For many months now, there has been much talk about the new Department of Labor’s (DOL) fiduciary ruling that was initially set to be phased in on April 10, 2017, but has now been held up for roughly two more months, based on a memorandum by the new Trump Presidential administration.
The primary aim of the Department of Labor’s fiduciary rule is to help ensure that financial advice – which includes life insurance – is in the best interest of consumers, in turn, better protecting individuals from unfair or excessive advisor commissions and fees.
With that in mind, how might this rule affect how you interact with your clients and prospects?
The answer is that it may or may not have a significant impact, depending on how you currently run your business, and on the products, that you are able to offer to your clients.
Originally created under the Barack Obama administration back in 2015, the new ruling set out to essentially expand the definition of “investment advice fiduciary” per ERISA (the Employee Retirement Income Security Act of 1974). This act defines a fiduciary as being “anyone who exercises discretionary authority or control over a (retirement) plan’s management or assets, including anyone who provides investment advice to the plan.” Likewise, ERISA also bans the misuse of assets through these provisions.1
Therefore, the key responsibility of those who are fiduciaries is to run the investment plan solely in the interest of its participants, as well as the beneficiaries, and for the exclusive purpose of providing benefits and paying the plan’s expenses.2
To advisors, this essentially means that all commissions and fees must be disclosed to their clients in dollar amounts. In addition, the rule expands who is actually considered to be a fiduciary, which includes any advisor who makes a solicitation or recommendation, and not just those who simply provide advice. (The prior definition of fiduciary included only those advisors who charged a fee for their services – either an hourly amount, or as a percentage of their clients’ account holdings).
While many financial product providers may move into more of a fee-based environment following the rule’s implementation, there will still be certain products available where advisors may earn a commission. However, any advisor who wishes to continue working on commission based pay will first be required to provide their clients with a disclosure agreement. This agreement, which is referred to as a BICE, or Best Interest Contract Exemption, would be used in situations where a conflict of interest may exist, such as the financial advisor earning a higher commission amount and / or the advisor receiving a bonus for selling such products.
Any fiduciary who does not follow ERISA’s principles of conduct, such as acting in situations that are considered to be a conflict of interest, could be held responsible for restoring losses to a plan, should any losses occur. The advisor could also be responsible for restoring any profits that are made via the improper use of a plan’s assets.3
Earlier this year, though, President Trump ordered the Department of Labor to re-evaluate the fiduciary law, and to “rescind or revise” the law accordingly. The president’s action included providing instructions for the Department of Labor to carry out what the President referred to as an economic and legal analysis on the impact of the fiduciary rule.
In response to the President’s request, the Department of Labor issued a memorandum a short time later – that was titled Field Assistance Bulletin No. 2017-01 – which clarified what the potential implementation could be of delaying the rule. The memo also explained the potential enforcement policies if the rule were to go into effect on its originally intended date of April 10, 2017. As of early May, however, the rule has still not been officially put into place.4
Also in March of this year, BlackRock and Vanguard, two of the largest asset managers in the world, called for an even longer delay of the DOL’s fiduciary rule, citing widespread confusion regarding the rule’s initial hold up.
With all the talk of late about the new ruling, the delay of its implementation, and how financial professionals will be required to act moving forward, consumers have become much more aware of what will be – and what has been – going on “behind the scenes” of their retirement accounts.
With more fiduciary-related details in the news today, many consumers have actually been surprised to learn that such a rule has not already been in place, as most would assume that at its core, financial advice should already lend itself to ensuring that the customer’s best interests are being taken into account.
Adding fuel to the fire here is that initially, many who are in the financial services industry were not in favor of this rule being put in place. It is, however, considered by others as a positive step in the right direction for both consumers and advisors alike.
Although the fiduciary rule has the intention of increasing transparency and choice for consumers when it comes to insurance and financial products, one of the other impacts that the rule may end up having is a smaller choice of financial vehicles to choose from altogether. This is because financial and insurance product manufacturers may move to mitigate their risk and their liability, as well as the vast amount of time that will likely be spent in meeting a higher level of due diligence.
For instance, as insurance and financial product providers reevaluate their offerings, it could be that they will place a much higher emphasis on the performance data, in turn, putting less on client relationships.
Companies that offer annuities will also be required to disclose their commissions to their clients – which could substantially reduce the sale of these types of products, as annuities (and other insurance products) typically pay a healthy amount of commission to the selling agent, as well as charge a long list of fees over time.
The new rule may be rough on many of the small, independent broker dealers in the market, as well as RIA (Registered Investment Advisor) firms, too. This is because some of these smaller entities may not possess the necessary resources to invest more in the compliance expertise and in the technology that will be needed to meet these new requirements.
The result here could be some of these smaller firms either disbanding altogether, or being acquired by larger players. As an example, the brokerage operations of American International Group (AIG), and of MetLife Inc., have already been sold in anticipation of the new rules coming into play, and the related expenses.
In some cases, the result of the rule being implemented may ultimately even be some of the big financial product players exiting the commission based industry altogether as they move towards fee based accounts. But in any case, as the rule moves towards implementation – which is currently slated for mid-June 2017 – consumers may end up having fewer options when it comes to financial planning.
The new fiduciary requirements could also have the effect, at least in the short-term, of causing service “gaps” with consumers, as advisors and companies reevaluate their training and monitoring of transactions, and as they re-think their overall engagement with clients.
While there is little question that the 40-year-old ERISA rules were likely in need of updating, with all of the delays that have slowed the implementation of the new fiduciary rules, there is also the distinct possibility that a potential outcome here could actually end up being no expanded rules after all.
While the DOL’s fiduciary rule could cause a major jolt to the way that insurance and financial advisors currently do business, there may be some exceptions. For example, not all retirement plans are subject to ERISA’s terms. These include plans that are set up and maintained by churches and by government entities.5
Also, there are certain advisor / client situations that may also not be covered under the new fiduciary rule. For instance, it does not constitute “financial advice” if a client calls an advisor and specifically requests to purchase a certain product.
Also, advisors are allowed to offer education to consumers. This typically falls under the guise of providing general investment advice that is based on the person’s age and / or income amount.
Likewise, taxable transactional accounts, or those accounts that are funded with after-tax funds, are not considered to be “retirement plans.” This is the case, even if the money inside of those accounts is considered to be retirement savings by the consumer.
Yet, even with the exceptions aside, there are some areas of the financial services industry that may be less affected than others. For instance, those who are able to provide a diverse line of products may be more easily and seamlessly able to move into the new world of fiduciary regulation than those who have only a small shelf of product offerings to choose from.
Regardless of what occurs in the future with regard to the Department of Labor’s fiduciary rule, it is important that insurance and financial advisors have a good understanding of the rules and regulations that are in place, as well a way to ensure that they are remaining in compliance with them.
One of the best ways to not only be in the loop when it comes to insurance industry updates, but also to streamline your business overall, is to partner with an experienced insurance marketing organization (or IMO) like TR King.
We keep our partner agents and brokers updated regularly with in -depth details about what is taking place in the industry, along with advice on how to comply. We also offer a wide array of the top level contracts with major insurance carriers, as well as marketing and case management assistance.
Being at the top of your clients’ minds is essential for success in the insurance industry. But it’s tough to do everything on your own. If you would like more details on how you can benefit by partnering with TR King Insurance Marketing, please reach out to us and speak with one of our experienced reps by calling toll free at 1-(800) 590-7202 or 540-400-6275.
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