“Back to the Future” is an iconic movie that takes its hero into the future after first returning him to the past. Like the movie, the Department of Labor’s Best Interest Standard takes us into the future after first revisiting the past.
In our case, the past is 14th century England, where the remedy in the common law action of account embodied fiduciary duties of loyalty, care, and prudence – the core elements of today’s fiduciary duty.
Since the election we have been in a constant holding pattern of uncertainty – the new normal. Before President Trump took office, we still had uncertainty surrounding the implementation and interpretation of the DOL fiduciary rule. But we at least had certainty as to its effective date of implementation – or “applicability” date as the DOL refers to the date on which the rule’s basic principles take effect.
Americans for Annuity Protection (AAP) is convinced that advisors who recommend a client to purchase or transfer an annuity will be under a best interest standard going forward. Our key Capitol Hill contacts tell us repeatedly and consistently that there is little chance our industry will go back.
The future is today and ALL advisors will need to operate under a best interest standard when recommending annuities to protect assets from market risk and provide predictable and guaranteed payouts.
The RULE in a Nut Shell
The rule requires anyone who provides “investment advice” to 401(k), ERISA 403b, IRA and other retirement account owners to follow a “fiduciary” standard of care. The recommendation must be in the best interest of the customer and once the recommendation is made, the advisor becomes a “fiduciary” under the rule.
All of the following recommendations are considered investment advice and covered by the rule:
• Whether to buy, hold, or sell funds;
• How to manage investments, including asset allocation or portfolio composition;
• Whether to take distributions or rollover from one account to another; and
• Whether to hire someone to do any of the above.
Examples of Investment Advice:
Investment advice: “You should roll your old 401(k) over into an IRA and purchase an annuity.”
Not investment advice: “The benefits of rolling over an old 401(k) into an annuity are control over your assets and guaranteed income options.”
Once a fiduciary, the advisor must follow the Impartial Conduct Standards, which are the core elements and guiding principles of the new rule. Essentially, they require that any recommendation:
1. Be in the best interest of the investor without regard to the advisor or his company’s financial or other interests;
2. Not result in compensation that is more than reasonable compensation for the advisor or his company; and
3. Not involve statements that could be considered misleading.
What is a conflict of interest? A conflict of interest is any financial incentive that a reasonable person would believe could influence an advisor’s recommendation.
What does reasonable compensation mean? According to the DOL, reasonable compensation is compensation that is not an outlier and meets a market-based benchmark for a product type and class when compared to other similar products in the marketplace.
AAP suggests that a 10-year fixed indexed annuity that pays the advisor compensation within the standard deviation of the average for the 10-year FIAs he/she is licensed to sell will make it extremely difficult for lawyers and regulators to say it is unreasonable.
Plus, when that compensation is measured by the length of surrender and the life expectancy of the client, most annuities today are well under what plan participants are paying today. Bankrate.com states that smaller plans charge participants about 1.5 percent per year. Even the larger plan participants pay about .09 percent a year in fees.
What statements might be considered misleading? To abide by the “no misleading statements” requirement of the fiduciary rule, all material conflicts (of the advisor and his/her company) must be disclosed to the investor. A commission, for example, is considered a conflict of interest because the advisor’s compensation will depend on the product that he/she recommended.
The standard requires that these conflicts be identified, disclosed and mitigated in accordance with written policies and procedures.
What insurance products are impacted by the rule? Any product with an investment component, including: variable annuities, fixed indexed annuities, and fixed annuities.
While the DOL states that term insurance does not have an investment component, most experts believe that whole life insurance and universal life insurance do have an investment component. Therefore, a recommendation to use distributions from a 401(k) account (even required minimum distributions) to fund whole or universal life premiums would be subject to the requirements of the rule.
What Advisors SHOULD do TODAY!
AAP believes that no matter what the DOL does or when it does it, the financial services and insurance industries are moving resolutely to a best interest standard across all products and distribution channels. Today’s advisors need to prepare themselves and their clients for the tsunami of competitors touting best interest credentials.
Fortunately, you don’t have to be licensed as a fiduciary to apply a best interest standard to your business. Advisors who do not adopt a best interest standard in their practice will suffer from a weakened marketing position and most likely expose their business to competitor-fueled complaints, litigation, regulator inquiries/actions and terminated carrier appointments.
We understand that the timing and the final outcome is still uncertain. Unfortunately, uncertainty breeds confusion and confusion breeds delays that may harm consumers who are struggling to save for THEIR FUTURE. Delays in determining your financial needs. Delays in deciding to talk to an expert about your financial needs. Delays in taking action that will benefit your financial needs.
AAP encourages advisors to act now and move clients from uncertainty to certainty by preparing their business today for tomorrow’s regulation. If advisors follow a few simple steps, they can begin to build their business with best interest advice. Insurance advisors are most of the way there already with suitability and by adding these easy- to-adopt practices, they will be “back to the future”:
1. Define a process that identifies and details client’s interests, goals, time horizon and risk tolerance.
2. Promote diversification – another key fiduciary duty – to help minimize the risk of investment losses.
3. Show meaningful comparisons and reasons for selection.
4. Select products that pay reasonable compensation.
Then once the recommendation is made, the advisor must:
1. Document key factors that were considered in making the recommendation. 2. Record the client’s acknowledgement of, and agreement with, the information gathered.
The recent Memorandum by President Trump has put only the timing of the regulation and its final requirements in doubt. To quote an old saying, “it’s not a matter of if but when.” Will you be prepared to help your clients with a best interest practice when it’s time to go Back to the Future? Start today and get a jump on your competition.
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 firstname.lastname@example.org.
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