The Practical Impacts of the DOL Fiduciary Standard Rule Change
Industry Commentary & Opinions by Harry Stout
Much has been written about the major potential impacts of the proposed fiduciary standard rule change but little has been discussed about the practical impacts on running an insurance business on a day-to-day basis. My belief is that with regard to the rule change the devil will be in the details and how quickly new requirements must be implemented.
I have worked abroad in my career and have seen the implementation of similar regulatory reforms in other countries. From my experience, it takes three to four years to see the full impacts on how business is conducted and the shakeout that inevitably comes from such a disruptive change.
The reason for such a long implementation period is that new regulations typically give rise to a large number of practical issues. In this case, examples include: How do we document advice to the client? What contract form do we use to comply with the Best Interest Contract Exemption? How long do we need to keep records of client matters? Will the business be subject to ongoing audits? What products and commission rates comply with the new regulations? Should we only sell products from companies with a certain financial strength rating? Do we need to change our errors and omissions coverage to address the new legal liabilities involved in selling?
The list of questions and matters needing clarification goes on and on. To resolve all these matters and provide financial professionals with proper guidance, it takes a combined effort from the regulator and the regulated. We will need to see how this coordinated effort develops.
As financial professionals consider how the rule change will impact them, there are six practical areas they will need to analyze to determine how their businesses could change. The six key areas are:
- Profit model change – Marketing organizations and agents that rely on commission based business will need to re-engineer their operating models to work with less first year commission overrides and agents with less first year compensation along with increased costs. My belief is that commissions will be reduced to meet the new reasonableness requirement. At the same time, businesses at all levels will need to absorb additional compliance and technology costs to operate their businesses in a compliant manner.
- Revised product offerings – Organizations will need to revise their product offerings for qualified money sales to those products that conform to the new ruling. Financial professionals will need a reasonable level of support for the conforming products they sell and will look to their marketing organization for this resource. These new products will likely have a commonality of carrier ratings, features, surrender charge periods and compensation in order to comply with the new rule.
- Compliance – Additional training and ongoing support of the new regulations, ERISA and the compliance requirements of the new environment will be needed. This will include what forms to use, how rollovers and distributions are treated, consumer contracts, annual review requirements and other matters. The resources needed for compliance will expand significantly.
- Technology infrastructure – Case delivery, processing and advice documentation will need to change to accommodate the new rule. Integrated compliance, product delivery and fee processing capabilities will also be needed. Record keeping of customer contacts and advice provided will take on a new importance for producers in order to protect their businesses from the increased legal liability brought on by the proposed rule.
- Sales training – Training on how to conduct, document and disclose all aspects of the sales process in the new fiduciary environment.
- Product training – Basic training on how the new products are designed, function and should be sold.
I believe there is a growing consensus that changes are needed to improve how advice and products are delivered to consumers for their retirement savings. The question we will see answered in the next few years is whether the proposed rule change is the proper solution and how financial professionals implement mandated changes in their day-to-day business operations.
Harry N. Stout is Managing Director of Insurance Insight Group LLC, a national marketing and strategic consulting firm serving the life and annuity industry. Prior to joining IIG, Harry was managing director of investments and insurance with Australian and New Zealand Bank. He spent many years as president of ING’s U.S. retail annuity business, along with more than a decade as chief executive officer and president of Fidelity & Guaranty Life Insurance Company.