Despite the flurry of lawsuits that have followed the release of the final Department of Labor (DOL) fiduciary rule, some insurance carriers are coming to terms with the new regime and have announced plans to comply with the seemingly burdensome rules. Particularly, several insurance carriers with affiliated broker-dealer networks have indicated that they will attempt to comply with the best interest contract exemption, rather than exiting certain lines of business.
This would allow various preexisting compensation arrangements to continue to be viable, if the exemption’s requirements are strictly followed—and could mark the next trend in the broker-dealer industry despite potential alternatives to embracing the best interest contract exemption.
Because the rule’s applicability date is fast approaching, however, now is the time to begin preparing to either comply or embrace an alternative solution.
Best Interest Contract Exemption v. Alternatives
While the best interest contract exemption (the BIC, or BICE) would allow advisors to continue to sell traditionally commission-based products, such as variable and equity indexed annuities, it also exposes the insurance carrier to a heightened liability standard. As a result, many have spent the months following release of the fiduciary rule exploring alternatives to strict compliance.
It has been widely anticipated that broker-dealers might largely exit the business of selling commission-based variable and indexed annuities entirely, in favor of operating as level fee fiduciaries. Level fee fiduciaries are those who receive a set percentage or specific dollar amount (rather than a variable commission) and are not subject to the more stringent aspects of the best interest contract exemption, as they are specifically exempt from the formal written contract requirement.
It was previously thought that many insurance carriers would embrace fee-based annuities in order to qualify for this less onerous exemption.
Instead, firms have noted that because the DOL modified the final rule in order to ease compliance concerns (for example, the final rule allows for the sale of proprietary products while satisfying the best interest contract exemption), they will instead seek to fulfill the exemption’s requirements, so can continue to support advisors with commission-based compensation arrangements.
Rules for Compliance