Fall is now upon us, the kids are at school and, in keeping with the time of year, workers in the financial services industry are back at their desks.

As the leaves begin to change and the temperature cools, perhaps all is not as it should be for our business. The SEC’s Regulation Best Interest (“Reg BI”) in the works and some critics think it is doesn’t go far enough in establishing standards of broker conduct; in fact, several state attorneys general have brought suit against the commission, claiming the regulation won’t adequately protect investors against conflicts of interest.

Then there are states that have established their own agent and broker standards, one of the most notable being my home state of New York. Several insurers, including prominent variable annuity players Jackson National and Lincoln National, suspended fee-based annuity sales there due to new disclosures required under Insurance Regulation 187, which took effect August 1.

Meanwhile, on a positive (not to mention related) note, several insurers announced they received favorable private letter rulings from the IRS that will allow them to assess advisory fees from annuities without those deductions triggering a taxable event – which had been the case heretofore.

For now, I won’t dwell too much on the regulatory landscape. I will just quickly note that, as of this writing, it looks like the New York situation is working itself out, because an industry trade publication reported that the New York Department of Financial Services has issued guidance to address insurers’ concerns. A Lincoln spokesperson said that because of this, the company is likely to bring its fee-based products back to New York soon.

So, since school is back, where is the learning opportunity here? I would argue that the recent developments noted above point to a bright outlook for fee-based annuities, this, interestingly, despite the scuttling of the DOL rule, which put a temporary damper on their prospects. Whether they come from the federal government or the states, tougher adviser standards should encourage a greater migration away from traditional commissions.

Moreover, the growth of headcount in registered investment adviser (RIA) channels has been outpacing the industry in recent years. Fully independent RIAs tend to eschew annuities, but hybrid RIAs are much more comfortable with them. According to a 2017 survey conducted by Cerulli Associates, hybrid RIA headcount grew by an 8% compound annual growth rate over the previous five years, and Cerulli forecasts that the hybrid channel’s portion of total financial industry assets will grow from 8% to 10% by 2021.

I think the recent private letter rulings will only help the cause. Years ago, I recall presenters at industry conferences reveal that advisor compensation was one of the main obstacles against the offering of fee-based products. Early proponents like American Skandia reported having to take adviser fees from outside accounts, which was no doubt cumbersome.

My only caveat about PLRs is that technically they are meant to address only the specific scenario described in the letter. This has not stopped PLRs from serving as precedents for other companies, however. I will be very interested to see if other insurers follow the lead of Nationwide, which now has a guaranteed lifetime withdrawal benefit that allows for the deduction of advisory fees (within limits) without reducing the benefit base.

I’ll have more to share about fee-based annuities in an upcoming issue of The Soleares Report as several new ones have been filed, along with some new GLWBs and structured annuities.

While the industry will be facing some headwinds over the near term – lower interest rates being just one of them, in addition to the new regulations – I think insurers will continue to innovate and tweak product concepts, which will make matters interesting over the remainder of this year.