All of us have been reading about the DOL Rule lately. The public relations campaign in support of the Rule suggests many good intentions like “standards should be harmonized,” “a sale in the consumer’s best interest is better than a suitable sale,” “we need to avoid conflicts of interests for consumers.”
In reality, the seemingly innocuous rhetoric will have devastating consequences for consumers who want the protection and certainty only annuities provide.
We have seen many instances recently in other markets (e.g., health care and internet) when legislation and regulation used to drive a desired outcome, has ended up badly for many consumers. When policy decisions are based on political and institutional bias, flawed and incomplete analysis and preconceived assumptions of buying and selling behaviors, the outcome can only be destruction for the marketplace it is supposed to be serving and protecting.
Let’s agree that those that oppose the rule and those that are in favor of the rule are driven by their own agenda and belief systems. Good people can disagree. No doubt the folks proposing the rule have the best of intentions. But intentions aren’t in question here. Outcome and impact are. The bare-faced reality is the DOL rule as proposed will cause consumers:
MORE confusion; not less
LESS protection and MORE cost; and,
INSUFFICIENT access to annuity advisors and annuity advice.
Despite the complexity and contradictory requirements of the Rule itself, the impact of the Rule on consumers in search of annuities can be explained fairly concisely and its harm is clear.
IMPACT No. 1: The consumer is MORE confused
The proposal requires the new fiduciary insurance advisor to comply with “Impartial Conduct Standards” which in turn requires the insurance advisor to act in the “Best Interest” of the plan, participant or IRA and disclose “Material Conflicts of Interest”. The “definition” of best interest is almost identical to the ERISA prudent man and duty of loyalty rules, except that it also requires that the recommendation be without regard to the financial or other interests of the insurance advisor, insurance company, related entity or other party.
The subjective test the DOL proposes to meet the best interest duty while permitting compensation other than fees-for-advice is that the compensation be “reasonable.” The flaw in this thinking is the assumption, make that belief, that the long-standing practice of receiving commissions for products sold and services provided is a conflict of interest.
Is it a conflict of interest when doctors receive compensation for the surgery?
Is it a conflict of interest if class action lawyers receive a percentage of the damages?
Furthermore, the Rule provides no objective criteria as to what constitutes reasonable. With this thinking, shouldn’t all fees for advice, be it medical, legal or financial, be a prescribed set hourly rate nationwide to ensure impartial conduct?
The DOL thinks the answer to the last question is YES (at least for retirement savers). In the proposal, the DOL takes the unprecedented step of providing examples of acceptable fee structures and noted that while they are not required, the DOL says they should be considered and if they are used, no exemption is needed. As one article put it, “the DOL is saying, if you do business the favored way, it’s business as usual, but is it okay for the government to decide what an acceptable business model is?”
The DOL appears to judge compensation as a data point with no regard for any additional services provided or product benefits offered.
Today, investment advisors are already under SEC or state securities department. Brokers are subject to FINRA oversight. And, all annuity sales are regulated by state insurance departments. With variable annuities you must notify the DOL’s Employee Benefit Security Administration of the intent to use the exemption. The Rule dictates that anyone selling an annuity IRA is giving “investment advice” and subject to fiduciary standard. That opens up the question, who has jurisdictional authority? Who does the consumer call?
This means, the client is MORE confused!
IMPACT No. 2: The consumer is LESS protected and subject to MORE costs
Under suitability, the consumer files a complaint with their state DOL and state auditors conduct the review. If the review concludes that the sale is unsuitable, the insurance carrier is liable for any sale that is deemed unsuitable by the state department of insurance. The consumer has no out of pocket costs for the review other than minimal expenses of travel or phone calls. Also, since the carrier is liable under the suitability statute, the premium used to fund the annuity is under the protection of strenuous reserving and standard non-forfeiture laws in the arsenal that is the insurance company.
Under fiduciary standard, the consumer files a complaint with the SEC and/or the State Securities Department. The consumer must figure out which is the appropriate regulatory authority.