NAIFA ratchets up FI focus as DOL phases in fiduciary rule

With so much attention now focused on the U.S. Department of Labor’s plans to phase in its conflict of interest rule next year, it’s easy to lose track of one aspect that could prove critical to the insurance and finance industry: how financial institutions beholden to the new regime will interpret and implement the rule’s myriad regulations.

This is a mounting concern for the National Association of Insurance and Financial Advisors, which is holding its annual meeting in Las Vegas, Sept. 17-19. The industry’s varying responses to the rule is one among multiple advocacy issues — including continuing Congressional efforts on tax reform and legislative initiatives to impose state-sponsored retirement plans that may conflict with the private market — that NAIFA will be focusing on in the year ahead.

Related: Not ready to become a DOL-compliant FI? Go partner with one 

All eyes on the DOL

“We continue to be in a wait-and-see mode on two fronts,” says NAIFA President-elect Paul Dougherty, who takes the organization’s helm at the close of the conference. “We’re awaiting judges’ decisions on the multi-suit litigation underway. We’re also keeping on the financial institutions.”

Why the institutions? These entities — insurers, broker-dealers, RIAs and independent marketing organizations authorized to sign off on best interest contracts under the fiduciary rule — are responding to the Labor Department’s regulations in different ways.

Some of the companies are moving quickly to implement business processes to comply with the rule. Others are taking moderate steps. Still others have indicated they no longer intend to be in the retirement business.

The hodgepodge of actions, says Dougherty, is creating a “convoluted” market, making it difficult for the industry to present a unified front on implementation issues. That assumes a full phase-in of the rule in April 2017.

NAIFA and its co-complainants in a consolidated a nine-party lawsuit, filed in the U.S. District Court for Northern Texas, are adamant that the Labor Department exceeded its authority in handing down the fiduciary rule; and that, if implemented as now framed, the rule will be bad for retirement savers and the industry.

“If left changed, the DOL rule will ultimately damage the very goal the Obama Administration is trying to achieve, which is encouraging folks to save and play a more active role in preparing for retirement,” says Dougherty. “Instead, retirement savings will decline, in part because of limited access to retirement investment advice.”  

That, he adds, is because fewer advisors will be inclined to serve retirement savers below a certain income or asset threshold given the prospect of litigation. And many those who do meet the threshold may nonetheless opt out, deciding they’re unable or unwilling to pay asset under management fees in lieu of a sales commission. 

Related: DOL fiduciary rule: Disruption or opportunity?

Insurance and finance industry leaders are concerned that some of the negative fallout from the new fiduciary standard will inhibit their recruiting efforts. (Photo: iStock)

For advisors, the former is currently the greater concern, as the DOL regulations provide for a “private right of action” by clients alleging that a financial institution or advisor has failed to meet the best interest standard. Worse still is the prospect of class action suits by law firms to which the DOL is effectively outsourcing enforcement of the rule.

“It will be very difficult for advisors to quantify their potential future liability,” even though the financial institutions with which they’re affiliated will bear much of the legal burden under the BIC exemption, says Dougherty. “So the advisor still has a role to play in protecting themselves and their practices.”

Their task may be complicated by the companies’ varying responses to the DOL rule. One result, says NAIFA Director of Federal Relations Judi Carsrud, could be different BIC disclosure and other compliance requirements for their affiliated advisors. Among the latter: a potential rise in errors and omissions (E&O) insurance coverage to protect against DOL-related litigation.

“This is creating a difficult operating environment,” she says. “As advisors, we’re beholden to what the financial institutions decide to do.  

“There are so many moving parts to the conflict of interest rule,” Carsrud adds. “We’re focusing on what’s happening at the institutions and how we can best keep our members informed about how they should prepare.”

Turning to other advocacy issues, Dougherty said that tax reform, a perennial concern for NAIFA, could be a “significant element” of debate in the 2016 elections. The association will be “ready to respond” should Congress endeavor to simplify the Internal Revenue code and broaden the tax base by removing or watering down the current tax-favored treatment of life insurance and retirement accounts, including tax-deferred IRAs and 401(k) plans. 

Of continuing to concern to NAIFA are other tax issues, including a revising of the valuation of taxable estate assets; the extension of a current rule that allows overfunded defined benefit plans to use excess monies to provide post-retirement health insurance and group life insurance; and a tax provision requiring heirs of inherited IRAs and 401(k) plans to pay tax on inheritances with five years of an IRA owner’s death.