The best interest standard requires annuity agents to act in the client’s best interest when making a recommendation – a higher bar than the older suitability rule. Adopted by the National Association of Insurance Commissioners (NAIC) in 2020 and now in effect in most states, the rule was designed to align annuity sales practices more closely with the federal Department of Labor’s fiduciary expectations.
Four Obligations Under Best Interest
Under the NAIC model rule, agents have four specific obligations:
- Care obligation: Exercise reasonable diligence to know the client’s profile and the product
- Disclosure obligation: Disclose conflicts of interest and how the agent is compensated
- Conflict of interest obligation: Identify and avoid or mitigate any conflicts
- Documentation obligation: Document the basis for the recommendation in writing
What Changed for Annuity Buyers
Pre-2020, an agent could recommend a “suitable” annuity even if a better-fitting alternative existed. Under best interest, the agent must reasonably believe the recommendation is in the client’s best interest, considering compensation, contract features, and known alternatives. Compensation alone cannot drive the recommendation. Most carriers have updated their compliance forms to capture this analysis at the point of sale.
Best Interest vs Fiduciary
The best interest standard is stricter than suitability but is NOT the same as a full fiduciary standard. Fiduciaries (like Registered Investment Advisors and ERISA plan trustees) have an ongoing duty of loyalty and care, including monitoring the recommendation over time. Best interest applies primarily at the point of sale and to the specific transaction, not on a continuing basis.
