For Broker/Dealers, a Massive Shift in Thinking

Broker/dealers will find themselves challenged in the wake of the Department of Labor’s “conflict of interest” rule — although perhaps not so much for the reasons that have grabbed the headlines over the past 12 months.

The biggest change facing broker/dealers is that their registered representatives must start thinking more like financial planners. This is not easy when every time a registered rep stares in the mirror, they see a “producer,” or salesman.

“You have to think less as a broker and more like a planner,” and that means thinking more along the lines of a Certified Financial Planner or a Retirement Income Certified Professional, said Craig Lemoine, director of the Northwestern Mutual Granum Center for Financial Security at The American College.

Brokers are trained to sell first, plan second. Broker/dealers live and die by transaction volume, buying and selling, selling and buying.

The greater the number of transactions, the more commission revenue brokers generate for their firms and themselves. The larger the individual transaction, the higher the commission on that single trade. It’s the way brokerage works.

Now the DOL is asking brokers to turn that thinking upside down. For many brokers, that’s not an easy one-eighty.

Longer term, the DOL rule could mean new broker training methods. This is because the conflict of interest rule, also known as the fiduciary rule, will require brokers to think beyond a specific product and more about how the product fits in with a client’s retirement plans, he said.

The shift amounts to a big cultural change, Lemoine said. Brokers — who for the most part operate in a world of retirement products and services deemed suitable for clients — have a year to decide whether they’re a match for a fiduciary world.

In a retirement asset universe spinning around a fiduciary axis, the new table stakes for managing retirement account assets amount to acting in the best interest of clients – unless those assets are exempted by the Best Interest Contract Exemption.

That’s not easy, not when thousands of brokers have lived their professional lives under a suitability umbrella. Not when they believe the suitability threshold has served their clients at a reasonable price — and they know this because clients have said so.

Financial professionals handing retirement assets are required to act in a fiduciary capacity by April 2017.  The rest of the DOL’s new rule becomes effective Jan. 1, 2018.

B/Ds Tinker with Models

Broker/dealers have spent much of the past year warning regulators that a fiduciary standard would hasten the departure of advisors from the industry. They also warn the fiduciary rule would force producers to drop smaller accounts and raise operating costs by tens of millions of dollars to pay for new compliance requirements and implement technology platform reboots.

Already, opponents of the rule have threatened court action, despite proponents hailing the DOL’s changes as a win for the middle class.

Behind the bluster, many broker/dealers already had been thinking of how best to alter their business mix.

In earnings calls last year, industry executives spoke about a greater reliance on fee-based products and accounts, the move away from high-commission variable products such as variable annuities, and the option of moving smaller accounts to Internet-based investment platforms.

“Cerulli believes insurance companies will introduce share classes with expenses and commissions comparable to other financial products,” Bing Waldert, managing director at Cerulli Associates, said in a news release, as insurance companies are forced to lower variable annuity expense more in line with other financial products.

Larger broker/dealers in particular will use new technology to serve smaller accounts with low balances on a flat-fee basis, Waldert added.

New fee and compensation disclosures required of BICE will cause insurance companies to re-evaluate annuity pricing. The DOL’s rule that brokers receive “reasonable” compensation will circulate at length among compensation managers within broker/dealers.

“Reasonable compensation? I don't have an answer for you,” Lemoine said. “I think this will be the subject of class action. What is reasonable?”

Other signs point to insurance companies developing more annuity products with more predictable income streams.

“My sense is that broker/dealer firms are considering different products and services that would be more compatible with BICE’s requirements,” said Susan Krawczyk, a partner in the Washington, D.C., office of Sutherland, Asbill & Brennan.

“Products and services that operate on an ‘advisor’ model are under consideration, as are products that offer flexibility with setting compensation,” she told InsuranceNewsNet.

Disclosure requirements may well influence what broker/dealers are prepared to sell or how costs might be structured as clients see exactly how brokers are compensated.

Advisors interviewed over the past week said that high-commission products may suddenly become a much harder sell into retirement accounts as the fiduciary requirements demand that brokers present all the options available to clients, not just the most lucrative one.

In a statement emailed to InsuranceNewsNet, a spokeswoman for discount brokerage Charles Schwab said investors should expect fees are “reasonable and fully disclosed, and that the advice they get in return for those fees is in their best interest.”

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].