The Department of Labor (DOL) Fiduciary Rule may have been finalized just a month or so ago, but many annuity clients will be curious how the new regulation will affect their client-advisor relationship – and their investments.
Fixed indexed annuities are now subject to the DOL’s heightened fiduciary standards and, as such, must satisfy the best interest contract exemption (BICE). Because this rule garnered so much media coverage in its proposal stage, clients are likely aware of the April 6 ruling, and will be asking questions about how the new legislation will affect them.
First, advisors must be clear on the details of the rule and how it will affect their businesses and clients. Resources include the final ruling, fact sheet and outline of the Best Interest Contract Exemption on the DOL site.
Next, advisors should segment clients, particularly those with smaller and mid-sized retirement accounts that are the most impacted by the new legislation.
According to Redhawk Wealth Advisors in its paper, How to Thrive Under the DOL Fiduciary Rule, advisors should segment their clients into three types:
- Clients to be moved today: Clients who are in commission-based products that an advisor can reposition or convert to an advice-based fee-for-service account
- Clients to retain: These accounts might be at a disadvantage if they were moved to an advice-based account
- Alternative clients: Small or unprofitable accounts that may have to find a new home as the advisor cannot work with them anymore.
Once advisors are clear on the effects and ramifications of the ruling and have segmented clients, they’ll be better able to respond to customer queries. Here are answers to a few of the most common you may hear from clients and prospects.
What’s the ruling all about, and how does it change how an advisor or broker does business with clients?
The ruling is very complex, but the short answer is that it toughened the criteria for selling complex retirement financial products — including fixed indexed annuities — and has been designed to protect investors from unfair advisor commission practices. At its most basic, the DOL Fiduciary Rule requires advisors who work with retirement finances or retirement plans to recommend financial products that are in the best interest of their clients. Advisors must also must clients know if their advice is subject to any conflicts of interest. According to the ruling, conflicts of interest take a variety of forms and can bias advisor service in several ways. The rule states that “advisor compensation arrangements, which often are calibrated to align their interest with those of their affiliates and product suppliers, often introduce serious conflicts of interest between advisors and retirement investors. Advisors often are paid substantially more if they recommend investments and transactions that are highly profitable to the financial industry, even if they are not in investors’ best interests.”
Does the ruling affect all of my accounts?
The new DOL rules only affect advice on retirement savings products — not taxable investment accounts.
Do these changes take effect immediately?
The changes don’t take effect for at least another year. The rule calls for certain provisions to go into effect by April 10, 2017, and total compliance by Jan. 1, 2018. Starting in April 2017, advisors who handle retirement products are required to disclose fiduciary status and conflicts of interest to their clients. Banks, brokers and advisors then have until January 2018 to comply with the remaining requirements.
Will I save money – or will I have to pay more for advice?
This will vary depending on the segment(s) into which clients fall. Clients will still pay fees for an advisor to manage their account and fees for investments in the accounts.
Is there anything I have to do?
Under the new rule, many advisors may have clients sign a best interest contract that includes detailed disclosures of their compensation.