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Final Fiduciary Rule: What It Means

The final Department of Labor (DOL) “Conflict of Interest” rule pulled a few punches, but got in a surprise jab at fixed indexed annuities.

On the positive side, the DOL rescinded some of the requirements and amended one of the most troubling items, which was the timing of the paperwork for the client. It also allowed all compensation in the exemption.

On the negative, the department placed fixed indexed annuities in the same category as variable annuities, which imposes more requirements on sellers. Because of that surprise move, opponents are more likely to sue, despite the other compromises.

The DOL wrote the fiduciary rules to govern advice regarding qualified retirement employer-sponsored plans and individual retirement accounts. DOL officials and public interest groups say the rules are necessary to protect retirement investors from high commissions and irresponsible advice.

The insurance and financial services industries say the rules are unnecessary and will mimic the impact in England, where similar rules have limited small savers’ access to professional financial advice.

This is what we know on a few key fiduciary-related issues as we go to press: 

Can You Receive Commissions?

Many forms of compensation, including commissions — trips, trailing fees, revenue sharing and other incentives — fall into the category of “conflicted compensation.” But they are allowed through exemptions.

Advisors will need to comply with one of the prohibited transaction exemptions to receive that compensation on sales made after the enforcement dates, said Jamie Hopkins, co-director of the New York Life Center for Retirement Income at The American College.


For example, the new rules permit the commission-based sale of variable and fixed indexed annuities only if the agent complies with the best interest contract (BIC) exemption.

The BIC will not be fully enforced until Jan. 1, 2018, but will ultimately require five things of the financial institution overseeing the advisor-client relationship: 

1. The advisor agrees to act as a fiduciary with respect to investment advice to the client. 

2. Adherence to “Impartial Conduct Standards,” which requires advising in the client’s best interest, charging only “reasonable compensation,” and making no misleading statements about investment transactions, compensation and conflicts of interest. 

3. To have policies and procedures in place to prevent violations of the Impartial Conduct Standards. 

4. To avoid offering incentives for advisors to act contrary to the customer’s best interests. 

5. To disclose the fees, compensation and conflicts of interest associated with all recommendations. 

But while the DOL claims commissions are allowed, the time required to comply and the liability associated with the prohibited transactions might be too much, Hopkins said.

“There’s a general feeling that some of that stuff might have to go away,” he added. “From a liability standpoint, you might see people move away from those indirect compensation or revenue-sharing or bonus models.”

As for existing clients, the DOL included a “grandfathering” provision. Simply put, commission and other payments, such as 12(b)-1 fees, agreed to before the enforcement dates will be allowed to continue. 

Can the Rule Still Be Stopped?

Even before the final rule was published, a few groups, such as the U.S. Chamber of Commerce, talked openly of filing lawsuits to stop it.

“I think we have to at least consider the need to go to court,” David Hirschmann told reporters in March. He is president of the business group’s Center for Capital Markets Competitiveness.

According to Washington, D.C., attorney James F. Jorden, opponents have a good case, particularly because of how the final rule treats fixed indexed annuities (FIAs).

The final rule moved FIAs into the BIC, where they are treated the same as variable annuities.

“They don’t cite any basis for saying that or any study that demonstrates the necessity,” said Jorden, a shareholder of Carlton Fields Jorden Burt. “Frankly, the DOL’s analysis is flawed, and it’s just not supportable.”

The issue is whether FIAs should be regulated as an insurance product or a security. The DOL’s only explanation is that FIAs are a “complicated” product, but that does not mean they should be regulated as a security, Jorden said.

A DOL spokesman did not return a message seeking comment.

The DOL stance on FIAs is a more narrow reading of a 2008 Securities and Exchange Commission (SEC) effort to regulate all indexed annuities as securities. After a long fight, Rule 151A was thrown out by a U.S. Court of Appeals, leaving indexed annuities under state regulation as an insurance product.

The District of Columbia Circuit Court of Appeals ruled that the SEC failed to analyze the rule’s impact on the indexed annuity market that the commission sought to regulate.

One could argue the DOL is guilty of the same misstep, Jorden said.

“They believe one is more complicated than another, and that is not a sound basis,” he said. 

Timeline on Implementation 

The original fiduciary rule included an eight-month implementation period, one that the financial services industry cited as an impossible bar. The final rule stretched that timeline to about 20 months. Here are the two dates you need to be aware of: 

» April 10, 2017. The change in fiduciary definition will become effective on April 10, 2017. Advice on qualified business sold from that point forward will be subject to the new fiduciary standard. Advisors will be required to provide best-interest advice, to ensure that their compensation on qualified sales is “reasonable,” and to provide certain point of sale disclosures to customers. Financial institutions will need to have and disclose conflict-of-interest policies and procedures. 

» April 10, 2017, to Jan. 1, 2018. The DOL will defer the requirement to execute a BIC to continue to receive commissions until Jan. 1, 2018. In effect, advisors will continue to be able to receive prohibited compensation (assuming it meets the ”reasonable” bar and does not conflict with their advice) on new sales during that period provided disclosures are met. 

Source: Oliver Wyman

How Does the Rule Affect Fee-Based Advisors?

In the fee-based world, advisors who have followed a fiduciary standard for years may be feeling confident they can handle the new rules. But they will find it more difficult to do business, experts say.

“I think RIAs who are truly fee-only are better positioned, but even those folks will have to accommodate new standards of care,” said Craig Lemoine, associate professor of Financial Planning with The American College in Bryn Mawr, Pa.

“The landscape changes for fee- and commission-based advisors; commission-based advice will see a higher burden,” he said. “All advisors will need to develop a deeper understanding of the source of retirement funds, if suggesting a rollover from a profit-sharing plan is actually in the best interest of the client.”

Many RIAs employ a hybrid model: They receive income from fees and from commissions, and the commission-based revenue stream is likely to be the most affected by the new rule, industry experts said.

Advisors looking to continue selling commission variable and fixed indexed annuities into retirement accounts will need to comply with the BIC.

They will have to present the contract to their clients, and since it stipulates a high level of transparency with regard to fees and commissions, advisors will have to make a much stronger case to investors for why the product they are recommending is worth buying.

“When it comes to rolling over a 401(k) to an IRA, that may affect people across the board because if we can’t justify that our fee is better than what they are receiving, that will affect money coming into our firm,” said Brent D. Dickerson, proprietor of an RIA in Lubbock, Texas.

IRA and tax expert Ed Slott, founder of Ed Slott and Co. in Rockville Centre, N.Y., said the fiduciary responsibility imposed on retirement-related transactions means that advisors had better know the new rules.

If not, RIAs risk going out of business because they are competing with big companies offering fee-based managed accounts, Internet investment algorithms, and mutual complexes that can charge smaller and smaller commissions.

RIAs who decide to retain their commission-based revenue model had better be good at providing a service and justifying their rates.

“You can still do commission-based products, but you will have to earn it,” Slott said. 

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. Follow him on Twitter @INNJohnH. John may be reached at [email protected].

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