Wednesday, June 15, 2016

From the Desk of the AAAE President: Understanding the Impact of the DOL Rule

It has been just over two months since the new rule governing sales practices on qualified retirement accounts came down from the Department of Labor (DOL), and the financial services industry has been spending a lot of time and effort trying to analyze and understand the requirements of the rule and how it impacts its members.

The new rule stemmed in part from the Obama Administration and Department of Labor concerns about potential conflicts of interest in compensation practices that could adversely affect the choices offered to consumers regarding their retirement funds by financial professionals because of potentially higher compensation.

Many top annuity producers we talk to vociferously refute the idea that they do not treat the best interests of their clients as paramount, and many industry members believe strongly that the changes made will result in less advice and choice for those who need it the most (middle-income clients), significantly increase the costs for compliance, and also significantly increase liability for both producers and financial institutions due to increased litigation risks.

From an annuity industry standpoint, the new rule significantly affects and impacts the advice and sales process used to sell both variable annuities (VAs) and fixed index annuities (FIAs) if associated with a qualified retirement account, including traditional IRAs and qualified plan transfers and rollovers. The new rule makes such sales of VAs and FIAs subject to a fiduciary standard, in addition to the current suitability standard that has previously been used, and further requires, among other things, that compensation for the sale of such products be “reasonable”. Certain analysts take this to mean a compensation structure that is more fee-based than commission-based, as well as an elimination of many or all forms of additional incentives on the sale of such products.

Under the original proposed rule released in April 2015, it was understood that the sale of variable annuities would fall under the Best Interest Contract Exemption (BICE). In a new development, the DOL’s final rule now requires sellers of fixed index annuities (FIAs) who earn commissions to also comply with the BICE. The earlier proposed version of the rule permitted FIA sales to fall under a separate exemption (PTE 84-24).

Because the impact of the rule is much more far-reaching than expected, it is no surprise that efforts are being made by the financial services industry as well as outside the industry to overturn the rule prior to its effective date in April 2017. The efforts to do so are both legislative and through potential litigation. In the June issue of Annuity News & Lifelines, we have articles addressing the questions raised by the industry (see Gissou Gotlieb’s article) and more.

Because of the broad impact of the rule and the considerable time it will take to understand the new requirements, we are still in the early stages of determining exactly how financial institutions and producers will be impacted. Needless to say, if the rule is allowed to stand, the impact will be significant. At this point, we have more questions than answers, and all of us need to take a deep breath and be patient while this process plays out.

We have already been inundated by the press coverage on this rule, which at this point is rife with opinion and sparse on facts. Many commentators are merely speculating on topics that interest them in particular. In our ongoing coverage of this important topic in this magazine and in our other communications with our producers, we will try very hard to focus on the facts as they are ascertained and reported on by responsible parties. You have our commitment that we will be a significant resource for information on this topic that you can rely on to be accurate and responsible. While we may from time to time offer opinions on this issue, we will take great pains to keep you informed of the facts as they become clearer. In the meantime, it is business as usual, and the opportunity to provide FIAs suitable for your clients’ retirement needs could not be more favorable.

Please give us a call at 800.321.3924 if you have any questions or comments. Good selling!

–– Van A. Lumbard

Ann Arbor Annuity Exchange

Ann Arbor Annuity Exchange and its representatives do not give tax or legal advice. Please consult your tax advisor or attorney.

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