The best way for financial advisors to think about “reasonable compensation” in the fiduciary sense is to imagine a scatter graph.
And the best place to be on that graph is the dot in the middle of the pack of other dots.
Outliers on either side – high or low, left or right – of the swarm isn’t where advisors want to be if they are going to argue that they were reasonably compensated for the sale of an annuity into a retirement account, fiduciary rule experts say.
The Department of Labor fiduciary rule begins taking effect at 11:59 tonight. It begins by extending Impartial Conduct Standards to anyone selling products into retirement accounts. That means acting as a fiduciary, making no misleading statements and accepting only "reasonable compensation."
“You want to be with everyone else,” said Joshua J. Waldbeser, an associate with the law firm Drinker Biddle.
Waldbeser and Judi Carsrud, government affairs director for the National Association of Insurance and Financial Advisors, discussed reasonable compensation earlier this week in a webinar titled “DOL – The Eve of Disruption.”
The webinar was sponsored by InsuranceNewsNet.
Industry Data Widely Available
One of the many sticking points of the DOL rule is that it doesn’t define “reasonable compensation.”
Leaving the definition open to interpretation yielded thousands of public comments seeking clarification. Reasonable compensation is an industry standard, not a legal standard, Waldbeser said.
There’s no black-and-white line between what is reasonable and unreasonable, he said. What is reasonable compensation for some products like mutual funds may be lower than for more complicated products like annuities.
In any case, reasonable compensation it does not mean “below average” compensation, Waldbeser said.
Consulting firms and benchmarking companies have plenty of data that will help guide advisors stay in the middle of the scatter graph pack.
Simply being in the industry, talking to in-house departments that track commissions, conversing among peers at annual conventions or approaching trade groups should be more than enough for most advisors to get a sense of the commissions being paid for selling products.
At the end of the day, agents want to see themselves “in the cloud of dots,” with the recommendations they are making, Carsrud said.
Stick to Specifics, Opt for Transparency
The more specific advisors are with the commissions they earn from an annuity or life insurance sale the better.
Advisors who tell clients they earn a 4.5 percent commission on the premium paid into a fixed indexed annuity are more transparent than advisors who tell clients they stand to earn between 3 percent and 6 percent, for example.
Agents with access to specific data can give clients an exact percentage, but many agents work off a grid and don’t know the exact percentage until the end of the year.
“That’s the harder question,” Waldbeser said.
“Again, I tend to think that that’s still good-faith compliance but if that’s a concern I would certainly encourage anyone to talk to your attorneys or whoever you go through for legal advice on those kinds of issues,” he added.
The more agents document how they’ve explained their compensation arrangements to their clients and how those arrangements are in a client’s best interest, the more agents also help themselves should they face questions in court years down the line.
“My opinion is it’s wise to discuss it,” Carsrud said.
InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at email@example.com.
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