As Americans for Annuity Protection (AAP) writes this commentary, the DOL just submitted its intention to CONTINUE the Transitional Rule until July 2019. The Department filed the Transitional Rule with the Office of Management & Budget and awaits approval.
The reason we keep repeating “Transitional Rule” is because from our phone calls and emails many advisors still do not understand that as of June 9, 2017, they must comply with a Rule and those requirements are a change from what many are used to.
WHAT DOES THIS MEAN?
As originally proposed and filed in late August, Labor is extending the applicability date of the Prohibited Transaction Exemptions - Best Interest Contract Exemption (BICE) and PTE 84-24 - until July 1, 2019. That means that the Transitional Rule and the versions of the exemptions effective June 9 will remain in place until June 30, 2019.
What that means is that the transitional BICE and PTE 84-24 require that advisors and their financial institutions comply with the Impartial Conduct Standards.
What THAT means is that when an advisor or agent makes any recommendation about moving, leaving, or changing allocation of funds in qualified retirement accounts (IRAs, 401(k)s and ERISA 403(b)s), they must adhere to the three main principles of Impartial Conduct Standards.
According to the Conflict of Interest FAQ issued by the Department, THAT MEANS:
During the transition period, financial institutions and advisers must comply with the “impartial conduct standards,” which are consumer protection standards that ensure that advisers adhere to fiduciary norms and basic standards of fair dealing. The standards specifically require advisers and financial institutions to:
Give advice that is in the “best interest” of the retirement investor. This best interest standard has two chief components: prudence and loyalty:
• Under the prudence standard, the advice must meet a professional standard of care as specified in the text of the exemption;
• Under the loyalty standard, the advice must be:
√ based on the interests of the customer, rather than the competing financial interest of the adviser or firm;
√ charge no more than reasonable compensation; and,
√ make no misleading statements about investment transactions, compensation, and conflicts of interest.
WHAT IS THE DIFFERENCE?
The breathing room given with the delay is that the Department expects “financial institutions to adopt such policies and procedures as they reasonably conclude are necessary to ensure that advisers comply with the impartial conduct standards.” The Department explains:
During that period, however, the Department does not require firms and advisers to give their customers a warranty regarding their adoption of specific best interest policies and procedures [BIC], nor does it insist that they adhere to all of the specific provisions of Section IV of the BIC exemption as a condition of compliance.
Instead, financial institutions retain flexibility to choose precisely how to safeguard compliance with the impartial conduct standards, whether by tamping down conflicts of interest associated with adviser compensation, increased monitoring and surveillance of investment recommendations, or other approaches or combinations of approaches.
WHO IS MY FINANCIAL INSTITUTION?
ERISA and the Rule define financial institutions as banks, insurance companies, broker-dealers and RIAs. If you are licensed as a broker or registered rep, your Financial Institution is your BD and RIAs will be the financial institution for investment advisor representatives.
That leaves, in the annuity and life insurance world, insurance-only agents, producers, and advisors. Unfortunately, insurance-only reps can’t turn to their appointed insurance carrier as their financial institution to receive help and guidance on how to safeguard compliance with impartial conduct standards. That is because of the nature of the independent distribution channel.
Most, if not all, carriers have issued notices that inform agents and advisors that their insurance companies will NOT be acting as a financial institution and are requiring advisors to sign an attestation that they are in full compliance with Impartial Conduct Standards.
WHERE DOES THAT LEAVE INSURANCE-ONLY AGENTS?
Well, up a creek, but not necessarily without a paddle. You CAN comply - and comply with minimal disruption or expense to your business. Here’s how:
1. Follow a repeatable practice of assessing client’s current situation, needs, time horizon and risk tolerance;
2. Make recommendations that best meet those needs and provide more than one solution to show your client and potential regulators you are impartial to the final choice;
3. Use an authorized, compliant disclosure for compensation and material conflicts of interest:
4. DOCUMENT, DOCUMENT, DOCUMENT the customer’s acknowledgement of the following:
a. The information obtained is accurate
b. The recommendation meets their needs, risk tolerance and time horizon
c. The product selection is suitable and meets their best interest
Step One of a best-interest process is to determine that the information that is “relevant” to making an informed and prudent recommendation. While there isn’t a road map, a short list would at least include:
1. The needs, objectives, risk tolerance and financial circumstances of the IRA owner.
2. The fees, benefits and expenses in the current IRA.
3. The fees, benefits and expenses available in the recommended IRA.
4. Other considerations of health (medical expenses, for example), longevity, personal preferences.
However, Step Four is usually the advisor’s Achilles heel. As an expert witness for many cases and consultant to advisors facing regulator inquiries, the fourth item is typically missing. Many times, files are missing, or the paper trail is produced but without client affirmation or acknowledgement.
As Fred Reish, partner at Drinker Biddle & Reath law firm, so aptly states: “The best interest fiduciary process is a new way of looking at everyday transactions and making recommendations about those transactions. It’s important for advisers to realize that it’s not just a compliance issue; instead, it’s a process . . . a thoughtful, documented, best interest process.”
Americans for Annuity Protection wants all annuity and life advisors and agents to be safe from regulatory and legal exposure and to ensure that their businesses thrive and prosper so they may continue serving American’s financial planning needs.
Kim O’Brien is a 35-year veteran of the insurance industry specializing in guaranteed annuities and life insurance. She is the current CEO of Americans for Annuity Protection and Founder of AssessBEST, Inc., a sales and compliance software system. Visit www.AAPnow.com or www.AssessBEST.com for more information.
This article is provided for educational and informative purposes only and not for the purpose of providing legal advice. Readers should consult with their own legal and compliance counsels to obtain guidance and direction with respect to any issue or question. Contact Kim at [email protected]
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