A Word from Mike Tripses
I’m beginning to wonder if this isn’t the most all-consuming U.S. presidential news cycle in history. It’s hard to get news that doesn’t lead back to America’s decision about a single person for one governmental position (VPs not withstanding). I believe some of this stems from the continuing expansion of presidential power. Similarly, most industry conversations I am hearing lead back to the Department of Labor (DOL) fiduciary rule enacted this past April. Perhaps that’s because of growing awareness—especially in the insurance industry—that how Americans save is changing forever. This is not because the people have decided via their representatives, but because the unilateral authority (with some presidential nudging) of the continued expansion of regulatory agency authority.
The DOL fiduciary rule applies to recommendations to sell, not sell, or buy financial products with tax-qualified money, when the financial professional may receive compensation for the advice. It is an extensive recrafting of existing exemptions enacted decades ago under the DOL’s ERISA authority. It is directed at IRAs, 401(k)s and consumers whom own those plans and was promulgated to assure advice they receive is in their best interest.
What was the impetus for the rule? The driving force was “excessive” fees charged, primarily in securities transactions, around which the entire rule change was crafted, but also sucked fixed annuities into its vortex. American consumers enjoying a relatively free market, “overpay” and “underpay” for many goods and services every day as we freely make our purchase decisions. In this case, though, our labor department has decided it will prohibit “overpayment” for financial advice. The White House—as it politicked for this rule—stated consumers are being damaged to the tune of $17 billion a year. A February 2015 white paper from the office of the president stated: “Under our current system, your advisor can accept a back-door payment or hidden fees for directing you toward a retirement plan that’s not in your financial best interest. And it’s completely legal.”
Many agents who sell insurance products to meet clients’ accumulation and income needs are unaware of the dramatic ramifications. Hardly a single facet of our business will be untouched, assuming the rule withstands the current lawsuits to enjoin or vacate it. While non-insurance securities are covered as well, I will concentrate on insurance. Though the published rule and its enabling language are more than 1,000 pages, at the risk of oversimplifying, I will summarize it.
Prohibited Transaction Exemption 84-24 (PTE 84-24) allows an insurance agent to receive compensation for his or her advice. It applies to traditional non-FIAs, like declared-rate annuities, MYGAs, SPIAs and DIAs. To get the exemption, he or she must adhere to Impartial Conduct Standards, which to generalize, essentially means acting as though he or she does not have a dog in the hunt, e.g., pretending they won’t be paid. While most of the air has been sucked out of the room with the BICE discussion applicable to FIAs and VAs, the truth is PTE 84-24 is actually onerous in and of itself, and it is the core of BICE as well.
- Act in the Best Interest of plan at time of the transaction.
- Make no misleading statements (including failure to disclose any material conflict of interest that a reasonable person would conclude could affect exercise of best judgment).
- Ensure the transaction is on terms that are at least as favorable as an arms-length transaction.
- Receive no more than reasonable compensation accounting for the market value of total services and benefits (reasonable, as defined by “the market”).
- Disclose compensation to everyone receiving and disclose all product and contract limitations, charges, fees, discounts, penalties and adjustments.
- Acquire affirmative consent of the above from the plan owner on an ongoing basis.
- Maintain six years of auditable record keeping, including information to assess Best Interest.
The ramifications are extensive and not fully defined. What is in the best interest of the plan and how do I substantiate and document it? If there is a material difference between compensation I receive for similar products, can I just disclose it, or must I just sell the lower one? What are material conflicts of interest? What is reasonable compensation? What is the market value of my services? How do I disclose all compensation in the recommended sale and buy? How do I set up a process to acquire ongoing consent from a client? What is a sufficient auditable record? What happens if I am found in violation of any of these exemption requirements? The last question is a serious one. The I.R.S. can fine any plan found in violation of ERISA requirements, including this new rule. The client’s plan, not you, the agent. However, you can guess where that leads legally.
Will insurance companies help you with this? Possibly. How about your insurance marketing organization? At the risk of being overly bold, any IMO that tells you they have it all figured out and is ready to go is misleading. That being said, CreativeOne is committed to aiding its agent partners in every way and has dedicated full-time resources to develop the processes and procedures to help your business comply. The 84-24 exemption requirements go into effect April 10, 2017. We will be announcing our plans soon, covering all walks of agents from registered reps and BD partners to advisors, RIAs and insurance-licensed-only agents.
Now, most conversation has focused on the best interest contract exemption, or BICE. Securities and the “security-like” FIA (according to DOL) require essentially all of the above 84-24 exemption items to comply. However, the responsibility for ensuring they are met (and the liability for it if they are not) is transferred to financial institutions (FIs) such as insurance companies, banks, broker-dealers, registered investment advisory firms and possibly other entities that apply to be a FI (like an IMO). An agent must be appointed with a FI. A written contract (BIC) is required between the plan and the FI. It warranties best interest, no misleading statements and reasonable compensation. It discloses an extensive and prudent supervisory structure for the agents, material conflicts of interest, who is getting paid everywhere and how. It specifies how a client can receive all of this information on a website. It requires no limits to liability by the FI, and it allows class-action lawsuits, which cannot be avoided by required binding arbitration. The BIC requirements and FI allegiance go into effect January 1, 2018, but the impartial conduct standards are still effective April 10, 2017.
Most BDs and RIAs will become the FI for their reps and advisors and enforce the standards. CreativeOne is currently working with BDs and RIAs of all sizes to be their insurance marketing consultant; aiding them to develop how to accommodate annuities in their new processes. What about unregistered agents? Will insurance companies become FIs for qualified FIA sales for them? At this time, some say they might with assistance from their IMOs and others say they won’t. A natural route for an agent to comply would be to acquire a Series 65 registration and become an investment advisory representative. If they haven’t done so already, they could enroll in CreativeOne’s new “Route 65” program, which aids agents in attaining their Advisor Representative status, enlists them in our RIA and offers them a turnkey process and tools to immediately begin advising. The only way for an unregistered independent agent to sell FIAs, if the insurance company will not be a FI, is to find another entity to be their FI, which allows sufficient FIA breadth on its shelf. CreativeOne is committed to providing this through an avenue we will announce in early October.
All political seasons come to an end, but then there is always the next one. So too, will the DOL fiduciary rule get resolved one way or another, but there will always be another challenge after that. CreativeOne will always evolve, innovate and persevere for the benefit of our agent partners.
FOR FINANCIAL PROFESSIONAL USE ONLY. NOT FOR USE WITH GENERAL PUBLIC.
CP-0826 – 2016/9/23