By Heath Waddington, Senior Vice President of Sales & Marketing
In April of this year the Department of Labor (DOL) released their long-awaited “fiduciary rule”, and as a result, it seems likely that the financial services industry will be required to make significant changes in order to comply.
Assuming that the rule goes through as written, my last sentence will be an understatement. By imposing the burden of acting as a fiduciary on all monies associated with a qualified account or accounts impacted by the rule, the DOL will now require anyone making a recommendation on such monies to put the best interest of their client before their own interests in a specifically documented manner. While most financial professionals want to do what is in the best interest of their clients, the new processes that will need to be in place no later than April 17, 2017, will require huge investments of labor and capital.
For the time being, insurance companies are still trying to figure out exactly what their strategy will be for complying. Companies will still be allowed to pay commissions on fixed index annuity (FIA) sales, and producers will still be allowed to receive them. Going forward, however, there will need to be a signed contract, known as the Best Interest Contract (BIC) between a financial institution (FI) and the client. The DOL named five potential FI types in the rule: banks, broker/dealers, insurance companies, registered investment advisers (RIAs), and any other entity the DOL deems a financial institution. So, the question becomes, if you sell FIAs and the funds come out of qualified retirement accounts, who will be signing the BIC for you once the rule goes into force?
If you work for a bank, or you are registered with a B/D or RIA, the current assumption is that they will sign the BIC for your FIA business. So what happens if they don’t or if you are not associated with a B/D or RIA or working for a bank? That leaves the insurance company who can sign the BIC. We have received indications that some insurance companies will likely sign the BIC for their producers, but some will not. The simple reason for this is that current regulation, infrastructure, and processes on the insurance-only side are not set up to have the compliance and supervision that you see in a bank, B/D, or RIA.
If you do not fall into one of the categories described above with an FI that will sign off on your sale, you will not be able to sell fixed index annuities with funds coming out of retirement accounts in certain circumstances after April 17, 2017- or whatever dates FIs announce for their new business model. Given that reality, I have been very surprised by the lack of knowledge from the field on this issue. It seems that at this point, many producers still have not grasped what this new rule could mean for them and their business.
There are multiple lawsuits working their way through the courts that are challenging the new rule. We have had conversations with just as many individuals who feel the lawsuits will be successful as those who say they will not. We are not certain where this will ultimately fall, either successful or unsuccessful, but feel it is important that you begin to plan for the rule to go through in its current form and that you be in compliance by no later than April 2017. That means figuring out who you can align with that will sign the BIC and what you need to do to be ready for changes.
We will continue to provide updates as they become available and we encourage you to reach out to us if you have questions about how the rule may affect your fixed and FIA sales. If you have additional questions, please call us at 800.321.3924 and ask to speak to a marketer.
Heath Waddington | Senior Vice President of Sales & Marketing
Ann Arbor Annuity Exchange
Ph: 800.321.3924 x140 | Dir: 734.786.6140
Designed for Financial Professionals.