Most insurance and financial advisors are concerned that the U.S. Department of Labor’s proposed “investment advice fiduciary rule” will harm advisor-client relationships, interfere with advisors’ ability to serve retirement investors and increase costs, according to a new survey.
The National Association of Insurance and Financial Advisors (NAIFA) discloses this finding in a survey of 1,111 NAIFA members who offer retirement planning products for clients. Respondents each complete an average of 153 fixed annuity sales, 627 variable annuity sales, 3,895 401(k) plan rollovers and 3,235 IRA rollovers in a year.
The proposal mandates that advisors receiving commissions, revenue-sharing and other third-party compensation sign “best interest contracts” with clients before making recommendations.
Two-thirds of advisors surveyed say they anticipate a loss of business following the rule’s implementation because they believe:
1) Clients would be intimidated or unwilling to sign the required contracts required under the proposal; and
2) The burdensome data retention and disclosure requirements would make affordably serving small or medium-size accounts impossible for advisors.
More than 6 in 10 respondents (61 percent) say the contract requirement is likely to harm their relationships with existing clients. Some 35 percent say the harm done to those relationships would be “significant.”
Only 4 percent of respondents say the contracts would improve relationships with existing clients. And 36 percent say either the contract will have no effect on relationships or they are not sure.
“Requiring a person to sign a contract while you are asking them to open up to you about their financial situation would be very disruptive for some clients,” says NAIFA President Juli McNeely. “They may not understand why they need to sign something just to have a conversation, especially if this is a person you’ve been working with for years. More paperwork does not always mean more peace of mind.”
Nearly 87 percent of advisors who responded to the survey said they anticipate that implementation of the DOL rule would result in higher errors and omissions insurance premiums for their practices. Of those, 58 percent say they expect E&O premiums to increase “substantially.”
The rule would increase liability for advisors by requiring them to enter into legal contracts with clients and opening them to lawsuits in both state and federal courts. Only 4 percent of respondents say they do not believe the DOL rule will result in increased E&O costs, while 9 percent are not sure.
The rule’s best interest contract exemption would also require an annual disclosure document for each client detailing all transactions, fees and expenses, and the advisor’s direct and indirect compensation. In addition, financial institutions would have to maintain and update websites that show the total costs of all investments available to retirement account holders.
“Increased paperwork and electronic disclosures equal increased costs, and this would be particularly burdensome for smaller firms with limited resources,” McNeely says. “Add to that the increased liability and the potential for advisors to be sued in both state and federal courts and many may have no choice but to shift their business to wealthier clients who can afford higher fees or to leave the retirement space altogether.”
Increasing costs and contractual obligations are likely to impact advisors’ relationships with existing clients, NAIFA warns.
Currently, only 26 percent of respondents require clients to maintain minimum account balances. Some 46 percent of those who currently impose no account minimums say they would likely do so, should the DOL rule go into effect. And 41 percent say they are not sure. Of this group, 21 percent said they would require minimums of $100,000 or more.
The DOL favors monthly lifetime income projections for plan participants (as does NAIFA). But the proposed fiduciary rule would make receiving advice on the purchase of annuities more difficult for consumers.
If enacted, the proposal would create different rules and conditions for various types of annuities and for various types of plans (IRAs/401(k)/DB plans). For some annuities, the definition of “commission” would be changed.