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DOL Threat or Challenge?

Perhaps the most troubling answer given during InsuranceNewsNet’s webinars on the Department of Labor’s fiduciary rule was, “We don’t know.”

That was the response to what is considered “reasonable” compensation, which is what is allowed under the expected rule. In the next few months, the DOL is expected to release the rule covering money in ERISA-qualified retirement accounts.

But even then, the rule is not expected to clarify what is considered reasonable. So, agents and advisors will have difficulty knowing whether the compensation they are accepting could be out of bounds.

The inevitable next question is who decides what is reasonable. That answer is also a little disconcerting: a judge.

The DOL’s rule not only opens the door to a greater possibility of lawsuits, but it also keeps that door open forever. That was one of the key pieces of insight that Kim O’Brien brought to the webinars.

Kim very ably hosted the seminars as she drew from decades of presenting as an association leader as well as working in the sales channel. She was head of the National Association for Fixed Annuities (NAFA) until she helped found the Americans for Annuity Protection (AAP) with InsuranceNewsNet Publisher Paul Feldman.

Problem in Perpetuity

Kim pointed out that clients will be able to look back at an annuity sale at any point and sue over what they might in hindsight say was an inadequate recommendation. Why didn’t the agent recommend a particular annuity from another company that promised a better return?

The answer might be that the agent did not know about the other option or that product was not the best option for other reasons. But if that other option paid a lower commission, the judge might decide the agent was looking out for their own interest rather than the client’s.

Some would argue that the basis for the judgment would not be as simple as the higher or lower commission rate, but who wants to go through litigation to find out?

And, of course, it is not just a litigation risk. Agents will be required to keep documentation that can be inspected by a litany of agencies: Department of Labor, Securities and Exchange Commission, Financial Industry Regulatory Authority and Internal Revenue Service. Each one has its own penalties.

Besides those realizations, another question was how many agents and advisors will be pulled under this rule. Well, let’s put it this way — it would be difficult to see how most of them would avoid it for long.

Recommendation Is the Hook

The rule would require agents and advisors to be under the fiduciary standard if they made a recommendation about money in an individual retirement account or other ERISA-qualified account. If advisors have an annual review with a client and talk about the big financial picture, they enter fiduciary territory.

Also, retirement funds tend to be where people have money these days. So, when it comes time to buy an annuity, odds are very good that the money to fund the annuity will be coming from an IRA. Those odds are likely to increase as the rollover market grows past a half a trillion dollars annually.

The INN webinar panelists were Jim Jorden, of Carlton Fields Jorden Burt; Jules Gaudreau, National Association of Insurance and Financial Advisors president; Judi Carsrud, NAIFA government relations director; and Dick Weber, founder of Ethical Edge.

The questions the panel received revealed a range of understanding about the pending rule. Some questions focused on particular products and situations. Others were more general and existential, as in, “Will I be able to stay in business?”

Of course, we can’t answer that. We never could. Only advisors themselves can. But we can say this: When has it ever been easy? In your case, you achieved significant success in your professional life. How did you get there?

In your earliest days, sales were probably tough to make. Odds are good that you had days, weeks, months, maybe even years when you did not think you were going to make it in this business. But here you are, reading this magazine to secure greater success.

The DOL’s rule is likely to be implemented, although plenty of people are battling mightily against it. And they might have some or even total success. If you oppose the rule, it behooves you to support groups such as NAIFA and AAP.

Even if they slow down this rule or perhaps kill it, the SEC is in the wings preparing a fiduciary rule that it plans to release later this year. It is clear that the momentum is on the side of advising.

Some webinar attendees asked if getting a securities license would shield agents from the encroaching regulators. Not if that is the only reason that they would be getting the license.

If agents are going to focus on particular product lines, they can’t also pretend to be financial advisors. So, in those cases, they will need to pay attention to the new rules as they come out and recraft their processes. As I said earlier, successful people did not get where they are by taking the easy road. They will find a way to achieve greater success.

You Got This

Most likely, you chose to be an independent agent or advisor because you wanted to be in control of your fate. Whether you work for yourself or in someone else’s agency, you usually can call your own shots. That has not changed.

In the murk of what the DOL or the SEC will establish is much uncertainty. “We don’t know” is the frustrating answer to many of the questions at this point.

But here is one thing we do know. These things that lay ahead are not insurmountable. They are merely obstacles to navigate. The only person who can stop you is you.

It is time to test your mettle.

Steven A. Morelli is editor-in-chief for InsuranceNewsNet. He has more than 25 years of experience as a reporter and editor for newspapers, magazines and insurance periodicals. Steve may be reached at [email protected] Follow him on Twitter @INNSteveM. [email protected].

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