Fiduciary Rule Roils Sales Channels

By Cyril Tuohy

Advisors still have a year before they must follow the code of fiduciary conduct for retirement accounts required by the last week’s Department of Labor’s rule. But there’s no doubt that changes in the regulations governing compensation will affect how and what distributors decide to sell.

And don’t forget that the Conflict of Interest rule doesn’t eliminate commissions, bonus trips, trail fees, revenue sharing and other “conflicted compensation,” so long as the advisors comply with prohibited transaction exemptions to continue to receive commission.

Here’s an early look at how the rule might affect different distribution channels.

Roboadvisors

The channel that potentially stands to gain the most from the Conflict of Interest rule is the Internet-based algorithms, also known as roboadvisors. These include pure-play roboadvisors, fully automated investment services or Internet platforms tied to traditional brick-and-mortar advisory companies.

Top executives with Financial Engines, Riskalyze, Next Capital and Betterment were ecstatic about passage of the DOL rule, according to media reports this week.

A “momentous occasion,” said Christopher Jones, chief investment officer at Financial Engines. A “great day” for investors said Riskalyze CEO Aaron Klein. “A major step forward,” said Rob Foregger, co-founder of Next Capital.

Conventional wisdom dictates that many small retirement accounts with a few thousand dollars are better served by low-cost Internet-based algorithms. These are run by stand-alone advisories or as platforms of big mutual fund complexes like Vanguard, or even as part of discount brokerages like Charles Schwab.

For the Internet-based advisors, however, there remains the pesky thorn raised by the Massachusetts regulators. Earlier this year, they cast doubt on whether Massachusetts-registered roboadvisors could fulfill the requirements of a fiduciary standard of care.

As far as roboadvisors are concerned “There is absolutely no reason why digital advice cannot be a fiduciary,” Jones said.

Independent Agencies and Broker/Dealers

Commission-based brokers of mutual funds and commission-based agents selling insurance products will be among those scrutinizing the rule closely to figure out whether it’s still worth selling a fund or a variable investment product.

Without question, the cost of doing business for insurance will go up and might even cause some carriers to exit the variable annuity business, said Tom Zitelli, managing senior financial analyst with A.M. Best & Co.

“The suitability of potential variable annuities is where these unaffiliated distributors may have an advantage over affiliated distributors, as most nonaffiliated agencies offer more than one insurance company’s annuity product,” Zitelli told InsuranceNewsNet.

Technology, compliance and operational requirements apply to independent distributors as well as to affiliated distributors. There’s no question the requirements will make it more burdensome and expensive to do business.

In fact, annuity writers already were contacting and training independent agencies and broker/dealers about the changes even before the final rule was published last week, Zitelli said.

Insurance Agents

Insurance agents recommending or selling products into retirement accounts will now be held to a fiduciary standard — unless exempted — and that means big changes in the sale of fixed indexed annuities (FIAs) and variable annuities.

Insurers may choose to exit the low-to-moderate income household segment since those segments represent thinner profit margins — and in some cases no profit at all. Insurance carriers exiting the lower-income segments would amount to limiting retirement options to future policyholders.

Limiting access and investment choice for middle-income investors was precisely what opponents of the rule feared.

Although big insurance carriers that market their own variable annuities include a significant amount of disclosure about why their products are suitable, still more disclosure or proof may be needed under DOL’s new rule.

That may lead some life and annuity companies to follow MetLife and sell off its career distribution channel, Zitelli wrote.

At the very least, insurance agents may well find themselves driven out of the individual retirement account (IRA) business. This is because agents often lag their retirement planning peers when it comes to fiduciary standards and all that these standards entail, said Robert Wesley Shannon, a registered investment advisor and long-term care insurance specialist in Hurst, Texas.

Registered Investment Advisors

Fee-only SEC-registered RIAs who earn a living charging a flat fee or a percentage of assets under management say the rule will not affect them much since they operate under a fiduciary mandate to provide advice in the best interest of clients

New requirements mean “small changes” in procedures but will have no impact on way he operates, said Robert Gerstemeier, president and founder of Gerstemeier Financial Group, a fee-only registered investment advisor (RIA), and a former chair of the board of directors of the National Association of Personal Financial Advisors.

Some fee-based RIAs, advisors who accept fees as well as commissions, don’t expect much change in their practices either.

Chris Draughon, director of planning with First Coast Wealth Advisors, said the investments his firm offers clients are offered on a fee and a commission basis because it gives clients more choices, “but has not prevented us from acting as a fiduciary.”

More documentation, yes, but very little “material difference” in the way clients are served, he said.

But other commission-based RIAs and retirement experts said the rule is going to make it more difficult for advisors to place clients in one investment over another without more client scrutiny. Clients, they said, are more likely to start asking questions.

“When it comes to rolling over a 401(k) to an IRA, that may affect people across the board because if we can't justify that our fee is better than what they are receiving, that will affect money coming into our firm,” Brent D. Dickerson, proprietor of Trinity Wealth Management, an RIA in Lubbock, Texas, told InsuranceNewsNet.

When investors see what kind of fees they are paying and how advisors and brokers are remunerated, that’s when clients may balk, said Tom Balcom, founder of 1650 Wealth Management, an RIA with offices in Miami and Fort Lauderdale, Fla.

In any case, commission-based compensation models will undergo “dramatic fee compression,” he added.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

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].