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DOL update: When is uniformity not uniform?

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Pouring over tens of thousands of pages of comments, articles and studies about the Department of Labor’s Uniform Fiduciary Rule has finally brought some clarity.

There were days when we wondered!

Americans for Annuity Protection advocates for the annuity consumer’s right to a well-regulated, competitive and comprehensive annuity marketplace. For some time, we’ve observed that most consumer groups who discuss annuities or have been vocal about the DOL Rule really understand very little about annuities and the annuity marketplace. 

So, we decided to band together a group of industry experts that knew annuities from the inside out — how products are developed, distributed and regulated. Collectively, we have almost 100 years of marketing, compliance, product development and sales experience with annuities. With that intricate knowledge and expertise, it is not at all difficult for us to assess the pros and cons of regulation and identify what effects it will have on consumers — good and bad.

The DOL Rule as proposed is harmful to consumers.

The DOL has spent years preparing the messaging, and the public relations work that has gone into “selling” their Rule has been impressive. In the end, the PR is about the following assumptions:

* Consumers deserve a uniform standard of care in the IRA marketplace; 
* Consumers expect advice that “serves their best interest;” 
* Consumers expect little or no conflicts; and,
* Consumers expect any conflicts to be acknowledged and disclosed in detail.

Its seems that the majority of those for and against accept the assumptions as truths. After all, every mother deserves their child’s love, right? Well, no, not every mother and not every mother always. Let’s take these assumptions one at a time. 

Consumers deserve a uniform standard of care
Uniformity can be good — who wouldn’t love it if all cell phones and Kindles had the same chargers. But, with uniformity you often give up choice and competitive advantages.

With different charging mechanisms a phone can be cheaper, lighter, charge faster, or have a longer battery life.

Consumers may mix and match features and/or value and choose the phone that is best for them and their lifestyle. Likewise, with different standards of care, consumers can choose the relationship and buying experience that suits them and their pocketbook.

Proponents also claim that uniformity creates a level playing field which is better for the customer. But can you really create a level playing field when you retrofit two different areas of the law? This Rule takes fiduciary law (based on the laws of trust that date back to merry old England in the 1500s) and slaps it on top of insurance law (based on the laws of agency).

The laws of Trust are based on a relationship created at the direction of an individual, in which one or more persons hold the individual’s property and is subject to use and protect it for the benefit of others or the individual.

The laws of Agency are concerned with any “principal”-”agent” relationship; a relationship in which one person has legal authority to act for another. 

How can you create a level playing field with two separate areas of law and duties? Attempting to impose trust law onto annuity advisors who are bound by the law of agency is like fitting a square peg where there isn’t even a hole, round or otherwise. It’s like applying the rules of Gaelic football to American football? What, you ask?

As a fan of both, I love the fact that Gaelic football scores can run into the hundreds. Isn’t that a better customer experience than a 7-3 squeaker? Maybe, maybe not. Depends on the fan’s objectives and preference (aka CHOICE). But the DOL Rule takes away choice. It requires everyone to follow two sets of rules.  

What if we were to require the Green Bay Packers to abide by the NFL rules as well as Gaelic football rules? Do we allow the player to pick up a fumble with his hands because NFL allows it or call a penalty because the Gaelic rules do not? 

Do we pay for two sets of referees? Who will pay for the cost to determine when a Gaelic rule presides over an NFL rule or vice versa. While this situation will certainly impact the players and owners, the biggest harm will be to the fans who will most likely bear the cost and suffer while each play is argued, reviewed, and arbitrated.

Maintaining custody and/or providing ongoing management; while influencing performance outcomes is indisputably a fiduciary role. Recommending a product that best meets a client’s interests and needs while having no influence over the performance outcomes of the product is an agent role. 

There are decades of legal and regulatory precedence over the separation of investment advice and insurance transactions. This Rule simply adds one on top of the other with no clear direction to the consumer as to which one prevails and when or how they will be adjudicated.  

Another perhaps stronger metaphor: Would we tell judges that in addition to being bound by the constitution and the rule of law, they are now bound by the laws of religion? Of course not. There’s that little problem of the First Amendment. 

But what about investment advisors (fiduciaries) who also sell annuities (typically an insurance product)? Don’t they already follow both? Experience tell us that, typically, an investment advisor will take off the fiduciary hat and put on the agency hat when an annuity is the product recommendation. 

This allows the fiduciary to make a one-time transaction under a single set of laws and rules. This also allows them to be governed by that same set of rules into the future and removes the possibility of a seven-year free look period.

The Rule makes it clear the Department believes that this two-hat role is a problem and prohibits the choice. We disagree. We believe the consumer, already a purchaser of insurance, understands the difference between paying for ongoing advice and purchasing an insurance policy. We also believe that understanding that difference creates different expectations, and that consumers prefer choice over no choice.

 1 https://www.law.cornell.edu/wex/estates_and_trusts

 2 https://www.law.cornell.edu/wex/agency

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