IMOs Dance With DOL On Fiduciary Rule Deadline

Futurity First Financial is proceeding as though it will be granted “financial institution” status by the Department of Labor, enabling it to do business under new fiduciary rules.

But time is running short for the independent marketing organization to make a seamless transition, said Futurity CEO Mike Kalen.

Futurity owns three IMOs and, with $2.5 billion in sales, is one of the biggest sellers of fixed and fixed indexed products. In many ways, the company is a test case of sorts on whether the industry can adapt to controversial new regulations and continue to thrive.

To do so, it needs the go ahead from the DOL.

“We are feeling time pressured,” Kalen said. “If clarity comes out tomorrow, we will be fine. But as time continues to march on without clarity, the risk of us not being ready continues to rise.”

The fiduciary rule designates four entities as financial institutions: banks, broker-dealers, registered investment advisories and insurance companies. But the agency left the door open for IMOs to apply for the designation.

The financial institution assumes the liability for overseeing agents and advisors who sell under new “best interest” standard of care rules. The fiduciary rules apply to anyone selling financial products using retirement funds.

Futurity has had communication with the DOL on its expectations and Kalen is confident its application will be approved. The company is one of several IMOs and FMOs (field marketing organizations) that applied for FI status.

“Obviously, there are several significant assumptions there that we are currently relying on,” Kalen said. “We have essentially the framework written and the procedures written, but we have not yet started to actually build the systems or hire the people.

“That’s where the real stress point is occurring, because it’s time and money.”

How It Will Look

Futurity is planning to support a commission-based and a fee-based model for its agents, Kalen has said. While insurance carriers are still developing their post-DOL commission options, it's most likely agents will choose a commission-based model, of which Futurity will offer three options.

Agents should not expect major changes in terms of licensing, Kalen said, although there will be additional disclosures required. Futurity sells through three types of agents: insurance only, agents with a Series 65 license and agents/registered representatives.

“We’re quite confident that agents in all three of those models can operate very effectively post-DOL from a licensure perspective,” Kalen said.

Agent supervision will be done by Futurity First’s sales and suitability desk, which will be staffed by professionals who have advisory experience. The policies of supervision will be created and monitored by senior management and their compliance officer, he has said.

The group will be headed by an industry veteran with advisory experience and educational credentials such as Chartered Life Underwriter, Chartered Financial Consultant, Retirement Income Certified Professional or Certified Financial Planner designations. In addition, the head of the group will be paid through a salary and bonus, tied to quality and not on sales volume, Kalen has said.

The staff will have a strong mix of sales and suitability experience. They also will be paid salary and bonuses tied to quality and not sales volume.

Behind the Eight Ball

The rule mandates pertaining to selling under a strict best interest standard, with use of exemptions to receive commission payments, take effect on April 10, 2017. The compliance systems and paperwork disclosures must be in place by January 2018.

Several lawsuits filed against the DOL rule are complicating that timeline for regulatory compliance. Lawsuits are ongoing in four federal courts, and hearings have been held in Kansas and Washington, D.C.

Some speculate the DOL might be waiting to see how the courts rule before approving financial institution applications.

“My understanding is … any of these federal courts has the authority to stop this rule on a national basis,” said Bradford Campbell, former assistant secretary of the Department of Labor. “The plaintiffs here only have to get lucky once, whereas the government has to win three times.”

In the meantime, insurance companies, broker-dealers and others are moving ahead with investment in compliance systems. After all, the likelihood of a fiduciary standard of some sort is quite high.

Hillary Clinton has a big lead in the polls and is a supporter of the rule, and the Securities and Exchange Commission has plans for its own rule at some point.

But for IMOs, who have the additional FI hurdle to scale, are being more cautious. Campbell, counsel with Drinker, Biddle & Reath, represents IMO clients and said they are being put at a competitive disadvantage.

For example, broker-dealers who intend to use the Best Interest Contract Exemption have been working on the exemption's policies and procedures since the regulation came out in April. The BIC exemption is required to sell fixed indexed and variable annuities. It calls for disclosures and a signed contract between client and financial institution.

“The new financial institutions … will be starting that process well near the deadline,” Campbell said. “And that’s going to raise a lot of concerns for them in figuring out how to set up their BIC processes. How to set up the policies and procedures, identifying zero conflicts and so forth.”

Kalen is confident Futurity will be able to meet the challenges, but it is getting tougher every day that passes, he said. Futurity works with 4,000 agents, all of whom will need to sign a new agreement.

Drafting that agreement and educating them on what the new relationship is will take time, Kalen explained.

“We need to hire and train a new suitability desk. And we need to negotiate with the carriers all new commissions to meet the reasonable compensation guidelines,” he added.

“You can see pretty quickly how a compressed period of time is going to affect our ability to implement in the kind of quality way that we want to implement.”

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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