Are Fixed Annuities Covered by the Best Interest Standard?

Financial advice helps individuals navigate complex financial decisions and plan for their future. The financial industry operates under various standards designed to protect consumers and ensure recommendations serve their interests. Understanding these applicable standards for different financial products is important for consumers seeking guidance.

Understanding the Best Interest Standard

The “best interest standard” mandates that financial professionals prioritize their client’s interests above their own or their firm’s financial gains. This principle represents a higher level of consumer protection compared to the traditional “suitability standard.” While suitability merely requires that a recommended product be appropriate for a client’s financial situation, the best interest standard elevates this expectation by requiring professionals to act with reasonable diligence, care, and skill. It means a recommendation must genuinely serve the client’s needs and objectives.

Under a best interest obligation, financial professionals must avoid or disclose conflicts of interest, and ensure their recommendations are not influenced by higher commissions or other incentives. This standard requires a thorough understanding of the client’s financial situation, including their age, income, investment experience, and risk tolerance, to ensure the recommendation aligns with their specific profile.

Fixed Annuities Explained

A fixed annuity is a contractual agreement with an insurance company designed to provide a guaranteed interest rate on contributions. This financial product functions similarly to a certificate of deposit, offering a predictable return on the principal invested. The insurance company guarantees both the principal and a set interest rate for a specified duration, or even the life of the contract.

Fixed annuities typically feature tax-deferred growth, meaning earnings are not taxed until they are withdrawn, often during retirement. Common types include immediate annuities, which begin payouts soon after purchase, and deferred annuities, where payments start at a future date. Multi-year guaranteed annuities (MYGAs) are a type of fixed annuity that locks in an interest rate for a predetermined number of years, providing stability and predictable growth.

Applying the Standard to Fixed Annuities

The application of a “best interest” standard to fixed annuities is primarily governed by state insurance regulation. The National Association of Insurance Commissioners (NAIC) plays a central role by developing model regulations that states can adopt. The NAIC’s Annuity Suitability and Best Interest Model Regulation (#275) has been instrumental in extending a best interest obligation to recommendations for all annuity products, including fixed annuities. This model regulation was revised in February 2020 to incorporate a heightened best interest standard.

Under this revised model regulation, insurance agents and producers are required to act in the consumer’s best interest. This obligation involves several components: a care obligation, a disclosure obligation, a conflict-of-interest obligation, and a documentation obligation.

The care obligation requires professionals to use reasonable diligence, care, and skill when making recommendations. They must understand the consumer’s financial situation, objectives, and needs, and have a reasonable basis to believe that the recommended product addresses the consumer’s specific financial situation and objectives.

The disclosure obligation mandates that agents explain their role, compensation, and any material conflicts of interest to the consumer. The conflict-of-interest obligation requires identifying and managing potential conflicts that could influence the recommendation. The documentation obligation requires agents to record their recommendations and the justification for them in writing, ensuring transparency and accountability.

As of April 2025, all 50 states have adopted a version of the NAIC’s best interest annuity rule, enhancing consumer protections across the country. This widespread adoption ensures that financial professionals recommending fixed annuities are held to a higher standard of conduct.