The Department of Labor rule designed to corral conflict of interests among financial advisors will likely lead to new ways of distributing insurance products into qualified retirement plans, say insurance carrier executives.
The comments, gleaned from earnings calls with analysts last week, suggests a brighter and more optimistic picture of how the industry will adapt. The controversial rule drew the ire of industry lobbyists and advisors when it was initially published last year.
Instead of advisors heading the for the proverbial career exit in the wake of sagging sales, carriers and distribution partners seem to be poised to find innovative ways to sell more financial products through qualified retirement plans.
“It’s pretty clear to us that there’s going to be an array of advisor business models coming out of this change if and when this reg becomes final,” said Nora Mary Everett, president of Retirement and Investor Services with Des Moines, Iowa-based Principal Financial Group.
Advisors and broker-dealers are going to take different routes, she added. After all, there is a “huge amount of optionality, many exceptions (and) many exemptions,” between what the Employee Retirement Income Security Act (ERISA) allows and what the new DOL rule will require, she said.
Some advisories will opt for the fiduciary route with a third-party advisory service, Everett said. Other advisors will instead prefer a nonfiduciary mode with a third-party advisory service.
The new DOL proposal, which would hold advisors managing qualified retirement accounts to a fiduciary standard, is expected to appear in final form sometime in March or April.
Proponents, who include the Obama administration, consumer groups and labor unions, say the rule will shield investors from bad advice.
Financial advisors and many financial services industry executives argue the rule will only make it harder and more expensive for distributors to do business, forcing herds of advisors to abandon the profession and leave small savers lacking access to retirement advice.
While the DOL’s proposal applies only to advice that affects money in qualified retirement plans, it still affects tens of billions of dollars in accounts held by tens of millions of investors individually or through retirement plan sponsors.
Under the DOL’s preliminary rule, the sale of variable annuities will affect distributors to a much greater degree than the sale of fixed annuities.
BIC Exemption Required
Since the financial crisis, several life insurance carriers have moved away from selling variable annuities. Those carriers say the proposed DOL regulation doesn’t affect them as much as it might have in the past.
In the case of Radnor, Pa.-based Lincoln Financial, 70 percent of the company’s products are not affected by the DOL’s proposed rule, said President and CEO Dennis Glass. A few years ago, only 50 percent of the company’s products would have been affected by the DOL’s proposal.
The proposed rule requires a Best Interest Contract (BIC) exemption to sell VAs with commissions. The BIC mandates a signed contract with the client, as well as disclosures on the product and any compensation received.
Whatever the final wording DOL regulators decide on, sales of variable annuities into qualified retirement plans “will not entirely go away,” Glass said. “Many distributors will continue to offer the important guarantees that variable annuities provide.
“In addition, we would expect to see accelerated growth in our fee-based variable annuity products, as we have been approached by many of our largest distribution partners about the fee-based opportunity,” Glass said. “We’re also increasing our focus on fixed and indexed annuities, which still have the PTE 84-24 exemption.”
While PTE 84-24 remains in the new rule, it has been beefed up to include an “impartial conduct standard.” While a contract would not be required, financial professionals still need to provide several disclosures covering the product and any compensation received.
Exemptions make it easier and more lucrative for advisors to sell products, and industry proponents want variable annuities to be included in PTE 84-24, as they are now. Instead, some analysts say the DOL might go the other direction and add fixed annuities to the BIC.
While the DOL is done with its rule, the contents won’t be known until the Office of Management and Budget finishes its review and publishes the rule in the Federal Register.
Move from Commission to Fee Sales
While the volume of fee-based sales isn’t very large now, the DOL proposal “pushes some of the distributors in that direction,” Glass said.
Investment returns to Lincoln Financial between front-end commission-based and fee-based annuity products are “roughly equivalent,” Glass said. In any case, “that’s the way that we would price the product.”
There’s little doubt that carriers have been hard at work with distribution channels modeling different revenue scenarios based on what regulators have released.
“We’re thinking of every angle based on what was previously put out by the DOL,” said Eric Thomas Steigerwalt, executive vice president, U.S. Business, MetLife Inc.
“We have talked to a number of distributors,” he said. “I don't think it would be appropriate for me to share some of those conversations. But suffice to say, we are considering all potentialities from both a product perspective and how you distribute, and anything else that would result from the actual regulation coming out.”
InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at cyril.tuohy@innfeedback.com.
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If DOL dictates how we conduct our business then our business then some of us will tend to use products that DOL doesn’t find a problem with. Not necessarily the best solution but the product with the least friction or consequence from DOL. This is an outcome that worries me and one which DOL never fore
saw.
The vast majority of comments from within the DOL seem to infer that investors receive a lower return when working with Financial Advisors when statistical reporting from the past 30 years indicates the opposite result, if only due to savers and investors staying the course and making the better decisions when the market soars and also when it plummets. If the S and P has averaged over 7% for 25years annually, the typical American investor has earned under 5% because they chase returns and avoid buying when the market declines. The suitability standard has maintained huge compliance oversight and regulation from the B/D side- now, all advisors will be pushed into charging a 1% fee for advice, almost like a 1% 12b-1 fee versus going to an internet robo advisor which has boiler plate models that leave people 80% in equities in their Target Date Funds before the 2008 recession. The income for our firm will actually increase from a 0.25% trail to a 1% advisory fee, for the same work and same performance. B/D plans will highlight accounts that are boiler plate one size serves all that reduces paperwork, management costs and oversight but potentially leaves the customer worse-off with a plain vanilla portfolio and still paying 1% annually for their entire retirement years. When I meet clients with the TSP (low cost Government Retirement Plan) they typically have the majority of all their assets in the “G” fund which pays less than 2% on a 10-year treasury bond, because they are too worried about losing money in the “C”, “S” or “I” fund for stocks- so much for the benefit of low expenses- they have missed a 5 year rebound in equities and are still on the sidelines.