Experts say DOL rule will remain largely unchanged

The DOL’s proposed fiduciary standard could radically change the financial services industry as a whole. Of course, no one can predict what the ultimate outcome will be, but controversy and confusion surround the issue. 

The topic was, appropriately, a hot one at the LIMRA Annual Conference, taking place now in Boston. In one session, “The future impact of the DOL’s proposed regulations,” three speakers explored the key issues and implications for the insurance industry, and what their companies are doing to prepare. 

Speakers included:

• David Aspinwall, Esq., Great-West Financial
• John Dunn, Northwestern Mutual
• James Jorden, Esq., Carlton Fields Jorden Burt

First, the panelists defined who a fiduciary is, as current definitions stand. ERISA 3(21)(A) says a fiduciary is, among other things, someone involved in giving investment advice for a fee, based on five steps, according to the presenters:

• Recommendation
• Regular basis
• Mutual agreement
• Primary basis
• Individualized

But according to the DOL’s proposed regulations surrounding who is and isn’t a fiduciary, the definition would be:

• Categories of advice
  • Transaction recommendation
  • Management recommendation
  • Appraisals
  • Recommendation for advisor

Advisors must either

• Acknowledge fiduciary status, or
• Provide advice by agremeent (written or oral) that advice is individualized or specific to the individual for her consideration to invest 

But what is a “recommendation?”

“It’s very broadly defined,” said Dunn. “It’s any communication that can reasonably be viewed as a suggestion … saying someone should engage in or refrain from taking a particular course of action.”

“I’d suggest that anyone discussing an insurance product is engaging in this type of recommendation,” Jorden added.

But when do investment discussions create a fiduciary relationship? According to the speakers:

• When the investment discussion meets the definition of investment advice
• For example, where an advisor for compensation:
  • Refers a prospective or current IRA holder or 401(k) participant or beneficiary to an advisor (includes referrals to managed accounts)
  • Recommends that a prospective or current IRA holder or 401(k) participant or beneficiary rollover into an IRA
  • Recommends which funds and/or annuity products to place into an IRA or 401(k), including specific recommendations regarding asset allocation (e.g., recommending target date fund or an investment in a specific mutual fund)

“The referral itself constitutes a fiduciary act,” said Aspinwall. “If you’re talking to an IRA holder and suggesting a model for them to invest in or suggesting that they get into a target date fund, or a Fidelity fund, this is a fiduciary act. There are a lot of ways to trip over a fiduciary status.”

And what types of compensation would be prohibited under the proposed DOL rule (unless carveout exemption apples):

• Revenue sharing
• Commissions
• Payments that would incentivize the selection of one type of investment or asset over another

That leaves the only permissible compensation as flat fees for registered investment advisors (and those fees must be “reasonable”). 

“The easiest part is to receive a flat fee but even that flat fee has to be reasonable,” said Aspinwall. “They’re trying to push advisors into flat fees.”

There are “carveouts,” however. 

“This is the DOL’s way of satisfying the standard of sophistication they think is necessary, in regards to sellers carveout,” said Jorden.