With each day that passes, April 10, 2017 is a little bit closer. That’s the date the Department of Labor’s (DOL) Conflict of Interest Rule, also known as the fiduciary rule, will change our industry’s regulatory environment, especially for the qualified marketplace. The regulations introduced by the rule may force many people to change the way they work, pivot into new roles or even do an about face, leaving the qualified marketplace behind.
The path to the future won’t be the same for everyone. In fact, the potential directions are almost as diverse as the types of producers in our field. Do you know which way you’ll go? If you’re still at a crossroads, here are 10 things to consider.
1. Know the rule and the risks.
The DOL’s fiduciary rule changes how someone becomes a fiduciary under the Employee Retirement Income Security Act (ERISA), and sets forth a new set of standards for everyone doing business in the qualified marketplace. Make sure you’re in the know about how the rule affects you and your business.
You can read up on the rule at the DOL’s Conflict of Interest rule website, the LIMRA website or at OneAmerica’s fiduciary website. If the prospect of studying up on the rule overwhelms you, seek advice from someone you trust. Since each producer’s situation is unique, you might discover unexpected opportunities or challenges along the way.
It’s definitely worth your time to do your homework and learn how to comply. The risks of committing a prohibited transaction could be significant, and may include litigation, audits from the DOL and Internal Revenue Service, as well as associated penalties and fines. In the new post-rule world, even receiving compensation for recommending another advisor will be a fiduciary act. It won’t be OK to just say, “I didn’t know.”
2. Assess your client base.
Where does your business stand today? It’s a simple but important question. To answer it, revisit the basics: Review client records, know what you’re charging each client, note current rates and key dates. Think about what’s likely to change for both you and your clients under the new rule. The more you know about your business as it is now, the more prepared you’ll be to make good decisions as you adapt to the new regulations.
The mix of warranties and representations will vary depending on which compensation structure you choose. (Photo: Thinkstock)
3. Ask for help.
If you’re not sure exactly how or when to prepare, you’re not alone. Why not ask for advice? Reach out to someone you trust. If you’re not already affiliated with a financial institution, it may be in your own best interest to start a conversation with one.
Why? Because under the new rule, insurance-only agents who want to receive compensation on new business may need to work with a financial institution, which will vouch that the agent is working in the client’s best interest. Financial institutions, as described by the DOL, include:
- broker-dealers registered with the U.S. Securities and Exchange Commission (SEC)
- insurance companies
- registered investment advisors (RIAs)
Another good reason: A financial institution can show you how to comply with the best interest standard—and may offer you tools to do so. In fact, most broker-dealers I know have been working feverishly for the past few months to create a roadmap for compliance. That roadmap will include additional disclosures, documentation, supervision and a litany of rules and regulations.
4. Know the life-only options.
If you’re an independent, life-insurance-only agent who has never acted as a fiduciary in the past, and you work within the qualified marketplace, your role and your business are likely to change. Here are a few pathways to compliance for those who aren’t already registered representatives or affiliated with RIAs:
More licensing: Some financial professionals who are not fiduciaries will decide to become registered representatives or investment advisor representatives (IARs). To make this transition, they would need to work with a broker-dealer who could sponsor them in their quest to obtain licensing and warranty their adherence to the best interest standard.At the next level, aregistered representative could acquire additional licensing and become an IAR. If licensing or registration are your chosen path, explore those options right away. As the deadline for compliance approaches, testing sessions at some local facilities have already begun to fill up.
Full fiduciary: Those who decide to become full ERISA 3(21) fiduciaries must register with the Securities and Exchange Commission (SEC) — the primary governing body for fiduciaries. They’ll also need to make sure they’re operating within a business structure that meets the rules set forth by both federal and state regulators.
A change of course: Some professionals may decide it’s not worth it to change their business models in order to comply with the new regulations. Instead, they might choose to focus on the non-qualified marketplace and other types of business that don’t fall under the fiduciary rule. That will require determining what business to keep, sell or hand off.
Annual and semi-annual reports give you a clearly understood plan to refer to throughout the year. They’re also a great way to benchmark your services and plan performance. (Photo: Thinkstock)
5. Determine your compensation model.
Under the fiduciary rule, both fee — and commission— based compensation models are permitted. Would a pivot to a fee-based structure be the right move for your business? A registered broker-dealer could potentially help you make the transition to becoming an IAR, or you could function as one through the operation of your own RIA. If you plan to stick with a commission-based structure, you’ll need to find out what your financial institution will require from you.
Understand that whichever path you choose, your relationship with your clients may be affected. You’ll take on more — and different — paperwork. The mix of warranties and representations will vary depending on which compensation structure you choose.
6. Re-examine your business plan.
If your business is likely to change in the new fiduciary world, you may find it helpful to create a blueprint for the new you. If you’re changing your compensation model, for example, you’ll be introducing new policies, processes and structure. A new or revised business plan will help guide your transition and growth, and help your clients understand how things are changing. As part of the plan, build in ways to show your value to clients, no matter how your business is structured. (See No. 8.)
7. Communicate with clients.
Make engagement with your clients’ part of your plan. Be proactive about articulating your value, and transparent when sharing information about your pricing. What paperwork can they expect? What is the value of each aspect of your services? When you share this information, you’ll help everyone set clear expectations. No one likes to be surprised by a heap of unexpected paperwork.