Commentary: Your Annuity Clients Probably Want You To Be A Fiduciary

By Paul McGillivray and Ryan Brown

The 2020 U.S. Department of Labor Fiduciary Rule (DOL 3.0) now applies to all IRA-to-IRA rollovers. It applies to IRA rollovers from 401(k) and other qualified assets, too. This rule hits 50% or more of most insurance agents’ annuity sales.

The DOL has reinterpreted its existing rollover rule for ERISA plan and IRA assets. DOL 3.0 now applies to IRAs.  The department wants to treat any qualified rollover as being a fiduciary act. Representatives and advisors are supervised by their broker-dealers and registered investment advisory firms. Independent insurance agents are on their own.

Representatives and advisors do their work under a regulatory standard that is much closer to that of an ERISA fiduciary. Except for 10 months in 2017-2018 when DOL 2.0 was in effect, financial professionals with only a life and annuity insurance license never have been fiduciaries. DOL 3.0 does not quite say “you are a fiduciary,” but arguably you are one.

If an annuity agent has an ongoing relationship with a client or the rollover is the beginning of a relationship, the annuity agent will be a fiduciary under DOL 3.0. How would an annuity agent later prove they are not a fiduciary? If you can’t prove you are not a fiduciary, guess what? You are one.

Whether a fiduciary duty applies is a “facts and circumstances” determination. That question usually comes from a complaint, an examination or a litigation. How can you later prove you were not a fiduciary? You will have no luck doing that. The DOL has stated they will revise their current five-part test for who is a fiduciary. We expect that will then apply for all qualified and IRA rollovers. In the meantime, they will regulate all by “interpretation.”

We believe that agents doing IRA or 401(k) rollovers to IRAs should disclose they are fiduciaries and act in compliance with that. The punishment for not acting as a fiduciary when you should have done so is potentially catastrophic to your practice and your net worth. You cannot afford to fail to comply with your DOL 3.0 fiduciary duty.

Can you prove you were not a fiduciary for a given case? Probably not for most of your sales. Should you try to prove you are not a fiduciary? No. Your clients and the annuity-buying public want you to be a fiduciary.  The federal and all state governments want you to be a fiduciary. The good news?  DOL 3.0 is better than DOL 2.0 was.

How will anyone know you failed to meet your fiduciary duty? Should a client file a complaint, the carrier or the insurance department or the DOL likely will look at your case. Then they can look at all your cases. Remember, you thought you were not a fiduciary. So you likely didn’t document your evaluations, your recommendations are not signed by clients and you never disclosed commissions.

Effectively, your client will be the first to decide if you were a fiduciary. Their statements about the sale you made, the process you followed and the services you promised will be a strong case against you — and your lack of required documents. Someone or something could prompt your client to submit a complaint and you will have to show you met your fiduciary duty. Remember, your annuity clients probably want you to be a fiduciary.

We created a list of negative things that can happen if you don’t meet your fiduciary duty - fines, legal costs, bans from qualified sales, lost licenses, jail, and the IRS can even disqualify the client’s IRA. What will ultimately happen? We have no idea, but it keeps us up at night.

To meet your fiduciary duty, you must document your evaluation of the client’s position, their needs and the current qualified account. You must evaluate solutions and ensure the client signs your written recommendation. You will disclose your fiduciary duty and the specific percentage of your commission. You will thoroughly document all this.

DOL 3.0 raises the required level of professional work to serve the qualified rollover market. You don’t need any new license. You need to evaluate your rollover process and your client documentation system. You need to do those anyway, to meet the new state Best Interest Suitability requirements that are here in many states, and coming to all states eventually.

Annuity carriers have great information to help agents accomplish their DOL 3.0 duty. Your independent marketing organization does too. The National Association for Fixed Annuities also has a great best practices guide. Learn the requirements of this rule as soon as possible and plan your next rollover carefully. Be a fiduciary. You will be a more effective professional and serve clients better than ever. 

Paul McGillivray is the sales support director at M&O Marketing in Southfield, Mich. He may be contacted at [email protected].

Ryan Brown is the corporate counsel at M&O Marketing in Southfield, Mich. He may be contacted at [email protected].

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