By Charlie Gipple
A couple years ago I had a car that I loved even though my wife kept telling me to get rid of it.
It was a 2007 Toyota Avalon and it was bulletproof!! I rarely had any issues with this car. At this point it had about run its course as it had over 150,000 miles on the engine. But nevertheless, I liked this car and hate buying new cars as the utilitarian in me believes that cars are a tool and that is it!!!
Well, one day the “check engine” sensor came on and I took it into the mechanic. The mechanic said to fix the issue it would be about $2,000, which is a good chunk of money. So, with that $2,000 price tag to fix it, I found myself in an unfortunate “in-between world” of wondering if the car was indeed going to have more issues like this in the future and become a “lemon” or if this issue was a one-time deal.
Basically, I needed to decide between: A. paying the $2,000 with the prognostication that this is a one-time deal and thus I move forward with this car; or B. trash the car and buy a new car which would create an expense that is multiples of the $2,000 repair bill I otherwise would have paid.
However, at least with the higher “investment” I would end up with a sustainable car. I WENT WITH OPTION B.
Many IMOs and agents right now would agree that we are in that “in between world” like my car analogy. “Is Trump going to do away with the rule and thus my existing model will suffice going forward or is the Fiduciary Rule still going to hit and thus I need to continue to go down the road of being DOL compliant?”
IT IS THE QUESTION OF “WILL MY EXISTING CAR SUFFICE OR IS IT OBSOLETE AND THUS I SHOULD BUY A COMPLETELY NEW ONE?”
Before giving my opinion on this I will state a couple of facts. This is the third time in 11 years the indexed annuity world has been faced with a rule or regulation that would be daunting. All three of these “rules” sought to effectively take the annuity products and plug them into a securities world.
For instance, in 2005 we had NASD Notice, where the agency (now FINRA) “suggested” that BDs supervise the sale of indexed annuities. Since then we have seen many broker-dealers run the indexed annuity business through their grids and, as a result, hundreds of IMOs were “disintermediated” from the agents/reps they once worked with.
In 2008, we had the Securities and Exchange Commission propose Rule 151A, which would have regulated indexed annuities as securities and completely “disintermediated” the IMOs. Fortunately, two years later this rule was vacated.
And now we are faced with the DOL proposing the agents be held to a “fiduciary standard” when working with qualified money; a standard that, up until now, has been largely associated with securities sales via “fee-based advisory” platforms.
Furthermore, for indexed annuity sales with qualified money, after April 10, 2017 an agent has to be supervised by a “Financial Institution.” Note: the DOL says there are only four types of financial institutions; Banks, Broker Dealers, RIA Firms, and Insurance Companies. However, IMOs can file for an “exception.”
My point is, this is another rule where the end result would be indexed annuities distribution and processes resembling that found in the securities world. An insurance square peg jammed into a securities round hole!!!
What is the IMO and agents to do now that we are in this “in-between world” of uncertainty on whether the DOL will go through or not? This is a very stressful time because for the IMO this rule will be daunting whether the IMO will file to be a “Financial Institution” or not.
For instance, below I list my “Big 16” of items an IMO looking to become a financial institution should consider. However, even if an IMO is NOT going to be the “Financial Institution,” they would likely still need to implement some of the below IF the DOL Rule were to go through.
The reason I say that is because whatever financial institution the IMO is ultimately relying on will likely still hold the IMO accountable for certain things to share the liability in a “Private Right of Action” world!!
My Big 16 items:
1. Product platform (those that abide by the “reasonable comp” rule)
2. Agent background checks
3. Field force training on “fiduciary matters”
4. Web-based financial planning tools
5. DOL compliance review for client and agent facing material
6. Best Interest Contract creation
7. Negative Consent: IE. Notice to “retirement investors” of the fiduciary status
8. Fact finding, risk tolerance, software sales system for “uniform” recommendations from client to client with similar objectives
9. Staff and systems for suitability review
10. Email surveillance
11. Website for data retention and disclosures
12. Ongoing compliance (audits)
13. Designate person to identify conflicts of interest
14. Recordkeeping/file retention for 6 years
15. Primary legal liability
16. Technology for business issuance, review and case management
Again, the list is daunting when you think of implementing these items. So, the struggle for IMOS right now is, “do I assume the DOL will go through and I invest in this stuff or do I assume the DOL is not going to happen and thus not invest in this stuff?”
It Doesn't Matter
I will share my humble opinion on what I think an IMO principal needs to consider. One opinion I will not express, however, is whether the DOL Rule will be vacated. I have read several articles on this matter and have been very involved with this and do have an opinion. I understand there is speculation about the new Labor Secretary stopping the rule.
I also understand there is a way through the budget process that Congress could stop it. I also understand that Trump has a big agenda on his plate and as a result could delay walking back any of the Fiduciary Rule. I know there are both sides to the argument!
The thing is, in my opinion, in the long term it doesn’t matter!!! Why not?
Because I believe that whether change comes in the form of the DOL Rule or anything else, it will come eventually. I am not saying our current business models are “lemons,” but I am suggesting that investment into technology, training resources, holistic planning, compliance, etc. should be developed whether Trump is our “savior” or not.
After NASD 05-50 happened 11 years ago, I learned something very interesting. By the way, I am fully cognizant that NASD 05-50 had nowhere near the magnitude that the DOL Rule would have, so I am certainly not minimzing the DOL Rule.
The DOL Rule is a change unlike anything we have seen in four decades. Anyway, 11 years ago I witnessed several IMOs completely redo their business models and invest in order to cater to the technology, training, wholesaling, etc. that the new world would require.
Those were the IMOs that were not “disintermediated” when many broker-dealers brought the business through the grid, but flourished because they took “option B” like I did with my car.
I will concede however that the April 10, 2017 date does create urgency should the rule go through!!!
Discussion of the Department of Labor (DOL) fiduciary rule is based on the information available from the DOL, pending litigations, and other sources deemed to be reliable as of the date this article was written. The views and opinions of author are subject to change as guidance from DOL becomes available and court opinions are published.
This article should not be considered legal advice and is intended for educational purposes only.
About Partners Advantage Insurance Services
Partners Advantage Insurance Services, LLC, is among the top national insurance marketing organizations in the country with 70 associates located in offices across the United States. The company's Advantage Division is a one-stop brokerage for licensed agents and agencies throughout the United States who sell annuities and life insurance. The company's Platinum and Premier Divisions work to enhance insurance marketing organizations and agencies throughout the country. For more information about Partners Advantage, visit www.PartnersAdvantage.com.
Charlie Gipple, CLU, ChFC, is senior vice president of sales and marketing for Partners Advantage Insurance Services. Charlie may be contacted at firstname.lastname@example.org.
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