Industry Taking A Skittish Stance On DOL Rule

Riskalyze is working with a bank channel client overseeing 87,000 accounts in individual retirement accounts. The client is unsure what to do about the impending Department of Labor fiduciary rule.

Half of the accounts contain $5,000 or less, said Aaron Klein, CEO of Riskalyze, an Auburn, Calif., firm that measures investing risk quantitatively.

The problem facing the client is a familiar fear for the financial services industry: how to comply with the costly disclosure requirements of the fiduciary rule when the accounts might not even be worth the effort.

"There are only 210 working days in a year," Klein said, noting the workload might overwhelm many advisors. "I've had clients ask me, 'Can we just resign from these accounts? Can we just abandon them all?'"

Klein spoke on a panel Friday at LIMRA's 2016 Distribution Conference for Financial Services in Miami. The panel, moderated by Christopher Raham, principal with Ernst & Young, discussed the various regulations expected to be included in the fiduciary rule.

The DOL published a tentative rule in April to govern all financial advice within qualified retirement employer-sponsored plans and individual retirement accounts.

DOL officials and public interest groups say the proposed rules, which would impose a fiduciary standard of care, are necessary to protect retirement investors from high commissions.

Advisors can still accept commissions if they agree to the Best Interest Contract (BIC) exemption, which requires multiple disclosures of fees, as well as an upfront contract before any discussion about investments can take place. Critics say the DOL is trying to ban commissions entirely, a charge the department disputes.

How the BIC will work in practice, and where the liability standard will fall, are yet to be determined, panelists said.

"Probably the crux of the rule is going to be 'Did we get the BIC contract in place before we moved on to investment recommendations?'" Klein predicted. "That's probably going to create a he said, she said kind of environment."

Even if the BIC hurdle is cleared, all commissions must be "reasonable," according to the original DOL fiduciary rule. The final rule is slated to be published by the Office of Management and Budget in the coming weeks.

"We could ask everyone in this room the definition of 'reasonable' and get 15 different definitions," said panelist Scott Stolz, senior vice president, Raymond James’ Private Client Group Investment Products and Wealth Management Division.

"If we do decide to go with commissions, it's going to be something that looks like a fee-based account," he added.

The Securities and Exchange Commission is looking at its own version of a fiduciary rule. Responding to an audience question, W. Mark Smith, partner in the Washington law firm Sutherland, Asbill & Brennan, said the SEC fiduciary rule isn't likely to conform exactly to the DOL rule.

"It seems more likely that we'll be looking at the same sorts of issues, but approaches from different ways." Smith said.

The industry will likely take a skittish stance to business under the new rule, at least in the beginning, Raham said. Sales processes will look differently and we could see "a lowest common denominator kind of operation," Klein said.

But Smith was a bit more hopeful, predicting a convergence around "a smaller set of ideas" to manage retirement accounts effectively.

"I think out of the starting gate we'll see a variety of different responses," Smith said. "The dialogue between distribution and manufacturing is essential here ... about how we can all meet all of our various business objectives."

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected].

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