Advisors Selling Annuities, Beware: CFP Standards and NAIC Annuity Sales Rules Differ

What You Need to Know

A new guide published by the CFP Board highlights key areas where state-based annuity sales rules fall short of the organization’s own fiduciary standard.
In cases where CFP Board rules are stricter than NAIC rules, CFPs must follow the higher standard of care.
CFP Board CEO Kevin Keller says fiduciary duty is the foundation of the CFP code and standards.

A new guide published by the Certified Financial Planner Board of Standards helps financial professionals compare the requirements of the CFB Board’s internal code of ethics and standards with annuity sales regulations adopted by the National Association of Insurance Commissioners (NAIC).

Specifically, the new CFP Board resource considers how the organization’s own advisor conduct standards match up against the NAIC’s Suitability in Annuity Transactions Model Regulation, which was originally approved in 2020 in the wake of the adoption of Regulation Best Interest by the U.S. Securities and Exchange Commission.

The NAIC is the national standard-setting body for state-based insurance regulators in the U.S., and as of late 2023, more than 30 states have taken voluntary action to adopt its framework for the fair sale and servicing of annuities to retail customers.

The NAIC rule’s conduct standards are substantially similar to those of the SEC’s Reg BI, but they do differ in some important ways with respect to the CFP Board’s code of ethics and standards.

As such, the new comparison guide is designed to help CFP professionals understand some important similarities and differences between the NAIC model regulation and the CFP Board code. It also clarifies that, in cases where the CFP standards set a higher bar of conduct than the NAIC model regulation, CFP professionals are obligated to adhere to the CFP requirements.

“The foundation of the CFP code and standards is its fiduciary duty,” CFP Board CEO Kevin Keller said in an announcement accompanying the new guide. “As this guide makes clear, a CFP professional makes a commitment to CFP Board to act as a fiduciary and, therefore, to act in the best interests of the client at all times when providing financial advice.”

NAIC vs. CFP Board Standards

The new in-depth guide runs is 13 pages long and includes a substantial amount of text comparing the requirements of the CFP Board code and the NAIC model regulations, but as noted in Keller’s announcement, there are four primary areas of disagreement between the two frameworks.

First, the CFP Board code imposes a blanket fiduciary duty on CFP certificants, while the model regulation does not use the fiduciary language and does not represent a true fiduciary standard. From a practical standpoint, this means living up to the NAIC standard is more a matter of transparency and disclosure versus a matter of outright permitted and unpermitted conduct.

That is, the model regulation provides that a producer, when making a recommendation of an annuity, shall act in the best interest of the consumer under the circumstances known at the time the recommendation is made, without placing the producer’s or the insurer’s financial interest ahead of the consumer’s interest.

Other Key Differences

The other areas of disagreement between the NAIC model regulation and the CFP Board requirements include the fact that the CFP Board code treats compensation as a “material conflict of interest,” whereas the NAIC model regulation does not.

“The model regulation excludes cash and non-cash compensation from the scope of material conflicts of interest,” the CFP guide warns. “As a result, while the model regulation requires disclosure of how the producer is compensated, there is no requirement in the model regulation to identify and reasonably manage compensation-related conflicts.”

The CFP Board, on the other hand, considers conflicts related to cash and non-cash compensation to be “among the most prevalent and significant conflicts of interest,” and as such, a CFP professional must disclose and properly manage their compensation-related material conflicts of interest.

Additionally, the scope of the CFP Board’s requirements are broader than the model regulation. That is, the model regulation applies only to annuities — not other types of insurance potentially sold by advisors — and it specifically excludes annuities in many workplace retirement plans. The CFP code, instead, applies to “all financial advice.”

Finally, the CFP Board guide stipulates that the CFP code and standards apply a “prudent professional standard,” while the model regulation does not. In practice, this means the model regulation allows a producer to recommend products that other insurance professionals would determine effectively address a consumer’s financial situation — even if a prudent professional would not recommend the product.