Friday, March 02, 2018

Living with the Fiduciary Rule After January 1, 2018

It was not that long ago when we were knee-deep in all things DOL – Department of Labor fiduciary rule – and its impact on our industry and livelihood. Positions were threatened to be eliminated, producers to be put out of business, and companies to not make it in the new world, while at the same time there were promises of new beginnings and opportunities. It was a time full of frenzy and turmoil as “experts” de-coded the rule and tried to assess its impact and meaning for each business. Some companies came together and some chose to part, all in the spirit of preparing for the implementation of the rule and surviving the new world.

While the industry banded together first in an attempt to stop the rule in its current format, no major resolution was reached other than delays and slight modifications. Yet, each time, we waited with bated breath for news of delay, modification, or repeal. Then many different groups got involved in the cause to promote a more workable rule, and there was much discussion around what the industry should do and which regulatory body should be doing it. Among the issues highlighted by the rule were key topics such as the definition of a “fiduciary”, multiple standards of care in the financial industry, jurisdiction of the topics (e.g., insurance regulators versus SEC or FINRA), and transparency in compensation and service. While we now know that the rule has been delayed, many of these discussions continue unabated. Wait, did we just say the rule was delayed?? Yes, the transition period of the rule has officially been extended until July 1, 2019. But there is more to know. On November 29, 2017, the Federal Register published the delay, making it official that the DOL extended the transition period and further delayed the applicability dates for full compliance with the fiduciary rule from January 1, 2018 until July 1, 2019. This means that certain requirements under the Best Interest Contract Exemption (BICE) and some terms under the Prohibited Exemption Transaction 84-24 (PTE 84-24) were delayed. During this continued transition period, those affiliated with a financial institution (FI) are to still follow the FI’s rules and insurance-only producers are to be in compliance with the requirements of PTE 84-24. In both instances, all financial professionals giving “investment advice” on qualified funds are considered to be acting in a fiduciary capacity and must satisfy impartial conduct standards and other requirements.

While the publication of this delay does not change how Financial Professionals (FPs) are to conduct business since June 9, 2017, it bears a reminder that the rule has not gone away. FPs still need to understand their responsibilities under the rule, ensure their actions represent the best interest of their client, and follow the proper documentation and recommendation procedures.

So now that we know that the beginning of 2018 does not bring about a change in how we did business in the second half of 2017, what can we expect in the future? While some observers believe that the delay may signal the eventual repeal of the rule, some changes are likely here to stay. The discussion around having the best interest of the client and acting in a manner that represents the interest of the clients first (rather than that of the FP), transparency around producer compensation, elimination or disclosure of conflicts of interest, and the sustainability of these efforts are all topics that remain on the radar for our industry. Insurance regulators, securities regulators, product manufacturers, broker dealers, and insurance intermediaries are all thinking about how to best effectuate these changes in a manner that is good for the consumer, is practical for businesses, can remain effective over the long term and, hopefully, is more coordinated across the various disciplines of the industry.

What this means for the FP is that they should remain interested and involved in this topic, ensure they are in compliance with the rules, and think strategically about how to change their practice to be ready for the future. For those producers on the sidelines hoping to avoid dealing with the fiduciary rule by staying away from advising on qualified funds, it is time to re-engage and reconnect with your clients. Figure out a way to bring value to your clients and do not shy away from having candid discussions about compensation – when required by the rule. If done right, your clients will not stop doing business with you just because they know you earn a living from helping them reach their retirement goals. Help them and as you do, help your business flourish and be prepared for the future. The applicability dates for full compliance with the BICE or PTE 84-24 may be delayed, but your chance for reconnecting with your clients and rethinking your future and its success should not be.

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

Designed for Financial Professionals.