If the conflict of interest rule in the Department of Labor’s proposed fiduciary regulations is implemented as now drafted, in-house broker-dealers of life insurers face the highest level of fiduciary risk among all advisor channels.
That’s the sobering finding of a 4th quarter, 2015 report of Cerulli Associates, “The Cerulli Edge: Retirement Edition.” The research explores the implications of the DOL’s April 2015 draft rule, which endeavors to impose a fiduciary standard of care on broker-dealers industry-wide.
The Cerulli report warns that life insurance broker-dealers face the greatest fiduciary risk among all BDs because of their higher use of commission-based compensation and proprietary products. More than 60 percent of them derive compensation from commissions. That compares with an estimated 20 to 40 percent for advisors in most other BD channels (including wirehouses, dually registered advisors, bank broker-dealers, independent broker-dealers and regional broker-dealers).
Compounding the problems for insurance BDs, the report adds, has been a lack of investment in technology and processes that might help smooth the transition to a new compliance regime. Among the DOL’s proposed requirements: the Best Interest Contract Exemption (BICE), a contract that an advisor offering investment advice must present prospective clients if there is potential for conflicted advice arising from commissions or the selling of proprietary products.
“Insurance companies are notorious for not investing in the infrastructure of their BD,” the Cerulli report states. “This has impacted the ability of these firms to compete for experienced advisors. The outdated technology at many of these firms only reinforces the challenge of bringing them in compliance with the new DOL rules.”
Turning to the potential for a slowdown in business connected with rollovers from employer-sponsored defined contribution plans to individual retirement accounts, the report believes the DOL’s draft rules could be an “impediment” for new advisors.
Also facing heightened fiduciary risk are captive and career agents who sell variable annuities. At the close of the third quarter of 2015, these producers accounted for over 20 percent of VA sales.
“In general, variable annuities pay higher commissions to advisors, which insurers justify due to additional product complexity and longer holding periods,” the report states. “Sales of complex products paying a higher commission through an affiliated salesforce could come under scrutiny in a period of heightened regulation.”
Though insurer’s broker-dealers are at greatest risk, significant numbers of retirement advisors industry-wide will also have to adapt to the DOL’s draft regulations. A 2015 survey conducted by Cerulli revealed that nearly half (45 percent) of retirement specialists don’t hold themselves to a fiduciary standard. And fewer than 4 in 10 (37 percent) act as an ERISA 3(21) investment advice fiduciary — paid professionals who provide investment recommendations to a plan sponsor or trustee.