As we look toward 2017 and the implementation of the Department of Labor’s fiduciary standard rule, many questions remain. Though the UK and Australia have been operating under similar rules for several years, there is no clear indication of what such regulatory regime will do to the insurance and retirement advisory industry in the U.S. To gain insight on the issue, we interviewed representatives from all sides of the industry, including: carrier, IMO, independent agent, legal and, of course, NAFA.
See also: NAFA plots course in DOL rule fight
Participants in the discussion included:
- Chip Anderson, executive director at NAFA
- Chris Johnson, senior vice president, chief marketing officer at National Western Life
- Pam Heinrich, general legal counsel for NAFA
- Bob Phillips, managing director and founder of Alternative Brokerage
- Marvin Mitchell, financial advisor, president and CEO at Compass Retirement Solutions
Warren Hersch: Everyone has been talking about the DOL fiduciary rule being too broad and too unwieldy. Does anyone have a thought as to if there were one or two changes you feel would help to streamline the process and make the rule workable?
Bob Phillips: One of the things that we can look to for specifics aspect is financial services and insurance laws that have passed in other countries, particularly the UK and Australia. They were more interpretive, they were more specific scenarios, and they were less broad. Then once everyone agreed to everything in the UK and Australia they gave three years for the company, the agents and everybody to roll it out and have it done.
We’ve been given less than a year on something that, as you said, is broad. It should have been done better. This seems to be more of a political rollout with a timeline set on the backend to get it done by — and get it out — vs. doing what’s best for the industry, what’s best for the agents, and what’s best for the clients.
I don’t think there are any quick fixes. I think it needs to be redone or we’re going to have a revisiting as we have had in some other areas. It just seems destined to fail at this point, at least in rollout. Whether it happens and everybody has to adapt, that’s almost, well I don’t want to say beside the point, but the most concerning thing is the lack of preparation and the lack of specifics, as already been mentioned.
Chip Anderson: I would like to comment on what Mr. Phillips said. He is exactly right. This seems to be a political agenda to get this rule in place before the current administration leaves office. And all the things that they’re trying to get changed in this short period of time is unrealistic. If you want what’s really best for the client, this is not the rule that is the best for the client.
Pam Heinrich: I will add this comment that the NAFA lawsuit isn’t seeking for the department to make some fixes or some tweaks to the rule, we’re asking the court to vacate the rule because it is, as written, unworkable. I don’t know that we would venture to outline any small minor assessments; I think they’d have to go back to the drawing board.
Warren: Would you expect an exodus from the field, say comparable to what’s taking place in the UK where I understand some 9,000 agents and advisors left the field subsequent to the implementation of what they call their retail distribution review.
Chip: That’s exactly right. I believe that personally.
Chris Johnson: I absolutely would and I think there’s a little bit of a backlash from those who offer the products coming our way as well. You know a lot of broker dealers today allow their reps to write fixed indexed annuities off of their grid, or what they call “outside business activity.” I think the LBA’s because of the new oversight responsibilities of everyone that offers product, they’re going to have to limit how much product they offer in order to make sure that they can police it all properly. I think that overall ability for registered reps to sell fixed indexed annuities off the grid is going to change dramatically and that impacts about how 50 percent of registered reps sell insurance products, so I think that’s going to have a big impact.
Warren: Would you expect also, at least for a segment of the advisor community, that more of them will endeavor to become dually registered or do you not see that happening?
Chris: I think you’ll see both. You’re going to see some people go the whole way and get dually registered. You’re also going to see a lot of people leave the business as a result of the additional requirements.
Pam: Well, I would agree with what both Chip and Chris have said. I would say that the department really misunderstands the fixed annuity segment of the industry. The department talks about the supposed loss of between $33 and $36 billion dollars over 10 years and once the sale of fixed annuities into that projected loss; however, they admit that that has nothing to do whatsoever with fixed annuities and is entirely the latest in sales mutual funds. They offer no evidence that there is a problem that needs solving in regard to fixed annuities and I think we got in with the current a little bit. So that’s a challenge.
Warren: Some speculate that many retirement investment advisors will dispense with commissions altogether, charging a flat annual fee for services so as to avoid the myriad requirements in the best interest contract exemption provisions. Do you agree?
Chip: While that’s certainly possible while some advisors move to that platform, that doesn’t help — and again are we looking at what is best for the American people? What is best for the client? That doesn’t help the client in this situation. It’s been proven over and over that a fee charged every year to the client, even a 1 percent fee vs. a 5 percent upfront commission, which doesn’t come out of the client’s pocket by the way, that 5 percent commission comes from the insurance company paid to the agent of the registered rep. But a 1 percent fee over a 15-year period of time, out of the client’s account vs. the 5 percent one-time commission is much higher. And as that client’s account grows, that fee continues to grow from the advisor even at a 1 percent fee.
If you look at variable annuities or mutual funds with management fees and other expenses that those fees have, over the years those fees per year are much higher and that does not benefit the client.
Warren: It’s an interesting point you’re raising. The DOL, I understand, implemented this rule in part to reduce costs to the consumer, but you’re suggesting even the opposite might be the case over the long-term, yes.
Chip: Clearly, and it doesn’t take a mathematical genius to figure that out, frankly, and I’m kind of surprised that the DOL is pushing in that direction.
Pam: I was just going to say, we made that point to them in our comment letters that we submitted last summer.
Chris: I think one of the things you have to consider with the whole fee-based question is probably a third of the distribution with National Western Life would have the ability to transfer to a fee-for-service model. The rest of the guys depend on heaped commissions to pay their bills and the transition is just not going to be possible for everybody.