The Biden Administration announced last week the latest Department of Labor (DOL) amended fiduciary rule proposal that, if adopted, would dramatically impact the way independent advisors do business with any qualified money sales.
The DOL’s 800-page “Retirement Security Rule” (available here) is allegedly designed to close loopholes in the current “Best Interest” regulations, including as they pertain to products like fixed and indexed annuities. It would also change current pathways to compliance (such as PTE 84-24) and expand the definition of who is a fiduciary.
President Biden made public comments as the DOL released this proposed rule, including several inflammatory ones:
“Look, when a person pays for trusted advice and it comes with a hidden cost, that’s what I call a junk fee. And I think it’s wrong.”
“Right now, millions of Americans, especially seniors, are being targeted by financial advice and insurance brokers selling bad annuities to – that work for the broker, not for the client.”
“Some advisors and brokers steer their clients toward certain investments not because it’s the best interest of the client, but because it means the best payout for the broker. I get it, understand it. But I just want you to know we’re watching.”
“And these conflicts of interest are meaningful: An advisor may receive a commission as high as 6.5 percent to recommend some insurance products. When the saver pays for advice that is not in their best interest, and it comes at a hidden cost to their lifetime savings, that’s a junk fee.”
IAMS was troubled by these incendiary and misplaced comments and joined leading trade associations in objecting to this mischaracterization of annuities and the professionals who sell them. Our primary trade partner, the National Association of Fixed Annuities (NAFA) called the proposal “misguided,” adding that “the onerous and unnecessary regulation…will lead to more confusion, higher costs and less financial security for American retirement savers who need it most.”
A purported “Fact Sheet” on the proposal was released Oct. 31 by the White House and is available here.
What would the so-called Fiduciary Rule 4.0 mean for the independent advisor?
The Fiduciary Shift
The new rule flips upside down the current 5-part test that determines if you’re a fiduciary in the eyes of the DOL and essentially covers everyone who operates in the retirement advice business – if you sell annuities, you’re a DOL fiduciary for all qualified sales. While the concept of adding a legal fiduciary duty is noble in theory, the practical implementation and legal liability add many concerns. The DOL’s insistence on holding advisors to an arguably vague “best interest” standard adds a layer of subjectivity that will cause uncertainty and legal risks.
How can advisors define and measure what’s truly in the best interest of clients under a DOL standard of care rooted in ERISA history? To be sure, a heightened DOL “fiduciary” standard is an additional legal hurdle agents must clear along with SEC and NAIC state “best interest” requirements.
Earning Compensation: Prohibited Transaction Exemptions and Conflicts of Interest
Under the new rule, once you’re a DOL “fiduciary”, a strange thing happens: You cannot earn any compensation because that amounts to a conflict of interest and therefore a “prohibited transaction.” And unless you operate under a DOL-approved “prohibited transaction exemption” (or “PTE”) you cannot earn any compensation. There are two operative PTEs that might be available for agents, PTE 2020-02 and PTE 82-24. In short, nearly everyone selling annuities in the independent channel will navigate through PTE 84-24, with some reps of BDs and employees of banks using PTE 2020-02.
The identification of prohibited transactions like compensation or incentives might sound like a reasonable safeguard against conflicts of interest. However, the rule’s broad strokes could inadvertently limit your ability to sell any annuity and other financial products, potentially handcuffing you in providing tailored solutions for clients. The DOL is proposing to drastically rewrite PTE 84-24 – which most of you reading this would hope to use and may be using today. Without a valid PTE, you cannot earn anything from your sale of qualified money annuities, and you risk the client suffering excise taxes and penalties for blowing up their tax-deferred status.
More Potential Pitfalls for Independent Agents
Industry leaders including IAMS have decried the proposed rule as it seems to be a solution in search of a problem. The rule invariably will add burdensome compliance costs, especially for smaller firms and independent agents. We also expect clients to lose access to advice, especially lower-income individuals who are more vulnerable to bad guidance than richer clients.
We are concerned that the DOL proposal inadvertently creates a two-tier system where only those with substantial assets can afford comprehensive financial guidance. Another risk faced by agents is that fear of legal repercussions might stifle innovation in the industry. The proposed rule could very well discourage carriers and distribution from exploring new, potentially beneficial, non-traditional investment and insurance solutions.
Additionally, commissions – particularly incentive-based compensation (such as incentive trips, tier-based production compensation, rewards, reimbursements, and the like) would come under attack, making running your business more costly. And with a stricter standard of care and requirements, the rule could lead to more legal and tax liability for producers.
Navigating Murky Waters
As financial advisors confront the DOL’s Retirement Security Rule, we won’t shy away from asking the hard questions. Is this rule a genuine leap toward safeguarding clients, or does it risk becoming a bureaucratic quagmire? Financial advisors bear the responsibility to critically evaluate these regulatory changes, advocating for a balanced approach that protects both clients and the vibrancy of the industry.
The DOL has opened a 60-day comment period for feedback on the proposal that ends Jan. 2, 2024. Advisors who wish to comment can do so at this location. You can also contact your local US Congressperson to offer your thoughts.
As an advocate for the independent producer, IAMS is here to help you demystify and navigate the new proposed fiduciary rule. By the time a final rule goes into effect – potentially in fall 2024 – we’ll be ready with compliance plans, forms, tools, and best practice guides. We will also host ongoing educational webinars to keep you in the loop on how the proposed changes will affect your business.
Our next DOL Fiduciary Rule webinar is scheduled for Friday, Nov. 17 at 10 a.m. CST. Join IAMS EVP & General Counsel Chris Conroy and Annuity Sales Director Matt Sabala for a behind-the-scenes look at the “Retirement Security Rule.”
They will discuss:
- Compensation changes and the end of incentives?
- Amendments to existing rules on required disclosures
- Carrier supervision of rollover sales
- Changes to your product lineup and sales process
- Details on the DOL’s 60-day comment period and public hearing
Click the button below to register. Feel free to reach out at 800-255-5055 or contact@iamsinc.com to learn more about how IAMS can help.
