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Regulation and Compliance > Federal Regulation > DOL

3 significant challenges for annuity advisors in 2017

By Ben Yahr, Gerry Murtagh

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We expect to see significant changes in the annuity industry during 2017. The Department of Labor’s fiduciary rule will become applicable in April 2017 and have major impacts on financial services delivered to the retirement market.

The DOL rule will affect companies’ strategies and operations, the products they offer, the advice they provide and the technology they use to support their customer and distribution networks.

The biggest impact, however, may be felt by advisors. The DOL rule establishes a fiduciary standard for recommending products to retail IRA customers, which means advisors must always act in the best interest of their clients. Distributors are planning to change products and business processes to eliminate conflicts of interest, implement a best interest sales process and efficiently achieve compliance. As a result, advisors will need to adapt to three fundamental changes:

          1. Downward pressure on compensation
          2. Fewer products from which to choose
          3. Longer and more challenging sales processes

To appropriately prepare, advisors will want to examine their business models, paying special attention to the typical needs of their target customers, the products that can meet these needs and the associated compensation.

Change 1: Downward pressure on compensation

To comply with the DOL Rule, professionals providing investment advice to retirement customers must put their clients’ best interest before their own and provide greater transparency in the product recommendation process.

Distributors will adjust compensation plans to minimize or eliminate conflicts of interest and will share more information about product design, fees and commissions with their customers. Some distributors have decided to fundamentally change parts of their business model that they believe will be too costly or too risky under the DOL Rule. For example, some firms have decided to eliminate commission-based accounts for IRA customers. By April 2017, commission-based brokerage customers of these firms will be transitioned to either a fee-based account or a self-directed account. Table 1 below summarizes plans that several distributors have announced. 

Table 1: Retirement accounts offered under DOL

Company name

Fee

Commission and fee

Ameriprise

X

Commonwealth

X

Edward Jones*

X

LPL Financial

X

Merrill Lynch

X

Morgan Stanley*

X

Raymond James

X

Note: *May not initially offer all investment products on commission basis

(Source: Investment News)

In addition, distributors that plan to continue offering commission-based products are adjusting advisor payouts (either the commission level or grid) to normalize payouts between product categories. Some companies are applying these changes to all business while others are limiting the changes to IRA accounts. When considering all of these changes, we expect to see downward pressure on advisor compensation.

As a result, advisors may want to proactively evaluate the expected impact on their total compensation under the DOL Rule. Key questions include:

          • What are the key components of an advisor’s total compensation today? By product type (e.g., VAs, FIAs, mutual funds, etc.)? By account type (i.e., qualified vs. nonqualified)? By customer segment?
          • How will the DOL rule affect their compensation, if their book remains the same? 
          • How will non-cash compensation, such as benefits, education trips and contests, change?

Advisors will likely need to revisit this analysis in early 2017, as a high degree of uncertainty remains, since many distributors are waiting to see what their competitors do before they finalize their plans.

 key questions

Advisors will have to ask themselves key questions in order to find the right choice for clients amid a shrinking product mix and a more challenging sales process. (Photo: iStock)

Change 2: Fewer products from which to choose

Many distributors are actively “narrowing their product shelf,” which means fewer products for advisors to sell. Under the DOL Rule, companies are reducing the number of annuity products, fund families, share classes and specific products for various customer types. For example, Prudential recently stopped L-Share variable annuities since many broker-dealers stopped offering this share class on their platforms.

A narrower product shelf doesn’t automatically mean lower sales for an advisor. When considering the impact of the DOL ruling, an advisor should consider the following key questions:

          • What products are on the distributor’s platform? Will the products that an advisor prefers selling be available for sale? Will the advisor’s organization continue to offer these products?
          • How has the compensation structure changed for the products available on the distributors’ platform?
          • What differences, if any, exist with respect to available products on the distributor’s platform for qualified and non-qualified accounts?
          • What opportunities exist to provide additional value to customers by recommending substitute products or addressing additional client needs? 

While changing product offerings may be challenging initially, advisors may find themselves spending less time searching for the best product as many distributors plan to centralize this work, allowing advisors to concentrate more on understanding and solving client needs. 

Change 3: Longer and more challenging sales processes

In addition to what advisors sell to IRA customers, how they sell to these customers will change in 2017. An advisor that receives compensation for investment advice provided to qualified accounts must act as a fiduciary. Thus, the advisor must have a consistent and documented process showing he asked for critical information about his customers’ needs and made recommendations in line with the distributor’s best interest sales process.

In addition to the client level information typically collected, an advisor may need the following technology and data to support the sales process:

          • Product data (e.g., features, performance and fees)
          • Industry data from data aggregators for plan costs, advisory program fees and brokerage platform costs
          • Academic research to support the best interest sales process
          • Education brochures and tools
          • Sales tools to illustrate how investment recommendations satisfy client objectives
          • Customer reporting that provides the information needed for periodic investment review meetings

 Key questions to think about include:

          • How much product training will the distributors offer? Will it be sufficient and effective? How much time will it take?
          • What support will the distributor provide to help execute the sales process? Does it take advantage of current technology or will it be cumbersome and require a lot more time? Will it allow advisors to see more or fewer customers than the current process?

While advisors may feel these new selling processes are complicated, it’s important to recognize they can create new opportunities for meaningful conversations with clients about their unique needs and situations. In this sense, the new processes can lead to stronger and deeper relationships.  

Moving forward

Looking ahead to April 2017 and beyond, advisors must have a clear-eyed view of the changes to come. They must ask fundamental questions about the products they are best suited to sell, the customers they want to serve and the value they can provide. They must prepare for the business model changes resulting from the DOL Rule that will require them to learn about new compensation arrangements and new products, and adopt new sales processes.

Many advisors may have much different businesses in 2017 and beyond than the ones they operate today. Some advisors will re-evaluate which distributor to align with. While much is unknown, the one thing that advisors can be sure of is that 2017 will be a year of significant change.

See also:

4 DOL fiduciary rule compliance considerations

Accelerating change through innovation

How the life insurance industry will change in 2016

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