What’s BEST in Best Interest?

Commentary

Americans for Annuity Protection has been at the forefront of the discovery process to determine what the DOL Fiduciary Rule really means for consumers. As a whole, the Rule is too ambiguous, was developed using faulty and misleading research and unfairly (and often inaccurately) puts annuity IRAs at a competitive disadvantage.

One of the most misunderstood aspects of the Rule is what constitutes BEST in best interest. We are often asked “How do we know that of all the products available, the agent or advisor is recommending the ‘BEST’ one?”

AAP has done a lot of research on ERISA and how fiduciaries have been expected to function under its standards since enacted in 1974. Based on conversations with and reports by legal and fiduciary experts, solution does not need to be the BEST product in the universe but needs to serve the client’s interest, which is determined by the individual and specific needs of that client.

The “best” is measured against those who also have interests in the recommendation – the product provider and advisor or agent. In other words, the recommendation must serve the client’s “best” over any interests that the product provider or advisor may have (e.g., commission, profits, business revenue).

In addition, as with all fiduciary advisors today, under the DOL Rule, “the Advisor need not avail him or herself to the entire universe of products,” but may determine his or her own “shelf” of product solutions that serve his business practice, advisory skills and clientele best.

As Assistant Secretary Phyllis Borzi affirmed in a presentation last summer, the Rule “does not require an advisor to scourer the earth for the best product.”

At the heart of the fiduciary duty and specified under the Best Interest Contract Exemption (BICE) for variable and indexed annuities and Exemption 84-24 for fixed rate annuities is the requirement that any fiduciary advice provided must meet the "Best Interest Standard of Care (also called the Impartial Conduct Standard)." The Rule requires that advice must be provided:

1. with the care, skill, prudence and diligence that a prudent person who is familiar with such matters would use;
2. giving appropriate consideration to the client’s objectives and goals, time horizon, risk tolerance, and insurance needs and whether or not the recommended product is reasonably designed to meet their interests;
3. without regard to the interests (typically compensation) of the Financial Institution, Product Provider or Advisor.

The Rule also prohibits unreasonable compensation. Which begs the question, what is “reasonable compensation?” AAP discussed this at great length in our commentary “The Compensation Conundrum.” As a quick refresher, the DOL states in the Preamble of the Rule that a recommendation need not be the “lowest cost,” but that it be reasonable as measured by a market-based benchmark for products in a similar class or category.

As helpful as this information may be, it still leaves a wide opening that will be subject to legal wrangling and court interpretation. Additionally, a recent study by LIMRA added to the confusion when two consumer surveys – “Bye-Bye Commissions” and “Use of and Impact of Advisors” – reveal that 55 percent of consumers prefer to pay an advisor a flat fee to develop and implement a plan for retirement income.

However, we also learn that four out of five consumers surveyed by LIMRA say they won’t pay more than $100 for a “comprehensive analysis of finances, including retirement and investment strategies.”

For most advisors providing these services, the time required will barely cover today’s minimum wage. Clearly there is a disconnect. You can expect to pay more pay for a plumber to provide advice on a broken dishwasher.

This ambiguity and uncertainty is why Americans for Annuity Protection has joined with Texas Tech University and Dr. John Gilliam to research consumer attitudes and expectations about best interest and reasonable compensation.

Gilliam is an associate professor in the Department of Personal Financial Planning at Texas Tech University. His academic life is strongly influenced by over 35 years of professional experience in the financial services industry.

AAP and Texas Tech University are joined by the Society of Financial Services Professionals in spearheading what Gilliam named The Best Interest Initiative.

The DOL fiduciary rule is, unfortunately, wide open to interpretation. Ultimately, the courts will be asked to weigh in on two of the most important, yet nebulous, phrases used in the rule “best interest of the client” and “reasonable compensation.”

The Best Interest Initiative’s ongoing research will provide documented and unbiased insight of what these phrases mean to the consumer and ultimately how advisors can practice most effectively to meet not only the letter of the new rules, but the spirit of best interests from the client perspective.

Findings from the research will serve as definitive guidance to financial institutions and their representatives, enabling them to better withstand litigation. Americans for Annuity Protection applauds the efforts by Gilliam and Texas Tech University and fully supports this initiative.

The Best Interest Initiative is currently seeking sponsors to underwrite the research. If you would like additional information or would like to become involved in the project, please contact Dr. Gilliam at [email protected] or call 806-834-8864, or contact Kim O’Brien at [email protected].

As a sponsor you will be entitled to topline data once all studies are completed and before released to the public.

Kim O’Brien is the vice chairman and CEO of Americans for Annuity Protection. She has 35 years of experience in the insurance industry. O’Brien served The National Association for Fixed Annuities (NAFA) for almost 12 years and led the organization to defeat the SEC’s Rule 151A.

Contact Kim at [email protected].

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