Slowly we are all settling in to the requirements of the DOL Transitional Fiduciary Rule. As of June 9, 2017, all recommendations involving qualified money must follow the impartial conduct standards.
The DOL requires agents and advisors to give advice that is in the “best interest” of the retirement saver. The best interest standard has two chief components: Prudence and Loyalty. Under the prudence standard, the advice must meet a professional standard of care as specified in the text of the exemption.
Under the loyalty standard, the advice must be based on the interests of the customer, rather than the competing financial interests of the adviser or firm. That means the advisor may not charge more than reasonable compensation or make any misleading statements about investment transactions, compensation, and conflicts of interest.
But what does BEST in best interest really mean? Is it the best product in the universe of financial products? Or the best product of its type with the best features? Or is it the lowest compensation which many, in error, equate with cheapest or “best” for the customer? Is it the highest interest rate or best projection for returns?
Recently we were reading “Point Made: How to Write Like the Nation’s Top Advocates,” by Ross Guberman. The book includes a quote from Chief Justice John Roberts that is little known outside legal academia, but has important application to our question.
This quote was taken from a brief filed with the U.S. Supreme Court when Roberts was an advocate and petitioned a Ninth Circuit decision regarding the Clean Air Act:
“Determining the ‘best’ control technology is like asking different people to pick the ‘best’ car. Mario Andretti may select a Ferrari; a college student may choose a Volkswagen Beetle; a family of six a mini-van. A Minnesotan’s choice will doubtless have four-wheel drive; a Floridian’s might well be a convertible. The choices would turn on how the decisionmaker weighed competing priorities such as cost, mileage, safety, cargo space, speed, handling, and so on.”
It is clear how this quote and its meaning equates with our fiduciary application of best interest for annuity and life insurance recommendations. While Chief Justice Roberts doesn’t specifically discuss the seller’s role in his analogy, we all understand that the purchase of any product is likely to involve a salesperson.
Questions That Need Answers
So, what does BEST really mean under the Rule? Best Product in the Universe of Products?
Not necessarily. If you sell Ferraris you may not even know much about other makes and models. You are also probably not familiar enough with motorcycles and bikes to discuss their specific advantages, benefits and features. And knowledge is a key component of prudence. You should not advise about products you aren’t familiar with or specialize in.
The Department of Labor has been quite clear and recognizes that under the DOL rule the advisor “need not avail him or herself to the entire universe of products, but may determine the firm’s ‘shelf’ of product solutions that serve his business practice and clientele best – using standards for selection and adhering to them.”
To drive the point home further, the DOL stated in a response to a pending lawsuit that the rule “does not require an advisor to ‘scour the earth for the best product.’”
Best Product Type?
Again, not necessarily. Either a Ferrari or a Volkswagon Beetle may suit Mario. Or, he may need both to best meet his family’s transportation needs. The cars serve different functions and provide different solutions just as annuities and life insurance do. And, equally just as mutual funds, stocks and real estate do. The Andretti family’s needs and the function the car or cars will serve, will help determine the type of car or cars to buy.
Lowest Commission/Fees or Highest Interest Rate/ Potential Returns?
Well you guessed it, not necessarily! As a former insurance product developer, we learned that lowest compensation doesn’t automatically equate to lowest-priced product. Just like a car, there are many costs components to annuities and life insurance. The commission is just one. Other costs include the guaranteed and non-guaranteed benefits and features, product development, marketing, legal and compliance.
Instead, as Roberts states, the decision should be based not on lowest compensation, highest guaranteed interest/participation rate or highest potential returns. The decision should be based on what the consumer needs, how much losses can they endure and when will they need the product to deliver their objectives.
The lowest-priced car that doesn’t offer the features most important to the buyer (for example, the braking mechanism or guaranteed income) probably isn’t best for them.
And, when looking at compensation – commissions or fees – there are other factors to consider when deciding between two or more products or advisory services. Most DOL and ERISA experts call these “neutral factors” and can include the types of services provided, experience, the time it took to provide the insurance or investment solution, customer preferences, company strength and ratings as well as product features and benefits.
You’re probably wondering, what IS the BEST in Best Interest?
To borrow from James Carville’s famous quip – it’s the PROCESS stupid. Not that anybody reading this is stupid, but we use it to make a point. The Best in Best Interest is putting the client’s interests before you own. To do so, you must establish best practices and processes.
The DOL considers prudence one of the “chief components” of an impartial conduct fiduciary standard, and our legal experts tell us that includes a prudent process to evaluate products and make recommendations. The process must define factors that the advisor will use to complete the analysis and advise the client on the product or products he or she recommends.
For instance, factors like financial needs and objectives that the recommendation meets; the planning time horizon; the risk tolerance and need for safety and market-loss protection (diversification); and, of course, reasonableness of compensation.
The 84-24 Exemption requires that advisors and financial institutions establish policies and procedures to comply with impartial conduct standards and meet the requirements for the exemption. With the transitional rule in effect until July 2019, a good news year’s resolution would be to get yours in place now.
Fortunately, there are many tools out there with processes built in to help meet the fiduciary duty. Call your marketing organization or supervisory firm, for suggestions.
Register today for our FREE Suitability & Fiduciary Training Course and we’ll send you a Certificate of Completion and CE Credit Voucher when completed. Register here.
Kim O’Brien is a 35-year veteran of the insurance industry specializing in guaranteed annuities and life insurance. She is the current CEO of Americans for Annuity Protection and Founder of AssessBEST, Inc., a sales and compliance software system. Visit www.AAPnow.com or www.AssessBEST.com for more information.
This article is provided for educational and informative purposes only and not for the purpose of providing legal advice. Readers should consult with their own legal and compliance counsels to obtain guidance and direction with respect to any issue or question. Contact Kim at [email protected]
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