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Regulation and Compliance > Federal Regulation > DOL

Compliance expert answers 7 looming fiduciary rule questions

By Warren S. Hersch

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With the April 10, 2017 deadline to meet impartial conduct standards of the Department of Labor’s conflict of interest (fiduciary) rule just 5 months away, industry stakeholders are ratcheting up their compliance efforts.

Related: A DOL fiduciary rule compliance checklist

For a high-level view of issues they can expect along the way, LifeHealthPro interviewed Ben Yahr, a senior manager of EY’s financial services office.

The discussion explored questions that financial institutions and retirement advisors will face during the rule’s phase-in, how products and producer compensation might evolve, as well as prospects for the rollover market and the M&A space. The following are excerpts.

LifeHealthPro: What impact do you expect the 2016 election results will have on the DOL rule?

Yahr (pictured): Companies are not slowing down preparations for the rule’s implementation, as there’s not much time to get into compliance. Companies are carefully reviewing their operating models to see what changes they’ll need to make.

LHP: Are you confident that independent marketing organizations applying with the DOL to become financial institutions will be able to meet the rule’s requirements?

Yahr: The fact that there wasn’t a clear path forward for IMOs — the DOL hadn’t designated them financial institutions in the finalized rule — caused a lot of confusion in the market. My sense is that certain IMOs will be approved in short order [as FIs], but the DOL may ask for revisions to some plans. This will be an evolving process.

Related: Broker-dealers on DOL fiduciary rule: Expect advisors to walk

More importantly, carriers will need to get comfortable distributing product through IMOs under the rule. The level of confidence that product manufacturers have in IMOs’ supervisory structures will be the true test. For its part, the DOL will look for three things in IMOs applying to become financial institutions:

      • how they define their best interest sales process, including provisions for aligning a recommended product with the clients’ financial needs, objectives and risk tolerance;

      • the supervisory structures they have in place for ensuring compliance with the rule; and

      • compensation arrangements they establish to adhere to the rule’s best interest contract exemption or BICE.

Related: DOL fiduciary rule forces Merrill to drop commission IRAs

There’s a general notion among FIs that they’ll want to maintain current revenue to be able to recruit, reward and retain new advisors, says EY’s Ben Yahr.

LHP: Is it your sense that IMOs will have more significant hurdles to surmount than other financial institutions — broker-dealers, banks and insurers — subject to the fiduciary rule?

Yahr: Yes, IMOs face by far the biggest challenges because they lack the supervisory structures of other financial institutions. Until now, there wasn’t the need because they haven’t had the same level of regulatory oversight.

The DOL rule represents a significant change to their business model; they’ll have to grow into it. Other FIs have processes respecting the supervision of sales, compliance and product governance that can be modified to conform to the rule. They will, to be sure, have to make substantive adjustments, just not to the degree that IMOs will.

LHP: Do you anticipate a dip in sales commissions under the rule? If so, how might agents and advisors need to compensate?

Yahr: Under the rule, if a company is using the BICE, which will be the case for the vast number of products sold, you’ll need level compensation within product categories, though differential compensation can exist between categories, provided that compensation can be justified by neutral factors.

Related: DOL rule puts a damper on Cerulli’s VA sales forecast

I don’t think companies are settled on what compensation will look like. There’s a general notion among FIs that they’ll want to maintain current revenue at both the firm and advisor levels. That will be key to continuing to be able to recruit, reward and retain new advisors.

Companies are now looking at solutions to help advisors work more productively and efficiently. One way to help preserve an advisor’s income, even if revenue per sale were reduced, is to adopt technology that will allow them to conduct more transactions.

LHP: Would you expect changes as well to products, such as the development variable and fixed indexed annuities with a fee-based chassis?

Yahr: Products will evolve over time, but I believe this will happen more slowly than people have speculated. The product development cycle — from manufacture to state approval — is a long one.

Also, I don’t think carriers and distributors know yet add how annuities must change. This will be a function of harmonizing new products with other portfolio offerings, as well as with necessary changes to business processes.

Related: Variable annuity sales fall in advance of DOL rule

As firms examine different M&A options, they may see greater size and scale as a competitive advantage, says Yahr.

LHP: Some market-watchers anticipate fewer 401(k)-to-IRA rollovers, either because fewer advisors will be operating in the retirement space or because of increased automation of investment advice using robo advisors. Do you also foresee a decline in plan rollovers?

Yahr: That’s my expectation. Also to consider are fees generally. A lot of 401(k) plans have fairly low fees, thanks to access to institutional pricing of fund shares. Depending on customers’ needs, it may or may not make sense to roll 401(k) assets to an IRA.

If you’re a financial institution providing both retail accounts and retirement accounts, one question you have to ask is, “Are there retail product features we need to make available to plan participants so they’re not incentivized to move money to an IRA.” Companies are increasingly looking into this issue to make retirement plans more “sticky” or appealing.

LHP: What about industry consolidation? Do you anticipate more mergers and partnering among financial institutions and advisory firms in the wake of the DOL rule?

Yahr: I expect we’ll see an increase in M&A activity. As firms examine different options, they may see greater size and scale as a competitive advantage.

LHP: Any final thoughts on how agents and advisors can best prepare for the rule?

Yahr: The path to compliance will likely be filled with a lot of gray areas. Ultimately, advisors will need to decide what’s in the client’s best interest. As long as they keep that in the forefront, they’ll be able to chart a path forward with confidence.

Related:

Trump, GOP could torpedo DOL rule, Dodd-Frank

One consequence of the DOL rule: more risk-averse advisors

4 versions of the Best Interest Contract Exemption

5 things to know about selling annuities under the DOL fiduciary rule

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