the selling agent, you might think that selling an annuity represents a conflict of interest. However, if the annuity is a practical inclusion in the client’s portfolio, it could still be appropriate for a fiduciary to recommend it. The CFP® Board, one of the organizations that governs fiduciary standards, simply requires that fiduciaries disclose any compensation they receive so their clients can give informed consent.
If a fiduciary isn’t comfortable selling a product on which they would receive a commission, many insurers now offer advisory annuities that do not pay a commission. These products are designed for fee-only advisors who cannot accept commissions or other sales-related compensation.
Fiduciary Rules vs. NAIC Suitability Standards
The code of ethics that governs fiduciaries is similar to the suitability standards that many agents who sell annuities follow. The National Association of Insurance Commissioners (NAIC) sets the best interest suitability standards for annuity brokers and agents.
The NAIC’s Suitability in Annuity Transactions Model Regulation incorporates a “best interest” standard. Like fiduciaries, annuity agents must only recommend products that are in the best interest of their client, and the client’s best interest must always be placed ahead of any financial interests the agent may have.
To uphold this standard, the NAIC requires agents to disclose their role in the transaction, their compensation and any conflicts of interest. They must also document any recommendations they make and the justification for any recommendations in writing.
The NAIC’s suitability guidelines have been implemented in 41 states as of 2024.
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