Caution Urged in Wake of DOL Rule Reprieve

UPDATE: President Trump fails to order delay at the last minute

Key insurance distributors counseled agents and financial advisors to proceed with caution in the wake of President Donald J. Trump’s suspension of a fiduciary advice rule for retirement investors.

The Department of Labor rule, which raises investment advice standards into retirement accounts, was scheduled to begin taking effect April 10.

“There will be some level of relief because there was a level of uncertainty, however, at the same time that uncertainty hasn’t gone away,” said Scott Perry, CEO of Clearwater, Fla.-based AmeriLife, an independent marketing organization. “It’s just been pushed out.

“One of the things we’ll be communicating to our channel is be ready for change, be flexible, pay attention, get involved if you feel so inclined but don’t let this freeze you in your boots."

Insurance agents and commission-based financial advisors, along with broker-dealers, had fiercely opposed the rule because it limited choices to consumers, raised the cost of many insurance products, and made it more difficult for agents to sell. Multiple plaintiffs have sued seeking to overturn the rule.

Consumer groups, unions and fiduciary advisors backed the Obama-era rule because it tamped down on conflicted sales practices to the benefit of consumers.

Jason Smith, CEO of Clarity2Prosperity, an IMO in Westlake, Ohio, said Trump’s order was a bittersweet moment.

“We were looking forward to a higher standard of advice to investors as we feel everyone should follow a best interest process and recommend solutions agnostic to what the compensation is,” he said in an email to InsuranceNewsNet.

Insurers, Broker-Dealers Beneficiaries of the Delay

Insurance companies and broker-dealers are the most likely to benefit from any implementation delay of the rule, said Jamie Hopkins, co-director of the Retirement Income Program at The American College of Financial Services in Bryn Mawr, Pa.

“Many of these companies have been hesitant to make adjustments to their core business since the rule was adopted,” he said. “At this point, they will be able to continue business as usual. Variable annuities will also benefit from a delay or eventual repeal of the rule.”

Some large broker-dealers like Merrill Lynch who have moved away from commission-based retirement accounts, are unlikely to return to commission-based structures for the time being, he said.

“Many of the changes that insurance and other financial service companies needed to make in order to comply with the DOL fiduciary rule were changes the companies wanted to make but needed a good reason. The DOL rule provided a reason for change,” Hopkins said.

On Friday, the president signed executive orders delaying the fiduciary rule and the Dodd-Frank Act financial reform laws passed in the wake of the 2008 financial crisis — laws that critics said were too burdensome and stifled businesses.

Shortly after the election, members of the Trump administration talked of undoing Obama-era rules and referred specifically to Dodd-Frank, but there was no mention of the fate of the DOL’s conflict of interest rules.

Any review of the fiduciary rule will likely have to await the selection of a new Department of Labor secretary.

Senate hearings on Labor Secretary nominee Andrew Puzder, a fast-food executive and opponent of excessive regulation, have been pushed back several times since last month.

So it’s business as usual for many agents and distributors, a welcome development for many smaller independent advisors who survive by through commission-based sales.

Sunk Costs-But Not Wasted Costs

Perry said the moratorium on the rule would come as good news to insurers, IMOs, agents and small and middle-market retirement investors.

“There’s a move to fee-based advice but the commission-based model is still an efficient and effective way to compensate distributors and agents in serving the smaller accounts.”

Regulators had crafted their rule to minimize conflict of interests inherent among commission-based sales by agents who have in the past been required to meet a suitability standard of care.

But agents had argued that investors were better off with the sale of a suitable commission-based retirement product than no sale at all in cases where agents were driven out of the industry by onerous regulatory burdens.

Publication of the final rule last April sent insurance carriers and distributors into compliance overdrive with process changes, compliance revamps and product tweaks.

In July, executives with Principal Financial, a large and well-funded insurer, said complying with the rule would cost the company an estimated $1 million a month for the next 18 months to 24 months and between $5 million to $10 million a year after that.

For insurers and distributors that have spent thousands of dollars to comply, those “sunk costs” have already been disbursed, but planned implementation budgets may be a little lighter as companies find they no longer need to hire as many people to comply or train agents.

Sunk costs, however, are not necessarily wasted costs as fiduciary rule-related improvements will have spillover effects.

“Some of the changes we put in place to comply with DOL will help, notably enhanced electronic processing and really putting some of the best talent in principal review, but no regrets on all the money wasted or that will be saved,” said Larry J. Rybka, CEO of ValMark Financial Group, owner of a broker-dealer and registered investment advisor (RIA) in Akron, Ohio.

For Smith, all the work to implement the rule appears to have had its intended effect, even if the rule is simply delayed, delayed for months and reissued with major modifications or eventually scrapped.

“We will continue with the upgrades and training advisors on how to follow a best Interest process as regardless of what government regulatory bodies tell us what we have to do, it's the right thing to do,” he said.

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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