We know you what you’re thinking -- oh no, not another musical reference. But, you know what they say, life DOES imitate art.
"A Funny Thing Happened on the Way to the Forum" is a musical with music and lyrics by one of my favorites, Stephen Sondheim.
Inspired by the farces of ancient Rome, the musical tells the story of a slave and his attempts to win his freedom by helping his young master woo the girl next door. The title comes from a line often used in vaudeville: "A funny thing happened on the way to the theater,” which was meant to convey that good intentions are often marred by misperceptions and misunderstandings, causing wrong turns and unexpected outcomes.
In “Forum,” our slave is forced to meet unexpected situations with creativity, resourcefulness and agility, and despite a myriad of twists and turns, trials and tribulations, “Forum” ends happily for all.
The show’s opening number, “Comedy Tonight,” promises the audience will see some things familiar, some things peculiar, some things appealing, some things appalling, some things gaudy and others bawdy. In other words, something for everyone.
Like “Forum,” the Department of Labor promises something for everyone – 401(k) providers, record keepers, IRA advisors, consumers – in its fiduciary rule. Unfortunately, unlike “Forum,” the Rule delivers nothing for anyone – except perhaps for fee-based consultants.
The Rule mistakenly presumes fee-based advisors conduct themselves without conflicts and allows them to continue to play their parts with almost no disruption, new lines or direction. Meanwhile, the rest of the retirement planning community is completely turned on its head and asked to comply with complex, costly and impossible requirements.
The foundation of the Rule is to put client’s interests first - in other words, good intentions. But, like our play’s message, the road to bad regulation is paved with good intention.
In its flawed analysis of the retirement marketplace, the DOL relies upon its Regulatory Impact Analysis (RIA) and used a variety of assumptions to estimate that the “benefits” of the rule would reduce mutual fund fees and their purportedly under-performance.
Never mind that they never demonstrated under-performance had any correlation to fees, nor did they bother to measure fees against increased services and value provided – a core standard of the fiduciary duty.
I know, you’ve heard this song before (so sorry - can’t help it) but, as we await a likely delay, it is important to be reminded that the Administration has required that the DOL complete a more thorough and reliable analysis of the Rule’s impact on consumers.
Therefore, we must not waver in our pursuit of repealing the Rule. Americans for Annuity Protection (AAP) does not suggest that we go back to “business as usual,” but recommends we take a sensible approach to putting the client first and use existing regulation – that the DOL acknowledges is in place – to get there.
First, Utilize Existing Suitability Rules and Reorder the Process
Require that the assessment of a customer’s objectives, needs, time horizon and risk tolerance be done FIRST. With the suitability standard, determining if a product is suitable requires a product recommendation first, and the alignment of goals and objectives to determine suitability, second.
A new order - assessing needs first and recommending products second - will better align the advisor with a client-first standard. Most advisors tell us that they already know their client’s financial needs before they recommend a product. However, that will not be enough now that the fiduciary standard has left the proverbial barn.
The new world requires that you utilize a standardized needs analysis process that is reliable and consistent for all your clients to show you completely understand all their issues and that you demonstrate your client-first practices with documentation and records.
Second – Accept the Reasonability of Commission-Based Advice
Acknowledge and provide for the fact that variable compensation for annuity sales is a one-time payment, in advance, to pay the advisor for marketing, business costs and skill. The payment is made once for the life of the annuity.
Measured against the surrender period and mortality, the payment is very modest and a reasonable cost of doing business for the insurance company when compared to a 1 to 1.5 percent fee for the life of an investment.
Add in guarantees of income you can’t outlive and protection from market risk and the annuity compensation is extremely economical and reasonable for the consumer.
Third, Remove the Best Interest Contract (BIC)
When you put enforcement of a regulation in the hands of the plaintiff’s bar, you have uncontrolled and uncalculatable expenses. To quote a recent blog: “this new Fiduciary Rule is uncharted water for all of us, so it’s going to be trial and error to figure out what’s in the best interest of the client and what’s not.
Unfortunately, it’s going to take a lot of legal bills for all of us to figure it out.” Unpredictable corporate expense never ends well for consumers.
Proponents of the BIC say, if you remove it, you take the “teeth” out of the Rule. But Emily Newton, an attorney for the U.S. Department of Justice, arguing against the National Association for Fixed Annuities, insisted that “there is no new federal enforcement mechanism” in the rule considering that the types of annuities contracts that NAFA members deal in are “already subject to breach of contract claims.”
Okay, then why is the BIC is even necessary for annuities?
Six years of proposed regulation, pulled regulation, re-proposed regulation (which varied ever-so-slightly from the first round), interpretations and multiple exemptions, suggests a farcical comedy more than a serious approach to putting the consumer first.
Even though “Forum” is set in Rome during the first century A.D., it is a lesson for today. And, while many might like a “Comedy Tonight,” Americans for Annuity Protection advocates the happy ending is when consumers get choice of advisors, financial products and fee structures that best works with their needs and plans.
AAP encourages all industry players to use the probable delay wisely and work to repeal this Rule and apply common sense and easily adaptable solutions to truly put consumers first.
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. Contact Kim at email@example.com.
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