In early 2015, the Department of Labor (DOL) introduced a proposal to expand the definition of a fiduciary under the Employee Retirement Income Security Act (ERISA). The impending rule aims to ensure that retirement advisors abide by a fiduciary standard, putting their clients’ best interests before their own profits and protecting investors from backdoor payments and hidden retirement investment advice fees.
If this proposal is adopted – which it likely will be within the next month or so – it will dramatically change the retirement finance field and transform the way advisors are compensated.
First and foremost, the new rule will be costly to financial firms. Economic Consequences of the U.S. Department of Labor’s Proposed New Fiduciary Standard, a study conducted by the Financial Services Institute with Oxford Economics, projects that the rule will cost nearly $3.9 billion to implement, with startup costs ranging from $1.1 million for the smallest companies to $16.3 million for larger firms.
And as the management consulting firm Oliver Wyman stated in its report Distribution Disruption: Impacts of the Department Of Labor Fiduciary Standard for US Life Insurers, the annuities market will experience the most tectonic shift of any other market, as these products tend to have high embedded commission levels.
“From a new business perspective, more than half of the new money flows to the Variable Annuity and Fixed Index Annuity market and about a quarter of Fixed Annuity sales are from qualified pools of retirement assets. This is ‘ground zero’ for the DOL’s campaign,” says the Oliver Wyman report.
Although there’s been plenty of political opposition over the past year or so, the DOL is pressing ahead with the rulemaking. So what can advisors do right now to prepare themselves for the changes?