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:
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how they define their best interest sales process, including provisions for aligning a recommended product with the clients’ financial needs, objectives and risk tolerance;
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the supervisory structures they have in place for ensuring compliance with the rule; and
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compensation arrangements they establish to adhere to the rule’s best interest contract exemption or BICE.
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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.
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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.