With the Department of Labor fiduciary rule taking effect June 9, agents face a lawsuit threat, analysts say.
When the deadline hits, agents need to be ready to act as fiduciaries when dealing with retirement funds.
“Any lawyer can sue on recommendations made June 9 and after,” said Kim O’Brien, CEO of Americans for Annuity Protection.
These four simple steps will best protect an agent/advisor while selling traditional products with retirement dollars, O’Brien said:
• Determine and document client’s goals, needs, concerns, time horizon and risk tolerance first;
• Make recommendations that are in their client’s best interests second;
• Make no misleading statements and disclose material conflicts of interests with compensation third;
• And record and retain all decision criteria as well as the customer’s agreement with all data, recommendations and decisions made.
In addition, any compensation must be “reasonable,” a DOL standard that has many in the industry shaking their heads. But a good market-based compensation scale should develop in good time, one analyst said.
“It certainly should be an area of concern,” said Bruce Ashton, a partner with Drinker Biddle & Reath. “That’s why I think we’re going to see benchmarking services develop” to track commissions paid across the industry.
That will require carriers sharing compensation information, Ashton said, something they will likely be willing to do, albeit anonymously. That does not mean the litigation threat isn’t real, he added.
“It’s going to be something that gets challenged in litigation I suspect, and then it’s going to be a matter of providing evidence from some source or another,” Ashton said.
The DOL eased the pain somewhat with a companion announcement that it will not enforce the rule for the rest of this year. That includes the tax penalty the Internal Revenue Service would impose in case of a violation.
The DOL did not return multiple messages for this story.
Other Changes Likely
“Reasonable compensation” has been “baked into ERISA” law for decades, he added, so it is likely here to stay. But other aspects of the fiduciary rule face amendment under Labor Secretary Alexander Acosta, a staunch opponent of government regulation.
The good possibilities include eliminating the provision that does not allow clients to waive their class-action rights, Ashton said. Also, the secretary could eliminate the contract aspect of the Best Interest Contract Exemption, he explained. The contract created a private right of action for IRA owners, a strong point of emphasis for plaintiffs suing the DOL.
“The term that comes to mind is to ‘relax’ the rule,” Ashton said. “I don’t think they’re going to do away with it because it’s not going to look good.”
The pro-rule Consumer Federation of America was “pleased” by Acosta’s decision not to delay the rule further, said Barbara Roper, director of investor protection, but is watching closely what happens going forward.
“We may have a tough fight ahead to hold on to the key provisions of the rule that make it effective and enforceable,” she said via email. “After all, industry rule opponents have made clear that they support a best interest standard in name only, one that allows them to continue to profit unfairly at their customers’ expense.”
InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at john.hilton@innfeedback.com.
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It seems to me that regulations should be in place to protect the consumer from fraud and false advertising. BUT, to force every insurance company to all comply with regulated commissions, no bonus, no yearly trip is crazy. A company that has developed a lean operating company that wants to reward their agents for selling well is the free enterprise system. How can the government tell me what to pay my employee’s? If I want to pay them more than someone else so be it. The consumer has to bear the majority of the weight of choosing what company and products they want to use. Suitability and transparency can be beefed up for sure if the government is afraid that people cannot make a decision for themselves. There are many things that can be done without breaking the company’s right to prosper by their own imagination and good business practices. The law is extremely faulted. When will they want to draw the line? Every person investing has to be assured there is no risk? No need to do your own research? Let the government protect you from every possible liability? Socialism is what I call it. I want to compete for sure in a fair market, but do not tell someone they can’t compete without being like everyone else.
I have dealt with the U.S Government controlling what I am allowed to make. I sell the Federal Crop Insurance coverage and Risk Management Agency (RMA) includes in their contract with the private insurance companies what the maximum commissions they can pay as well as any perk (trips, bonuses and even buying lunch). This has been happening for about 10 years now.
Hmm. Are we founding another EPA? Is this the beginning of a federal bureaucracy that will soon be more powerful than the entities that formed it? Once the rules are in place, and once enforcement is in place, won’t they be free to simply play with the numbers? This could get excruciating in no time.
I just want to know when we are going to attack the concept that lawyers get 30% of an award!