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