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May 31, 2016 at 03:00 AM
The Department of Labor’s new fiduciary rule is the most significant industry game-changing development we have seen since the tax reform to annuities in the early 1980s. As a compliance expert with a leading consulting company, the biggest question I receive these days is: “How do I comply?” Even though I’d like to have a panacea response, my answer is often the same: “It depends.” Every company, distributor and producer is in a unique position under this rule, and compliance answers will vary based on the licenses one carries and the type of products manufactured and marketed.
This is part 1 of a series of articles taking a deep dive into what the annuity world will look once the rule takes effect next April. Part 1 takes a look from the perspective of the “insurance-only” producer. (Part 2 focuses on annuity carriers and Part 3 focuses on IMOs.)
By insurance-only, I am talking about those licensed insurance producers that do not maintain a securities license or investment advisory registration. Many of these individuals may work under an IMO/FMO umbrella for marketing support, and the only regulator he or she has ever known has been the state insurance department — not FINRA, not a state securities regulator, not the SEC, and certainly not the DOL or IRS.
Is it possible to comply with competing regulatory frameworks?
The fundamental conduct standard regulating agents’ product advice has been suitability, which is rooted in the concept of needs-based sales. The insurance-only agent is likely comfortable operating within the current annuity suitability framework, given state and carrier requirements for suitability and product training before any sales can occur. This producer also likely understands the line that cannot be crossed when recommending annuities and rendering “investment advice” beyond the scope of their licensure. However, starting April 10, 2017, the producer will need to understand a new framework — what it means to be a fiduciary.
Herein lies an inherent problem. The DOL fiduciary rule broadly expands new ERISA-like fiduciary duties of prudence, care and loyalty, as well as a duty to offer “investment advice” in the best interests of the consumer for all qualified sales. Many agents will ask: “I thought I wasn’t allowed to provide “investment advice” under my state insurance license? How can I comply with both state investment advice restrictions and these new DOL fiduciary standards?”
It’s a difficult proposition.
In the past, a few states have provided guidance for agents to understand the boundaries of an insurance license. In 2011, Commissioner Susan Voss issued Iowa Insurance Bulletin 11-4, which offers a list of “Prohibited Activities for an Insurance-Only Person,” including “Discussing risks specific to the consumer’s individual securities portfolio.” This instructive bulletin helps clarify for agents the limits of what they may and may not discuss with clients.
Complying with the strict language of the DOL rule may make it difficult to also comply with the spirit of Bulletin 11-4. Now, insurance-only agents must seek to meet a consumer’s overall investment needs and objectives while not crossing a state or federal investment advice-without-a-license line.
Best interests may not mean best product
Some have wondered how the enforcement of the DOL Rule will work for insurance-only agents that are only able to offer a “limited menu” of products, such as a catalog of fixed annuities. Will the DOL or plaintiffs’ lawyers challenge the fact that insurance-only agents are only licensed to sell insurance products? Consider this possible exchange in a courtroom in the year 2019, with the agent on the stand:
Plaintiff’s Counsel: ”Why did you sell this indexed annuity product with an income rider when your 45-year old client said he wanted more, not less, exposure to the market?”
Agent: ”I don’t have the appropriate licenses to offer securities, so I offered the best product I could offer under the circumstances.”
Counsel: ”But isn’t it true that you acknowledged your fiduciary status to your client? And under such status, aren’t you required to act in the best interests of your client, without regard to your own interests?”
Agent: ”Yes, but I’m also obligated to follow my state’s insurance and securities laws.”
Counsel: ”So how can you possibly consider yourself a fiduciary without all the necessary licenses to serve the best interests of your client? How could you even know it’s in the client’s best interest without requisite knowledge and ability to sell the full universe of financial products?”
Perhaps this is an extreme example, but it highlights the dilemma for insurance-only agents. Was this the DOL’s intent?
Probably not.
Many believe the enforcement of the rule won’t bully insurance-only agents into these exchanges but will instead provide fiduciary scrutiny when there is perceived bad advice relative to other products available to that agent in the same asset class. In other words, the agent may be in fiduciary hot water when he or she recommends an indexed annuity from a B-rated carrier that pays relatively high compensation when there was an identical product available with half the compensation and better benefits from an A-rated carrier.
