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Regulation and Compliance > Federal Regulation > DOL

How the Fiduciary Rule Will Squeeze Your Shelf

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The U.S. Department of Labor’s fiduciary rule will become applicable this month, and it will have major effects on financial services delivered to the retirement market.

The DOL rule expands the applicability of the existing fiduciary standard for recommending products to retail individual retirement account customers, which means advisors must always act in the best interest of their customers, as defined by the DOL rule.

(Related: SEC Jumps Into Fiduciary Rule Fray, Seeking Comments on ‘Future Action’)

As a result, distributors are planning to change products and business processes to eliminate conflicts of interest, implement a best-interest sales process and efficiently achieve compliance.

Many distributors are actively “narrowing their product shelf,” which means fewer products for advisors to sell.

Under the DOL rule, distributors are reducing the number of annuity products, fund families, share classes and specific products for various customer types. For example, some broker-dealers have stopped offering L-share variable annuities on their platforms and this has led to some manufacturers pulling their L-share class for their variable annuities from the market.

The DOL has created a narrow contract exemption from the best interest standard, along with a provision letting consumers use private lawsuits to respond to possible violations of DOL requirements.

The private right-of-action provision within the best interest contract exemption, or BICE, provision puts more due diligence obligations on firms hoping to reduce the risk of litigation.

Client meeting (Photo: Thinkstock)

(Photo: Thinkstock)

Because these expanded due diligence obligations, firms are looking at their product lineups and eliminating products that have low sales volumes or that are appropriate for only a limited set of customers.

The product changes will help firms implement a higher quality best-interest sales process in a more cost-effective and compliant manner.

Simplification of the products that stay on the market is coming as well, since distributors don’t want to overwhelm advisors with long explanations of product features.

A narrower product shelf doesn’t automatically mean lower sales for an advisor. When considering the impact of the DOL rule, 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 distributor’s platform?

  • What differences, if any, exist with respect to available products on the distributor’s platform for qualified and nonqualified accounts?

  • What opportunities exist to provide additional value to customers by recommending substitute products or addressing additional customer 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.

That shift should give advisors new opportunities to have meaningful conversations with customers about their unique needs and situations.

By giving advisors more time to understand their customers, the new processes can lead to stronger and deeper customer relationships.

— Read DOL Fiduciary Deadline Is Coming. Here’s a Compliance Checklist on ThinkAdvisor. 


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