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The DOL’s Game Changer


Posted By: Steven D. McDonnell | Posted On: Mar 18, 2016

Last week I was sitting in a doctor’s waiting room and decided to comb through industry news alerts I receive via e-mail. I settled in on an article in Investment News, “House Speaker Paul Ryan becomes leading opponent of DOL fiduciary rule.” It underscored the political importance of the debate over the rule in Washington: House Speaker Ryan and others in Congress, mostly fellow Republicans, oppose the rule while the Obama administration is determined to push it through, insisting it will help protect American investors.

I was astounded by the number of comments left by readers and the diversity of their opinions. As I recall, while in the waiting room the piece had generated 66 comments. I looked again just a moment ago while writing this and that number had risen to 174.

Some of the commenters’ thoughts, to my mind, were half-baked, misguided, illogical, and/or ill-informed. One person thought the rule will protect up-front commission sales, while many in the industry believe insurers will be forced to transition more towards ongoing fee arrangements. One poster thought, in the interest of transparency, that advisors should invoice clients every time a fee is assessed (how costly and time-consuming would that be?); then there was the reader who, based on the experience only of his girlfriend and her supposedly limited retirement plan options, lambasted the entire industry as “rigged.”

Folks just love to oversimplify the causes of problems, and come up with equally simplistic solutions don’t they?

Speaking of the issue of simplicity, while researching this topic I attempted to read through the original drafts of the DOL fiduciary rule and Best Interest Contract Exemption that appeared in the Federal Register.  My intention was to come up with my own take on what they contained rather than do what I did in the past as a journalist and simply report (perhaps “repeat” would be a better word?) what experts had to say on the matter.

I admit, regretfully, that I was not able to finish reading those drafts. Sure, I became occupied with other matters, but the main reason for my dropping the exercise was that I found the prose dry and “governmental” and, to my mind, the details were vague and difficult to decipher.

At this point, the fact that I didn’t finish reading the rule is moot as it now sits with the federal Office of Management and Budget.  Nothing has been leaked from OMB so we’ll just have to wait until the final version comes out. I’ve heard rumors it may emerge as early as the end of next week.

So I don’t know what I can add to the debate that would be original, what has not been hashed out countless times already in the press and, no doubt, in company meeting rooms and around water coolers.

I can always fall back to my journalistic instincts and tell you some things I have heard.

A veteran industry attorney told me that, contrary to my take on the language of the rule and BICE, anyone who has experience in reading such documents would not find them vague or fuzzy at all – rather they are very clear – and together, they will be a “game changer” for the industry (I detected an ominous tone to that term, the implication being that the changes will be mostly for the worse).

One might argue there has already been collateral damage. My attorney friend said some industry players have been holding back on initiatives they might otherwise be pursuing, pending the debut of the rule, thus normal business progress has been hampered. And I have to think MetLife’s plan to sell its advisor force to MassMutual was at least partly motivated by the belief that the new fiduciary rule will make it more difficult, if not impossible, for insurers to sell through affiliated distribution systems.

Another contact believes the industry won’t let the matter rest; rather it will litigate against the rule in the courts. I’m sure this is not a tactic the industry wants to use, rather one of last resort. The industry hasn’t won all its battles with regulators (see SEC vs VALIC), but not that long ago it successfully fought off an attempt by the SEC to require fixed-index annuities to be registered as securities.  I assume the legal teams of insurers and trade organizations are strategizing.

There are competing bills that have been introduced in Congress as alternatives but it’s doubtful they will be able to scuttle the rule currently at OMB.

By nature I am not a fan of regulation, and sometimes I think that the more rules are put in place, the more people shirk responsibility for educating themselves. Unfortunately it seems to be part of human nature to shift blame when things go wrong.

I don’t want to come across as defending the industry against all comers. There are unscrupulous reps who just want to rack up commissions. Last summer my parents, who were both turning age 80, were approached by an agent who wanted to sell them a bonus indexed annuity with a 16-year CDSC period sporting a 20% charge in year one. Luckily they had a son who could walk them through the product and show them the penalties for withdrawing early. Needless to say my parents did not make the purchase.

And I question whether this rule will really accomplish its stated goals. Firstly, it doesn’t look like index annuities will be affected very much by the new standard because again, they are not deemed securities.

Secondly it seems like the rule sets up a system whereby advisors will face penalties once improprieties are discovered, but it doesn’t necessarily prevent shady transactions from happening in the first place.   

And changing compensation methods is no silver bullet. A financial advisor told me he will make more money, over time, from ongoing fees than from an up-front commission. This point was made in the comments of the Investment News article noted above.  And in fee-based relationships there’s the danger of “reverse churning” (a new term for me), where the advisor simply sits on the assets, doing little or nothing to deserve the compensation. Years ago PaineWebber was fined for this type of thing. The bottom line is that there can be abuses on the fee-only front.

In closing, I will simply say that it’s pretty much certain the new fiduciary standard will put added pressure on the industry (and even be disruptive to it) while it is not clear that it will change advisor behavior for the better.