LPL Lawsuit Raises Questions About Annuity Monitoring 

Let’s do a little role-play exercise. 

Imagine you are an average consumer, and your trusted financial advisor recommends an annuity that you will rely on to pay for essential expenses in retirement. One day, you get a letter from your advisor’s brokerage firm saying “Important information: The credit rating of the insurer who sends your retirement paycheck just declined.” How would you respond?

That question is at the heart of a lawsuit filed recently in federal court in California by plaintiff Kerry Nietz, who alleges that LPL knew for years that the Phoenix Companies and its subsidiary, PHL Variable Insurance Co., were experiencing financial problems but failed to notify clients and continued to collect annuity commissions. PHL is now under court-supervised liquidation in Connecticut, and the lawsuit contends clients were deprived of the opportunity to move their assets before liquidation began.

Attorneys looking at the matter have varied opinions about the scope of advisors’ ongoing duty to monitor and disclose insurer-specific risks that develop after an annuity sale, but there’s a clear consensus forming among fiduciary financial advisors active on platforms like Reddit and LinkedIn. Most say a policy to inform consumers of serious credit concerns seems sensible, but there are also some nuances to be considered.  

Sending the Right Message

“An advisor looking out for the best interest of their client should make them aware of this seemingly important piece of information,” said Michel Finke, a prominent retirement researcher at The American College of Financial Services. On the flip side, they should also make sure clients understand what the information really means, as full-blown insurer failures like PHL’s are rare. Arguably, clients might be better off if advisors have some discretion, allowing them to disclose the downgrade only once they feel the information becomes salient and actionable. “In most cases, a credit downgrade likely won’t affect the basic planning strategy,” Finke said. “The checks will likely continue and the cost of exchanging into a new product could be too high.”

From a behavioral perspective, Finke said, making consumers aware of deteriorating credit quality might positively align the interests of insurers and consumers. “If an insurer risks the possibility of a substantial capital outflow from consumers liquidating policies as a result of credit-downgrade disclosure, then they will invest their general account assets more conservatively even if it compromises rates,” Finke suggested. 

Don’t Run! The other risk is that, in a deteriorating credit market, mass disclosures might contribute to a run on insurer assets that actually increases the probability of insurer insolvency. “This might have a net negative impact on consumers and on the reputation of the industry,” Finke said. “It is a worrying possible outcome if the lawsuit is successful.”