Definition
The best interest standard is a regulatory standard of care requiring that a recommendation be made in the best interest of the customer, applied to annuity transactions under the NAIC Suitability and Best Interest in Annuity Transactions Model Regulation (Model #275, revised 2020) as adopted by individual states, and applied to broker-dealer recommendations through the SEC's Regulation Best Interest.
Why it matters
The best interest standard is the contemporary successor to the suitability standard for most annuity sales and broker-dealer recommendations, raising the substantive bar from "suitable" to "in the customer's best interest" while introducing specific obligations around care, disclosure, conflict of interest, and documentation. It is the standard under which the majority of contemporary annuity transactions are conducted.
How it works
The best interest standard typically comprises four obligations: a care obligation requiring the recommender to exercise reasonable diligence, care, and skill; a disclosure obligation requiring identification of all material conflicts of interest and material features of the recommendation; a conflict of interest obligation requiring the recommending party to identify and either eliminate, mitigate, or disclose conflicts; and a documentation obligation requiring records of the basis for the recommendation. The standard does not require the recommendation to be the optimal available option, but it does require that the recommender not place its own interest ahead of the customer's. State adoptions of the NAIC Model #275 vary in specific implementation, and Regulation Best Interest (a separate SEC rule) applies to broker-dealer activities subject to securities regulation.
In practice
An individual purchasing an annuity from a recommender operating under the best interest standard has a regulatory protection that the recommender did not place its own interest ahead of the customer's, that material conflicts were disclosed, and that the recommendation is supported by a documented basis. Useful questions to ask the recommender include: which specific best interest standard applies (state adoption of Model #275, Regulation Best Interest, or both), what alternative products were considered, what conflicts of interest were identified and how they were addressed, and what documentation supports the recommendation.
In the Longevity Standard Framework
The best interest standard is a regulatory standard governing how lifetime income arrangements are recommended to individuals. The Longevity Standard framework's mechanical legibility produces structural evidence relevant to evaluation under any standard of care — the claim profile, the cost-of-income comparison, and realized value all describe arrangements in terms that the best interest analysis can incorporate — but the framework does not itself endorse a standard of care. The structural evidence the framework produces is particularly relevant under the best interest standard's documentation obligation, where the basis for a recommendation must be supportable.
Related terms
- Suitability standard
- Regulation Best Interest
- NAIC model regulation
- Annuity disclosure requirements
- Mechanical legibility
- Cost of income
- Realized value