DOL fiduciary rule proposal to restrict, ban some producer compensation

By John Hilton

For an industry that has struggled mightily at times to attract producers, the changes to compensation accompanying the new Department of Labor fiduciary rule are no small concern.

Repeated studies show a very high attrition rate for insurance producers entering the business. It adds up to “a dying distribution” system, said Sheryl Moore, CEO of Moore Market Intelligence and Wink, Inc.

"I think that we're gonna lose quite a few insurance agents if the DOL gets their way," she said, "and that could be devastating to pre-retirees who need to hear about annuities."

The DOL fiduciary rule proposal is far from a done deal. It is expected to be published in the coming weeks, and industry opponents stand ready to go to court.

Given that the current rule is the fourth iteration of the blanket fiduciary standard sought by DOL regulators, it is clear they are not giving up. Compensation remains the bullseye at the center of the DOL rule target.

The DOL wants to bring all retirement plans and individual retirement accounts under Employee Retirement Income Security Act of 1974 rules. ERISA’s fiduciary responsibility rules mandate that ERISA plans pay no more than “reasonable compensation” to service providers, which includes advisors.

Prohibited transaction exemptions allow for additional forms of conflicted compensation, but there are limitations.

“Financial Institutions may not use quotas, appraisals, performance or personnel actions, bonuses, contests, special awards, differential compensation, or other similar actions or incentives that are intended, or that a reasonable person would conclude are likely, to result in recommendations that are not in Retirement Investors’ Best Interest,” the proposed rule reads.

Compensation details to come

There are more details to come before the impact on compensation is fully known, Moore explained.

“It's up in the air at this point because DOL hasn't defined what is ‘reasonable compensation,’” she noted. “When I started working in the life insurance space, we had annuities paying 17% commissions. So, the 5% or 6% commission that we're seeing paid on a fixed annuity or an index annuity in my mind is reasonable when you consider where we've been.”

Samuel Greenes owns Blue Insurance Agency, with locations throughout New Jersey. The DOL is making a mistake equating insurance agents and life insurance with advisors and securities, he said.

“There are legitimate reasons for incentive payments based on loss ratios, persistency metrics, or premium growth targets in insurance – they reward customer satisfaction and loyalty,” he said. “As an independent broker, I have always viewed my responsibility as putting my client's needs first. But I cannot properly serve their risk and insurance needs without running a stable, profitable business, too.”

An independent insurance producer for more than 20 years, Greenes fears that the new rule will “put many insurance and financial professionals out of business.”

“We perform an essential service for consumers in understanding risks and tailoring insurance products to mitigate exposure,” he said. “If you suddenly eliminate our means of being paid fairly for this highly skilled work, it will not end well for either brokers or the public we serve.”

Eliezer Zupnick is the founder and CEO of Zupnick and Associates, an employee benefits insurance agency. The DOL seems to favor fee-based financial recommendations, he said, for better or worse.

“The fiduciary rule could lead to a shift towards fee-based client service arrangements,” he said. “While this could potentially align the interests of the advisor and the client, it may not always be cheaper than commission-based arrangements.”

'Apples to oranges'

Comparing an advisor charging a 1% fee to an agent getting a 5% or 6% commission is an “apples to oranges” comparison, Moore agreed.

“In the long run the insurance agent is going to be paid less than the advisor who's charging AUM [assets under management] just because the commission on an annuity is a one-time commission, and it's paid at point of sale,” she said. “There's usually no renewals or additional trails, because 97% of deferred annuity [applications] choose a heaped commission option where it's paid all upfront.”

Few new insurance agents survive even to year three in the business, statistics show. If their compensation is cut, it will be even tougher to retain those new people, Moore said.

But there is hope, she quickly added, if producers would bet on themselves and opt for trail commissions instead of getting paid all upfront. A trail commission structure means regular commissions are paid based on the annuity's account to the producer over a set time period.

“A trail commission option type of compensation actually ends up being more lucrative for the agent if the business persists,” Moore said. “Over a longer period of time they could be paid more. But I think the insurance agent is so hesitant to use a trail commission option, just because that contingency is the business has to persist.”

InsuranceNewsNet Senior Editor John Hilton covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.