After losing the U.S. Senate in the 2014 mid-term elections, the Obama administration faced a political pickle. How could it advance its agenda without the support of a Republican-controlled House of Representatives or a newly controlled Republican Senate?
With some clever political maneuvering, the administration went to its federal executive departments, including the U.S. Department of Labor, and tasked them to promulgate the progressive rules pursuant to the Administrative Procedure Act before the next election. Voila! The DOL made the Fiduciary Rule effective last June, even though it wouldn’t go into effect until April 2017.
Why the rush? The rule’s effective date in June 2016 prevented it from being undone by either the Congressional Review Act or executive order.
While every financial professional should support the concept of acting in the best interest of the client, the DOL’s fiduciary rule is flawed for reasons too numerous to explicate here. Especially flawed is the idea that receiving a commission is a material conflict of interest. Even though study after study proves that commissions paid to a financial professional from a company (not directly out of the client’s pocket) are more economically beneficial to a client versus the client having to pay an annual fee (out of his or her pocket), this Rule is not about conflicts of interest or even retirement investors. It is about one thing and one thing only, control.
Let’s go back in time to 2005 when FINRA released Notice-To-Members 05-50, which “gently” reminded broker-dealers of their supervisory duties regarding fixed-index annuities.
At the time, FIAs were absorbing a great deal of the annuity market share at a faster than expected pace. We all asked the same question, “Why would FINRA care about regulation of an insurance product?” While reasonable to ask, asking was naïve. The government doesn’t care about what it controls, it cares about how much it controls. Some proposed the “solution” of insurance producers, who sell insurance products, to go get securities-licensed so that they could be to be supervised by a securities firm so they could not sell securities, but insurance.
Isn’t it convenient for the SEC that the new conflict-of-interest rules serve the interest of the securities regulators? (Photo: Shutterstock)
The government lost that battle, but we knew it wouldn’t go down without a fight. A few years later, the SEC proposed Rule 151A to classify FIAs as securities even though they are clearly insurance products. Never mind that the SEC was hijacking a state issue, the government wanted control. Again, what was the solution? Go get a securities license to sell an insurance product. We won that battle with the Harkin Amendment in the Dodd-Frank legislation, but the war still wasn’t over.
Fast forward to 2016-2017. The government still wants control of the FIA industry. It sees the enormous amount of money moving from securities into FIAs. Operating under the auspices of “looking out for the consumer” and classifying FIA commissions as conflicts of interest, the Obama DOL decided to take FIAs out of the scope of PTE 84-24 and insert them into the Best Interest contract Exemption. How convenient that a securities license, the mechanism of allowing Big Brother to check under the hood of every transaction you make, is again the solution.
The modern dilemma the financial services industry faces daily is how to grow clients’ wealth without jeopardizing the security of their wealth so that they have income they can never outlive.
Fortunately for the American retiree, the FIA has been the answer to that quandary since 1995. But in making the rule, the government misunderstood both the FIA product and our industry.
Perhaps the worst part of this rule is how it will undoubtedly limit consumers’ access to that solution, which, given the circumstances, is needed more than ever. FIAs don’t need to be made great again — the American retirement does. Unfortunately for retirees, the DOL rule is making it much more difficult.
— Read Courts Will Not View DOL Fiduciary Rule Repeal Favorably: Borzi on ThinkAdvisor.