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Know Why the Black Swan Sings

Buzzwords are the signposts along the flat earth of business theory.
The latest one is “Disruption.” That’s down the road from “The Black Swan.” Which is just west of “Game Changer.” That was due south of Paradigm Shifter.” And the whole trip is the search for “Excellence.”
You probably know many other variants, but they all describe an abrupt change where nothing is the same afterward. 
Pretty much every conference I have attended lately addresses disruption. I go to meetings about insurance and media, both of which have been roiling for some time now.
In fact, when I started working in newspapers in the early 1980s, the old-timers were bewailing the state of the industry and craft. But here’s the thing — those guys went on to have a career and retire. By the time I left newspapers, it was like running out of a burning building.
As newspapers contracted, the unfilled jobs fell on the remaining employees. A former colleague just re-entered the newspaper world. He will be an associate editor at a small paper, covering county government, public affairs, special projects, enterprise, training others and writing a column. Each of those was likely a full-time job once.
Something good will grow from the ashes of these fires, like a rejuvenating forest after the dead wood has burned away. That’s the basis of creative destruction, where something dies for something else to live. The process is painful along the way, though.
The life insurance business is no stranger to disruption. It has been growing more difficult over the years to sell insurance products and run a business. 
Old-school life insurance agents are finding their old school has been shut down and converted into condos. Thomas Wolfe said you can’t go home again, but when could you ever? 
Even when you go back home tonight, it isn’t the same place you left this morning. Your loved ones are just a little bit older and maybe a little different because of the events of the day. And yet another part of the house suddenly needs repair.
Change is imperceptible, like two tectonic plates rubbing against one another until the inevitable earthquake. The latest quake is the Department of Labor’s fiduciary rule. The final version is expected in the spring, followed by an eight-month grace period for the industry to adopt it.
Any agent or advisor who has an effect on a client’s action with retirement money such as an IRA would fall under this rule. Specifically, any advisor dispensing “investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan” would be considered a fiduciary. 
In an insurance agent’s case, that means a new regulator in addition to the state insurance department. And if that agent also holds a securities license, that would mean a third regulator in addition to at least the state securities department.
The rallying cry supporting the rule is to act in “the best interest of the client.” Few agents and advisors would have a problem with that. Rogues would snicker at the notion, but they can be found under the fiduciary system of financial regulation as well as the suitability standard upheld by insurance regulators. Let’s put it this way — the fiduciary system did not miraculously make angels of the advisors who fell under it, as the news of advisor arrests attests to almost daily.
So, what is the problem? More paperwork, filings and disclosures would be one segment. Estimates on the cost vary widely, partly because nobody has a definitive answer for what would be required.
It also depends on whether an agent or advisor would be eligible for a prohibited transaction exemption. 
But what is the exemption all about, really? The prohibited transaction is the indirect payment — commissions and any other incentives. In fact, the DOL regulation’s very name points to this purpose, the Conflict of Interest Rule. 
The conflict is the payment. Anything but a fee paid by the client would interfere with advisors’ ability to act in the best interest of their clients. That is the real target.
This rule is the latest eruption from the tectonic plates of the commission-based and fee-based continents shifting against one another. The fee-based world seems to be winning in the public opinion and regulatory fights. 
The DOL rule does little to ensure that clients are protected. The main purpose is to call attention to how agents and advisors are paid. 
If advisors and the industry behave as though commissions and incentives are embarrassing, they will help their opponents. Being transparent about those methods of payment would take away that weapon. If some of the incentives are too shameful to reveal, then perhaps they should go. 
This discussion is nothing new, but it is part of an ongoing struggle between these ways of thinking. Both have good points. Newer advisors tend to have a foot in both worlds. Maybe they are the seedlings that grow from the ashes.
Is this really “disruption”? Or is it more like an inevitable eruption from inexorable, grinding change? Resistance breaks and dies; accommodation yields and lives.
At one of the conferences I attended lately, the LIMRA annual meeting in October, a veteran from a “new media” war addressed the old guard of the insurance industry. Bill Taylor, who co-founded Fast Company in 1995, spoke about being a “disruptor.”  
He and his tiny team took on the titans of the business journalism world and thrived. But it faced its own difficulties, such as during the bubble burst. Now online news is recrafting the industry so that individual publications themselves cease to matter. 
He expressed the entire issue in five words: “The risk is the status quo.”
In that case, it doesn’t help to scout the horizon’s flat line to spot the disrupting, game-changing, paradigm-shifting black swan. 
This world is round. Those who don’t move forward will fall backward.

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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