Sweeping changes affecting financial advice for retirement accounts will force thousands of agents and financial advisors to consider errors and omissions coverage or leave the business, a former Department of Labor investigator said.
Sweeping changes affecting financial advice for retirement accounts will force thousands of agents and financial advisors to consider errors and omissions coverage or leave the business, a former Department of Labor investigator said Wednesday.
Errors and omissions coverage wasn't necessary for wealth managers, broker/dealers, commission-based advisors and independent agents because they were considered nonfiduciary advisors. But now they will be swept under the DOL’s Conflict of Interest rule, the expert said.
“Either they’ll have to consider the insurance or get out of the business,” said Samuel A. Henson. He is vice president and director of legislative and regulatory affairs, retirement services, with Lockton, a global insurance broker based in Kansas City.
Errors and omission, or E&O, coverage protects insurance agents and financial advisors from claims alleging negligence or the failure of meeting duties of care toward a client. Along with directors’ and officers’ coverage, E&O coverage falls under professional lines insurance.
The DOL rule is scheduled to take effect next April with full implementation by Jan. 1, 2018. Supporters of the rule say it will help prevent advisors from recommending products and services from which they benefit at the expense of clients.
Opponents argue the law will be expensive to implement and make it more difficult for middle-income Americans to receive retirement advice at a time when many people haven’t put enough money away from their later years.
Lawsuits filed by industry groups in the past week argue the law reaches beyond the scope of the Labor Department’s mandate and should be scrapped.
In the latest salvo, the American Council of Life Insurers and the National Association of Insurance and Financial Advisors filed a 105-page compliant Wednesday against the DOL and Labor Secretary Thomas E. Perez.
The six-count suit asks the court to vacate the rule.
Also on Wednesday, President Obama vetoed a resolution repealing the rule.
But many of the arguments put forth against the rule aren’t likely to sway the court, which means the industry can expect few changes, if any, to the rule, according to legal experts.
With the DOL’s fiduciary rule as expansive as it is, those agents and advisors who previously were considered nonfiduciary are expected to undergo the biggest change to their practices. These segments of retail distribution could become easy pickings for plaintiffs’ lawyers down the road.
Non-ERISA Fiduciary Liability Filings Down
By this time next year, E&O brokers will have a better picture of the effects of the DOL rule on E&O coverage. But, at the moment, new lawsuits filed in connection with breach of fiduciary duties and derivative shareholder actions are in decline.
New “events” — lawsuits and enforcement actions — that that could trigger coverage under a D&O policy dropped 14 percent in the first quarter to 346 events compared with the year-ago period. This was according to Advisen, a risk management consulting firm.
Both the number of settlements and the average settlement value were down in the first quarter compared to the year-ago quarter.
“So far this year, the first quarter of 2016 saw one of the lowest totals for new securities and business litigation filings and enforcement actions of any quarter since before the start of the financial crisis,” Advisen said in a first quarter report on D&O claims trends.
The report only measures disputes not connected to the Employee Income Retirement Security Act, or ERISA, which establishes minimum requirements for private-sector pension plans.
Of the major case types, derivative shareholder actions dropped 33 percent in the first quarter compared to the year-ago period, Advisen reported. Capital regulatory actions dropped 19 percent over that period, and breach of fiduciary duties involving securities shrunk 17 percent.
Foreign corrupt practices act, security class actions and merger objection suits increased in the first quarter compared with the year-ago period, Advisen said.
401(k) Litigation Explodes
Retail agents and advisors usually serve individual clients. But some agents also serve retirement plans, and litigation around 401(k) retirement plans has exploded in the last few years, often over fees and costs.
Instead of going to court, insurers representing retirement plans protected by a fiduciary liability or an E&O policy are choosing to settle “left and right” for large sums, Henson said.
But since the pool of retirement plans is so large insurance carriers can spread the risk across a huge base, that means prices for fiduciary liability coverage in the employer-sponsored retirement plan space remain stable.
Clients with $5 million to $3 billion in retirement plan assets are paying much the same in premium for their respective liability coverage than they were several years ago as the industry hasn’t yet sustained a “catastrophic” event to jolt prices higher, Henson said.
Higher legal settlements indicate the industry is headed in the direction of a tipping point although it hasn’t reached it yet, he added.
Once it does, insurance companies will have to tack on premium increases to E&O and D&O professional liability policies they underwrite. That's when agents and advisors who decide to stay in the business are likely to feel the financial pinch.
InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at firstname.lastname@example.org.
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