Industry Groups Warn DOL Against Picking ‘Winners and Losers’

Regulators should remove their “clear bias” toward fee-based products and stay away from picking “winners and losers,” as they seek to amend key parts of the Department of Labor’s fiduciary rule, industry groups say.

The DOL’s preference for “clean (fund) shares” and fee-based annuities shows the DOL is more interested in developing fee-for-service models and “a la carte type” menu schedules charging specific fees for every service, wrote James H. Szostek and Howard M. Bard of the American Council of Life Insurers.

“The Department must abandon its experiment with picking winners and losers and instead provide clear rules that apply to any and all fiduciaries seeking exemptive relief for the receipt of otherwise prohibited compensation,” the pair added in comments to the Employee Benefits Security Administration.

The comments appear in the latest batch of filings answering the DOL’s request to delay the fiduciary rule’s applicability dates and amend exemptions to prohibited transactions.

Fee-based products, known sometimes as advisory products, compensate advisors through a fee or a percentage of assets under management. Insurers introduced dozens of new fee-based annuities over the past 12 months.

Fee-based compensation offers an alternative to commission-based compensation, which is how most of annuities are traditionally sold.

Commission-based sales are allowed under the fiduciary rule, but the rule imposes heavier burdens on advisors in the form of exemptions. Regulators say commissions lead to product sales that may not be in the client’s best interest.

Industry analysts see both compensation models existing side by side, at least for the time being.

Fixed-Rate vs. Indexed Context

The more narrowly focused Indexed Annuity Leadership Council also cautioned the DOL against playing favorites.

The fiduciary rule uses one exemption regime for fixed-rate annuities and another exemption category for indexed and variable annuities, a split that “continues to foster significant disruptions in the marketplace to the detriment of middle-income American savers,” said Jim Poolman, executive director of the IALC.

Weak sales in recent quarters, particularly for variable annuities, can be traced directly to disruption created by the fiduciary rule’s proposed two-tiered regulatory approach, he said. It favors certain classes of annuities over others, Poolman added.

An “inherent bias for low-risk, low-cost, and potentially low-growth” fixed rate annuities shown by regulators could short-change underprepared retirement savers desperate for higher yield in a low-interest-rate environment, he said.

Market-linked indexed annuities deliver higher yields compared with fixed-rate annuities and bank products.

The Exemption Context

Regulators earlier this year collected industry input while developing new exemptions giving advisors more options to sell annuities and retirement products under the fiduciary rule.

But drawing “artificial lines” between one insurance product and another only incentivizes “regulatory arbitrage,” said lawyers Joseph F. McKeever III and Michael L. Hadley on behalf of the Committee of Annuity Insurers.

Regulatory arbitrage means that advisors no longer sell products based on what is best for a client, but based on artificial distinctions in exemptions, they said in written comments.

The industry has already seen how exemptions can turn some distributors into winners and others into losers, industry advocates said.

An exemption crafted specifically for insurance intermediaries known as the insurance marketing organization Best Interest Contract Exemption, “does not solve the problems the Department has created through the Fiduciary Rule,” McKeever and Hadley said.

The IMO BICE creates an oligarchy of the largest IMOs with billion-dollar books of business authorized to annuities, but shuts out hundreds of smaller IMOs that don’t qualify because they don’t sell enough volume, critics have said.

In short, all annuities should belong to a single workable exemption, McKeever and Hadley concluded.

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

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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].