By Gissou Gotlieb, Field Suitability Compliance Officer
Before the Department of Labor’s “fiduciary” rule became public, there were scores of opinions, movements, and efforts of all kinds addressing the merits, shortcomings, and impact of the proposed rule. When the final rule came out on April 8, 2016, a hush fell over the crowds. The rule and amendments were over 1,000 pages long and significant changes had been made to the rule since its proposal in 2015. That left anyone not close enough to the rule to have known the revisions – most everyone in the industry – scrambling to read through the rule and understand what it was saying, what it wasn’t saying, its immediate and future impact, implications, options, and next steps.
The rule was commonly referred to as the “fiduciary” rule when discussed up to its release. However, upon closer examination, the rule is much more than that – hence the prolonged silence on figuring out what just happened and what to do. The final rule lays out terms and conditions for how and when a person will be considered a fiduciary, and also provides information on types of accounts, plans, products, and transactions that will be impacted by the rule, and how they will be impacted. As with most rules, it offers enough ambiguity to provide food for thought for months and years to come (e.g., “reasonable” compensation), and addresses some issues in more certain terms (e.g., fixed index annuities no longer treated like their partner, fixed annuities, under the Prohibited Transaction Exemption 84-24).
Given the sheer volume of the rule, we will attempt to lay out at a very high level some known elements of the rule and some considerations for financial professionals (FPs) and financial institutions (FIs) in preparing for the impact and implementation of the rule.
The Department of Labor (DOL) rule comes as a result of the DOL’s concerns about how qualified retirement savings are impacted by potential conflicts of interest through the practice of FPs, in the DOL’s opinion, putting their own interest ahead of their clients’ when making recommendations. While some would argue rules were already in place to address such concerns, the DOL pushed to create additional rules redefining who would be considered a fiduciary and outlining new standards for care.
As it stands, the rule covers activities (recommendations) involving ERISA plans, IRAs, and other qualified accounts. The rule does not cover non-qualified accounts, but has carve-outs for other types of non-ERISA plans that are tax-advantaged accounts such as health savings accounts. The product being sold may drive the processes and compliance requirements that may be triggered based on the rule. For example, fixed annuity sales may be conducted under the Prohibited Transaction Exemption 84-24. However, fixed index annuities fall under the Best Interest Contract Exemption (BICE) and trigger different requirements. Under BICE, the financial institution (FI) and advisor must generally: 1) acknowledge the fiduciary status, 2) give prudent advice that is in the best interest of the retirement investor above all other interests while avoiding misleading statements and receiving no more than reasonable compensation, and 3) implement policies and procedures designed to mitigate harmful impact of conflicts of interest and disclose information about their fees and cost of advice.
In our business, most people offering any type of financial advice on qualified plans, such as agents, registered representatives, and investment advisor representatives, will likely be impacted by the redefining of who will be considered a “fiduciary”. And once under this category, a number of other processes and activities will be triggered. While FIs will have to figure out what the rule means to their business models, products, and services, everyone else waits with bated breath to see how the FIs defining and redefining their business will impact them. Below are a few considerations that have yet to be fully addressed:
- What are practical differences between Investment Advisor Representative fiduciary responsibilities, liabilities and requirements versus a fiduciary under the DOL rule?
- How will the rule impact small investors after implementation?
- What are some of the ways in which something could be considered a conflict of interest for the involved FP?
- How will “reasonable compensation” be determined?
- Who will monitor and enforce compliance with the DOL rule?
- What are the implications of what has been addressed and not addressed in the rule?
While the FIs determine how to address these considerations and many more, questions loom regarding the longevity and effectiveness of any change that is made now. It is possible that strategies and processes will be further adjusted as more FIs become public with their future plans and as changes are implemented, interpreted, and enforced.
As mentioned earlier, the rule is complex and its impact far-reaching. Ann Arbor Annuity Exchange is committed to bringing our producers the most up-to-date industry information on matters that may affect their business, which includes the new DOL rule. We will continue to analyze this rule and also share with you any insights we receive from our partnering financial institutions. Please call AAAE to ensure you have access to our resources on this topic: 800.321.3924
Gissou Gotlieb | Field Suitability Compliance Officer
Ann Arbor Annuity Exchange
Ph: 800.321.3924 x134 | Dir: 734.786.6134
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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