By Gissou Gotlieb, Field Suitability Compliance Officer
Much has been said in the last several months about the Department of Labor (DOL) fiduciary rule and its impact on the financial industry. While we still don’t fully know its impact and reach in practical terms across the industry, we know that it is significant for those serving qualified monies. However, one aspect of this rule, its namesake, seems to be absent from much of the discussion: “fiduciary”.
The fiduciary rule is making people talk and it is making people think. The industry is talking mainly behind closed doors right now, but soon it will speak more publicly and so will the consumers. Much of the discussion currently is around how to comply with the rule: which commission-based products fall under the Best Interest Contract Exemption (BICE) and Prohibited Transaction Exemption 84-24 (PTE 84-24), which financial institutions will sign the BIC, and what new distribution and supervisory structures might arise as a result of all the changes. It may be beneficial, however, to take a step back to look at this from the beginning.
The term “fiduciary” commonly means someone who is in a trusted position to another, shouldering some additional legal or ethical responsibilities. In some cases the status and duties are specifically defined, and in others not as much. For producers in the financial industry, the term has typically been associated with an “investment adviser” under the Investment Advisers Act of 1940, as registered representatives and insurance producers have not been subject to this elevated duty. Of course other professions and relationships may put one in a fiduciary position, but we will focus specifically on financial professionals.
While the exclusivity of being a fiduciary was reserved for the investment adviser representative (IAR) as defined by the Securities and Exchange Commission, after the rule goes into effect, this exclusivity will go away and the terms will additionally be defined by the Department of Labor. The new definitions and standards are very different than both the DOL’s previous fiduciary definition and the SEC’s. Under the new rule, any producer, whether a registered representative, insurance-only, or IAR, will be considered to be acting in a fiduciary capacity when triggering any of the requirements of the rule. Triggering factors can be the producer’s actions as well as how (whether) they get paid and what types of accounts/monies are involved.
A producer can be considered a fiduciary by stating or implying that they are one, giving advice based on specific investment needs of the client or recommending an action (or inaction) regarding a particular “investment” as they relate to impacted monies. The types of monies affected under the rule are mainly qualified accounts including 401(k)s, IRAs, and other tax-advantaged accounts.
It is easier to see now why this rule is so far-reaching and significant. Practically speaking, most producers are in the business of providing advice on products and strategies, thereby recommending to liquidate, purchase, reallocate, and in some cases, do nothing. Their actions will be subject to the rule. Additionally, thanks to the aging population and the emphasis on retirement savings for at least the past decade, most of the accounts that the producers touch will be subject to the rule as well. For example, all transactions where a producer recommends to a specific client to not roll over an account, or to do a partial rollover of an IRA into another product/account, are activities that would fall under the new rule. This is big.
The bottom line is that most likely as a producer who wants to make a living serving the retirement market, you will be considered a fiduciary after the effective date of the rule in April 2017. Even if you decided to not touch such account types, financial institutions providing such accounts may have their own new requirements for selling or servicing non-qualified monies.
Financial institutions are formulating their game plan right now. Are you formulating yours?
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.
Ann Arbor Annuity Exchange is not affiliated with the Department of Labor or any governmental entity.
Designed for Financial Professionals.
Originally published in the Nov/Dec 2016 issue of Annuity News & Lifelines