Advisors Fear Fiduciary Rule Will Harm Client Relationships

WASHINGTON — Advisor-client relationships will be harmed to the point where advisors will be unable to serve their clients if the investment advice fiduciary rule proposed by the Department of Labor (DOL) is approved.

That’s according to a survey the National Association of Insurance and Financial Advisors (NAIFA) conducted of its members.

According to the survey, two-thirds of advisors said they anticipate that the proposed rule would result in their losing clients because they believe clients would be intimidated or unwilling to sign a “best interest contract” (BIC) as required under the proposal. Also contributing to client loss, advisors said, is that the data retention and disclosure requirements would make it impossible for advisors to serve small or medium-size accounts in an affordable manner.

More than six out of 10 respondents (61 percent) said the contract requirement is likely to harm their relationships with existing clients. Some 35 percent said the harm done to those relationships would be “significant.” Only 4 percent of respondents said the contracts would improve relationships with existing clients, while 36 percent said either the contract will have no effect on relationships or they are not sure.

The members also fear that the new proposal will increase costs and limit their ability to provide advice on lifetime annuities.

The survey found that one of the advisors’ key concerns is that they would be forced to sign a BIC with clients before recommending any products.

“Requiring a person to sign a contract while you are asking them to open up to you about their financial situation would be very disruptive for some clients,” NAIFA president Juli McNeely said.

“They may not understand why they need to sign something just to have a conversation, especially if this is a person you’ve been working with for years,” McNeely said. “More paperwork does not always mean more peace of mind.”

In their responses, the advisors voiced concern about increased liability and higher costs of errors and omissions (E&O) insurance. Nearly 87 percent of the advisors surveyed voiced that concern, NAIFA officials said. Of those, 58 percent said they expect E&O premiums to increase “substantially.”

The rule would increase liability for advisors by requiring them to enter into legal contracts with clients and opening them to lawsuits in both state and federal courts. Only 4 percent of respondents said they do not believe the DOL rule will result in increased E&O costs, while 9 percent said they are not sure.

Under the DOL proposal, advisors who receive commissions, revenue-sharing and other third-party compensation would be required to sign what NAIFA termed the “complicated and confusing” BIC with clients before making any recommendations. This would be required when agents’ receive commissions from a third party, the issuer, NAIFA officials said.

The exemption also would require an annual disclosure document for each client detailing all transactions, fees and expenses, as well as the advisor’s direct and indirect compensation. On top of that, financial institutions would have to maintain and update web sites that show the total costs of all investments available to retirement account holders, NAIFA officials said.

In regard to annuities, the proposed regulation would create different rules and conditions for various types of annuities and for various types of retirement plans, such as 401(k)s.  For some annuities, the definition of "commission" would be changed.

“At a time when the Securities and Exchange Commission and Financial Industry Regulatory Authority seek to reduce customer confusion, the DOL rule would do the opposite,” NAIFA said its members indicated.

NAIFA said respondents to the survey indicated that increasing costs and contractual obligations through the proposed fiduciary standard are likely to impact advisors’ relationships with existing clients.

Currently, only 26 percent of respondents to the survey require clients to maintain minimum account balances. Some 46 percent of those who responded said they currently impose no account minimums but they would be likely do so, should the DOL rule go into effect, and 41 percent said they are not sure. Of this group, 21 percent said they would require minimums of $100,000 or more.

Respondents each complete an average of 153 fixed annuity sales, 627 variable annuity sales, 3,895 401(k) plan rollovers and 3,235 individual retirement account rollovers in a year, NAIFA said.

InsuranceNewsNet Washington Bureau Chief Arthur D. Postal has covered regulatory and legislative issues for more than 30 years. He can be reached at [email protected].

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InsuranceNewsNet Washington Bureau Chief Arthur D. Postal has covered regulatory and legislative issues for more than 30 years. He can be reached at [email protected].