The world does not look like it did back when you started selling. In fact, you might have started in the days when your boss threw a phone book at you along with this suggestion: “Start prospecting!”
Selling might be better or worse since then, depending on your perspective. That’s the operative word: perspective.
Change is inevitable. Look at all facets of your life — nothing is the same as it was even a year ago. But sometimes you have the benefit of knowing what the driver of change will be. In the case of insurance and financial advising, the change agent will be the U.S. Department of Labor, and perhaps the Securities and Exchange Commission later this year.
The DOL released its “Conflict of Interest” rule on sales involving 401(k) and IRA money in early April and it was full of surprises — some relieving, others not so much. But here is the main question that we can answer now: Can you still do business as you did? Yes, depending on your perspective.
You won’t be doing business the same way, but you can get paid the same way you always did, with some restrictions. That was one of the welcome surprises: Commissions and other compensation will be allowed, even though they are called “prohibited transactions.” The rule does present a few complications, though.
Two of the best-selling annuities, variable and fixed indexed, will fall under the best interest contract (BIC) exemption. In this case, sellers will need to agree to operate under the fiduciary standard.
If you can advise clients on their retirement goals and sell products based on their need rather than on how much commission you would get, you are already most of the way toward complying with the standard. If you sell only one or two products to everybody, regardless of their need, you will probably need to rethink your model.
Also, some of the extra compensation may phase out, particularly incentives. One of the requirements in the rule is to disclose compensation, including eligibility for trips based on sales production. If you would be uncomfortable disclosing any kind of compensation to your prospect or client, chances are that they will be phased out.
The good news is that the disclosure and the best interest contract can be presented at the end of the sales process rather than at the beginning or middle. That was one of the concessions the DOL made in the final rule and was criticized as watering down the regulation. It is often said, however, that a regulation can be considered successful if no one is happy with it.
One of the largest concerns focuses on the phrase “reasonable compensation.” That is the subjective measure for prohibited transactions — they are allowed as long as they are “reasonable.”
But who decides that? Apparently the key enforcement would be a lawsuit. So years after a sale, clients could come back with a claim that they were not aware of other options that a reasonable person could have selected.
That is one of the more troubling aspects of the rule. Even if you are not sued, analysts say the standard of “reasonable” compensation will be set by court precedent, which will likely take years to play out.
You can find out more about the rule’s other positive and negative aspects in this month’s InFront column from Senior Editor John Hilton and in the DOL Rule Center on our website, insurancenewsnet.com.
John and others also focus on the likely legal challenge. Some of the rule was blunted, supposedly to curtail lawsuits. But then the DOL added an aspect that all but guaranteed litigation.
The proposed rule had fixed indexed annuities under not the BIC exemption, but instead the prohibited transaction exemption (PTE) rule 84-24, which featured different requirements. So, several months of examination and many thousands of comments didn’t take this into account.
From what we heard, DOL staffers said they didn’t realize that FIAs were identical to VAs and so could be treated the same. Obviously the whole SEC 151A fight settled that question. A federal court and Congress, through the Harkin Amendment, agreed that FIAs should not be regulated as a security, as VAs are.
Between the lack of comment on the final rule and what some are calling the overreach of the DOL, opponents are most likely to sue. In that case, they would ask for an injunction to hold back the rule, which just might be successful because they may be able to show a judge how the regulation could be damaging.
But here is the thing: If you are pinning your hopes to that prospect, you might be losing precious time to make positive changes to your practice. We believe the DOL is wrong to call commissions and other compensation “conflicts of interest,” but perhaps the spirit of the intent is a healthy one.
We have all heard of many cases in which aggressive salespeople have hustled clients into products they should not have bought. That does not serve anybody well, particularly the ethical agents and advisors who genuinely care about their clients.
We know that most agents and advisors fall into that latter category. People go into this business because they want to serve people and help families. True, some are hustlers, but you get them in any kind of sales.
In this month’s interview with Publisher Paul Feldman, author Jeffrey Hayzlett has an answer for advisors who are worried about the changes coming from the DOL: “People say, ‘I like it the way it used to be.’ Well, I don’t look like I used to when I was 20. My attitude is, I look better today. So if you have a different philosophy about that, it’s going to make doing those changes a lot faster.”
Change is constant. You can decide to be a victim of change or the driver of it.
It is always up to you.