How your adviser
gets paid

Is a life insurance agent a fiduciary in New York?

Not in the same way an investment adviser is, but the agent isn't free to sell you anything either. New York's Regulation 187 (11 NYCRR Part 224) says an agent recommending a life insurance policy or an annuity must act in your best interest. Only your interests can be considered. The agent can still be paid a commission, as long as the pay doesn't influence the recommendation. The standard applies to the sale "at the time of the transaction." New York's highest court upheld the rule in October 2022.

The same rule says that when the agent makes a recommendation, they have to give you the reasons for it, both favorable and unfavorable, in a summary you can read, and write down the basis for it. An agent also can't call themselves a financial planner or financial advisor unless they're properly licensed or certified and actually provide those services.

How each one is paid, what they owe you, and for how long

Every way of being paid pulls in some direction. The SEC makes brokers say that paying per trade gives them a reason to encourage trading, and makes advisers say that a fee on assets gives them a reason to encourage you to bring in more money. Knowing which pull applies to the person across the table is most of the point.

What this means for your 457, the VSF DROP or a pension payout

These are the decisions where the question of who gets paid matters most, because each one usually involves moving a lump of money.

• The 457 has no early-withdrawal penalty. Once you leave City service, the NYC Deferred Compensation 457 lets you take money out at any age without the 10% penalty (money rolled in from other plan types aside). In the Plan's own words, once rolled over, funds "may become subject to a 10% early withdrawal penalty." How the 457 penalty rules work.
• The 457 is cheap. The Plan charges $20 a quarter plus 0.04% a year on assets, and its Equity Index Fund costs 0.04% a year all in, about $0.40 a year for every $1,000.
• Annuities can carry ongoing fees and surrender charges. The SEC's example of a yearly insurance charge is 1.25%. Take money out during the surrender period, which can last for years (the SEC gives six to ten as an example), and you can pay a surrender charge.
• An annuity inside an IRA adds no extra tax break. The IRA already defers tax. The SEC says a variable annuity held this way gives "no additional tax advantage." What an annuity can add is income for life, and that feature has its own price.
• There's no DROP account you sign up for. For NYPD and FDNY, the VSF DROP, also called the banked variable, is paid automatically to a member who stays past 20 years and retires for service. It can be rolled over, which is why it often comes up in the same conversation.

None of this means an annuity or a rollover is wrong for you. It means you should know what you'd give up, and who is paid if you move.

Questions to ask anyone advising you

Ask these of an agent, a broker or an adviser, us included. Several are worded the way the SEC requires firms to print them.

1. "How are you paid if I do what you recommend, and by whom?" In New York, an insurance agent has to tell you whether the insurer pays them for the sale, and if you ask before the policy is issued, has to give you in writing the nature, amount and source of that pay, and what they'd have earned on any other quote they showed you.
2. "If I give you $10,000 to invest, how much will go to fees and costs, and how much will be invested for me?"
3. "On this recommendation, are you acting as my investment adviser, or as an insurance agent or broker? Does your duty to me continue after the sale?"
4. "What would I give up by moving this money?" Ask about the 10% penalty, surrender charges and the 457's costs. Under Regulation 187 an agent has to give you the favorable and unfavorable points behind a recommendation.
5. "How might your conflicts of interest affect me, and how will you address them?"
6. "As a financial professional, do you have any disciplinary history? For what type of conduct?" Then check for yourself at Investor.gov/CRS, the SEC's free search tool for firms and financial professionals.
7. "Can I have your Form CRS?" Brokers and investment advisers have to give you this short relationship summary, and it lists how they're paid and their conflicts.

Sources

• SEC, Commission Interpretation Regarding Standard of Conduct for Investment Advisers, Release IA-5248 (2019).
• SEC, Regulation Best Interest, 17 CFR 240.15l-1.
• New York Regulation 187, 11 NYCRR 224.4, and Regulation 194, 11 NYCRR 30.3.
• SEC, Form CRS Instructions.
• SEC Investor.gov, Updated Investor Bulletin: Variable Annuities, and FINRA, Your Guide to Annuities.
• NYC Deferred Compensation Plan, Plan fees.