DOL Rule Will Lead To Simplification Of Many Retirement Products

Financial advisors can expect some insurers to simplify many income and retirement products in the wake of the Department of Labor's fiduciary rule. In addition, the DOL rule will push distributors to use more efficient technology and record-keeping, according to industry experts.

A look at what advisors can expect to see from carriers and distributors will be part of the discussion on “Regulation, the Mother of Invention? Innovation Post DOL Fiduciary,” at the Insurance Retirement Institute’s annual meeting in Colorado Springs.

Even if courts rule in favor of plaintiffs suing to block parts of the rule from taking effect, financial advisors can expect insurers and marketing organizations to press forward with execution, the insurance experts also said.

The DOL rule, which raises standards for investment advice into retirement accounts, will take effect beginning in April.

On the product side, “Gimmicks will fall away and you’re going to see more and more focus on client value” said David Rauch, chief operating officer and general counsel for the insurance marketing organization Annexus in Scottsdale, Ariz. Rauch will participate in the panel session.

Companies want to simplify their products and return to basics instead of overwhelming advisors with product features, said Paula Nelson, head of annuity distribution, retirement, with Global Atlantic Financial Group, which sells life insurance as well as fixed and variable annuities.

“Commission-based products will survive post-April but there’s much inquiry around fee-based platforms,” Nelson said. “You have to get onto the platform so assets and client accounts can be kept on the same document.”

In the race to produce a “better” product, companies often engage in a game of one-upmanship. This game means tacking on an array of narrow features – surrender charges, indexes, crediting rates – and that tends to bury the product's fundamental value.

Advisors often complain that annuities have become too complicated, and consumers aren’t shy about telling the industry that annuity complexity is one reason not to buy them.

Nelson said insurers want their advisors to engage in “an easy conversation” to explain the benefits of annuities and life insurance contracts. This conversation will be required if advisors approach their clients from the perspective of a financial planner.

The DOL rule is designed to nudge the retirement industry into a holistic mindset instead of one that engages merely in the sale of products deemed merely suitable.

Distribution and Wholesalers

On the distribution side, Rauch said the changes would help impose a more consistent and repeatable way for an agent and a financial institution to review products that might meet the needs of retirement investors.

“Because you are talking about repeatability and consistency, they lend themselves to electronic documentation,” Rauch said. “That's the beauty of the rule. It will force and accelerate change and compel agents to adapt.”

The initial learning curve may be steeper than what agents are used to. But over the long run, the changes will make it easier and more efficient for agents and insurers as compensation and product platforms become more consistent, he also said.

Nelson said the role of wholesalers and independent marketing organizations (IMOs) also would change.

Under the rule, IMOs pushing incentive programs and product recommendations tailored to individual circumstances will be out.

Educating agents about products and explaining compensation options will be in.

Possible future distribution innovations may also involve using technology more efficiently and effectively. This would help advisors to explain to clients, the benefits and trade-offs of relatively more sophisticated products.

Many wholesalers are restructuring their operations to fit broker/dealer supervisory structures. There’s no question that distributors will have more fee-based products to choose from along with restructured commission-based products.

“As with any regulation, some good comes of it,” Nelson said.

Courts Unlikely to Affect Momentum

Opponents of the rule, which include distributors, have gone to court asking a federal judge to issue an injunction to prevent the rule from taking effect.

U.S. District Judge Daniel Crabtree “appeared sympathetic” to the arguments against the DOL rule put forth by Market Synergy, a distributor of fixed indexed annuities and life insurance products, according to an analyst at the hearing Wednesday.

The lawsuit challenges one aspect of the rule: the late addition of fixed indexed annuities to the Best Interest Contract Exemption, which the industry says is costly and restrictive.

A decision in favor of Market Synergy and other plaintiffs might “slow adoption a little bit,” Rauch said.

“I suspect people are far enough along with business tools and such, they are not going to slow down because tools make sense from an efficiency perspective,” he said. “But if agents are not forced to adopt (the rule), it slows down the adoption curve.”

Nelson said there wasn’t much connection between what the courts decide and how the industry chooses to move forward with the rule.

“Most of us are focused on execution,” she said. “Most things will benefit the industry regardless of what the courts do or how they act.”

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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