Regulatory threats to the livelihoods of insurance and financial service professionals, an ever-present theme at industry conferences, have taken on special weight this year. For this, we have the Department of Labor to thank.

The DOL’s Employee Benefits Security Administration (EBSA) released on April 20 a proposed rule that would impose a fiduciary standard on brokers offering investment advice to holders of retirement accounts. The draft, which replaces an earlier version unveiled by EBSA in 2010, is setting off alarm bells industry-wide.

As well it should. For the rule as currently formulated would impose potentially steep compliance costs on advisors. Absent substantial revisions to the text, the added burden could prompt an exodus of commission-based brokers. This at a time when many Americans struggling to save for retirement can ill afford, and don’t have retirement accounts sizeable enough to justify, the higher cost of a fee-based advisor.

Endeavoring to drive home these points with the DOL and EBSA are two industry associations seeking to block the proposal’s implementation: The Association for Advanced Life Underwriting (AALU); and the National Association of Insurance and Financial Advisors (NAIFA), both of which held annual meetings in Washington, D.C. in May.

The two organizations are girding for what’s likely to be a “bloody battle,” as Jeff Ricchetti, an outside counsel to the AALU, noted during a panel discussion at the AALU’s gathering. That fight will happen on multiple fronts: in written responses to the proposal (the comment period for which has been extended by 15 days); in one-one-one meetings with DOL/EBSA staffers; and in lobbying campaigns on Capitol Hill.

There’s much to discuss. As AALU Vice President of Legislative Affairs Chris Morton noted during the May 6 panel discussion, brokers would be generally prohibited from receiving conflicted payments, such as commissions or revenue-sharing.

They could receive an exemption from the general prohibition under a “best interest contract exemption,” which would require an advisor to enter into a pre-advice, pre point-of-sale contract with a potential investor. To qualify under the exemption, advisors would have to:

act in the client’s best interest and receive reasonable compensation;

avoid misleading statements;

identify and disclose potential conflicts of interest; and

warrant that they have policies and procedures to mitigate and disclose conflicts if they offer proprietary products or a limited set of products.

In respect to the last, the DOL would determine if the advisor is acting in the client’s best interest. 

As NAIFA President Juli McNeely told me in a Q&A in the run-up to its Congressional Conference (May 19-20), the rule is, on one level, burdensome.  By stipulating the need for a contract, the proposal would undercut advisors’ ability to conduct an open dialogue with clients and prospects about appropriate products, investment allocations and retirement planning.

More worrisome are the added compliance and liability costs — included a hike in premiums paid for errors and omission (E&O) insurance — that will come with being a fiduciary. How much greater will the expense be?

Industry advocates don’t yet have hard numbers to cite. But McNeely says that NAIFA is now surveying its members on the issue and expects the tab will be “significant.”

The people who will pay the most are those for whom the rule was ostensibly drafted: consumers. For if the rule boosts costs and paperwork to the point where brokers decide that offering retirement account investment advice within a commission-based sales model is no longer viable, then many will exit the business — leaving consumers in the lurch.

That’s precisely what happened in 2013 after the U.K.’s Financial Conduct Authority replaced commissions with “advisor charges” (fees) under its Retail Distribution Review requirements. As if to emphasize its intent, the DOL cited the FCA’s action in a letter supporting its fiduciary rule proposal.

Is the DOL in fact aiming to eliminate brokers who work on commission? NAIFA’s McNeely thinks not; in our Q&A, she quoted a DOL staffer who told her, “We don’t want to put you out of business.”

Personally, I’m not so sure.