Now that analysts and insurers have parsed the 1,000-plus pages of the Department of Labor fiduciary rule, tentative operating procedures are starting to emerge.
For starters, how agents are going to sell, how they will be monitored and paid, and perhaps most importantly, how everyone will mitigate liability concerns.
Those topics were front and center Thursday during a webinar sponsored by the Insured Retirement Institute and Drinker Biddle & Reath.
It seems insurers are recognizing that compensation perks are completely out under the new guidelines, said Fred Reish, partner with DBR. The firm, based in Los Angeles, has heard from several clients suggesting they have a way around the new rules to continue providing trips, bonuses and other incentives to agents, he said.
All of those ideas were shot down.
“The rules are actually quite strict in the sense that you can’t pay any more than the commission, period,” Reish said. “So far, every brainstorming idea that clients have asked us to look at does not work under this rule.”
High-commission variable and fixed indexed annuities remain allowable if they are sold under the Best Interest Contract Exemption. But even then, those past high commissions are not going to be as high. The rule still mandates “reasonable” compensation.
“If you were talking about two variable annuities … it would generally be very challenging for the financial institution to provide differential compensation within that category as to a variable annuity of one provider versus a variable annuity from another provider,” explained Joshua Waldbeser, associate with DBR.
Checklists a Likely Answer
In order to ensure that agents are complying fully the fiduciary standard, insurers are likely to develop “checklists” for them to follow, Reish said. A key part of these checklists will be financial information gathered from the client.
That has led some to wonder if relying on the client’s input will protect the agent and insurer.
“You can rely to a certain extent on what they tell you,” said Bradford Campbell, Washington, D.C. counsel for DBR and former assistant secretary of the DOL. “And if they give you bad information, but you have no reason to have questioned it, then you’re not liable.”
However, it might not be possible to make a true “best interest” recommendation without complete information, he added. As a result, the market will likely give rise to technology service providers who will serve as middlemen providing data to agents and advisors, Campbell said.
"The financial institutions who are on the hook for this are going to demand that there be this checklist of factors to look at,” he explained. “The advisor has to have gone through those and be able to show that they got the information necessary.”
Cap It All Plan
As an added level of protection, the financial institution assuming the liability is likely to apply “caps” to what an advisor can sell, Reish said. For example, only 40 percent of client assets can be devoted to a fixed-rate annuity.
“Those are decision points that I think that home offices are going to have to deal with in designing their compliance policies and procedures,” Reish said.
The mere assumption of liability is proving to be an issue for some insurers, particularly involving the future sale of FIAs, Reish said.
The financial institution certifies on behalf of agents that insurance and annuity contracts the agents sell are in the best interest of a client.
Some insurance company executives, however, have balked at assuming the liability associated with that designation. Some execs are suggesting the certifying financial institution referred to in the DOL rule is a manufacturer or a distributor of an insurance contract.
Insurance companies with proprietary distribution networks, over which insurers have more control, are more likely to accept liability, Reish said.
That doesn’t offer much solace to independent agents.
“The issue is all the independent agents out in the marketplace who (insurers) don’t have close relationships and whom they’re unwilling to be co-fiduciaries with,” Reish said.
InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at firstname.lastname@example.org.
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