Dear Agents: This is Your Life Under ‘Best Interest’

Insurance and financial advisors will surely be relieved that “differential compensation,” or commission income, trail fees and incentives aren’t barred under the new fiduciary rule released by the Department of Labor earlier this month.

But such compensation, which once came with few if any strings attached, now come with tethered by rope and heavy-gauge chains for agents who continue selling products into retirement accounts under new Best Interest Contract (BIC) exemption.

So assuming agents are operating under BIC, here’s what they can expect and where they might want to ask more questions in workshops and seminars.

Performance incentives, bonuses, contests, special awards, trips, appraisals and sales quotas — favorite levers of insurance companies to spur their armies of distributors are going to change, said Scott A. Sinder, partner at Steptoe & Johnson in Washington, D.C.

Who decides what programs to keep, what to drop and how incentive programs change? The insurance carriers and broker-dealers themselves and there’s going to be a lot of pressure on broker-dealers to re-evaluate compensation practices.

“Will they go away completely? Probably not, but their structure and how they are determined will change and companies will have to track that,” said retirement expert Jamie Hopkins, associate professor at The American College of Financial Services in Bryn Mawr, Pa., in an April 20 webinar conducted by InsuranceNewsNet.

Carriers and financial institutions will be expected to take different views on incentive programs and agents won’t have much of a say.

So if that trip to the Bahamas suddenly disappears next summer, agents, remember: it’s nothing personal.

“You (advisors), to the extent you work with that broker-dealer at some level, live with the results of it, but we expect contests, awards and bonuses to largely go away as a result of these rules,” Sinder said during a webinar sponsored by the National Association of Insurance & Financial Advisors.

The Prudent Person Test

A fiduciary standard of care will require agents to act in the best interest of their clients based on the “prudent person” test, which is designed to benchmark agents with other similarly situated agents.

The prudent person test serves as a benchmark for what an agent or advisor would do at the time he or she makes a recommendation. It is not an objective measure of whether retirement assets were placed in the best performing asset class to be evaluated 10 years later, Sinder said.

Advisors must act with the “care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person would exercise acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims … ,” according to the DOL rule language.

The phrase “like capacity” means that if somebody doesn’t sell variable annuities and you do, Sinder said, the DOL doesn’t care what they think. “We only care what other providers of variable annuities think,” he said.

Similarly, with the phrase “like character,” he said. Advisors selling a variable annuity on a proprietary product platform would only be compared with other agents selling variable annuities on a proprietary platform.

“It is the best possible fiduciary standard we could have if we’re going to be under a fiduciary standard,” he said.

The language in the BIC is designed to satisfy a negligence test so that advisors accused of negligence or breach of contract can point to peers faced with the same circumstances who perhaps made the same recommendations.

“You are required to provide advice that is consistent with the advice that a similarly situated advisor in your same situation would provide,” Sinder said. “It doesn't have to be the same, it has to be consistent with.”

Agents selling variable annuities or fixed indexed annuities and who are competing with brokers who don’t sell either need only “look to another person who also sells variable annuities in evaluating your conduct,” he said.

Gray Matters in Grandfather Clauses

Agents or financial institutions that sold a variable annuity and collect a trail commission from that one-time sale are under no obligation to do anything and don’t have to qualify for an exemption status because they are grandfathered in, the experts said.

“That is true for anything that was done prior to April 10 of next year,” Sinder said. “April 10 of next year is going to be the trigger date when you will become a fiduciary and you'll be subject to the best interest standard.”

Any transaction that was not prohibited at the time it was made and any compensation received from such transactions don’t fall under the best interest standard, nor does any compensation received in conjunction with the normal plan investment strategy.

“So if somebody is doing $50 a month into their retirement account into their employer plan, you need not provide them any special notice to continue that,” Sinder said.

But if investors make changes to their contribution or give advisors new money to invest, it’s new money and considered a new transaction in the eyes of the DOL. In that case, advisors must comply with their fiduciary obligations.

Advisors with existing contracts with clients would be required to amend the contrast by providing clients notice. The notice is provided by the financial institution with their normal account reporting clients receive monthly or quarterly, Sinder said.

Compensation models sealed before April 10, 2017, are generally grandfathered. “However, it wasn’t totally free and unlimited,” despite the industry push for a more expansive approach to retaining its revenue flows, Hopkins said.

A variable annuity opened on April 25, 2016, generating a trail commission is all well and good, but if the agent on April 25, 2017, recommends the investor put more money — an additional contribution — into the annuity, then regulators want those recommendations to be subject to the new rules.

New money into the annuity could trigger a change to the agent’s compensation model even under the grandfathering provision.

“So in some cases it gets a little tricky here, because there’s somewhat of a line there but it gets a little blurry as you get close to it,” Hopkins 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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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].