Who Pays For Aging?

The New Road To Client Access, Communication & Compensation

How advisors are impacted by the DOL fiduciary rule

By Ken Leibow

Mr. Leibow is Senior Vice President of Impact Technologies Group, Inc. His career spans 30 years, with an extensive background in distribution technology and back office systems. Visit impact-tech.com.

What impact have advisors experienced since the transition period started for the DOL Fiduciary Rule? What we know today is that insurance companies and brokerage firms have already implemented changes because of the DOL Fiduciary Rule.

These changes affect how an advisor approaches a client, how an Advisor is compensated, and how an Advisor records the repeatable process.

Overview of the DOL Fiduciary Rule as of Today

In simple terms, Department or Labor (DOL) Fiduciary Rule expands fiduciaries to advisors who offer advice and recommendations on retirement plans and IRAs for a fee or other compensation. In some instances, investment clients may be advised to shift their retirement savings from one fund to another, or rollover investments between a 401(k), IRA, Roth IRA, or another investment vehicle.

An advisor “fiduciary” may have to justify their recommendations by showing the investment strategy is in the best interest of their client especially if the recommendation results in a higher fee or cost structure. The other side of the DOL Fiduciary Rule is the advisor’s compensation.

Reasonable compensation is permitted, however a Best of Interest Compensation Exemption (BICE) is established to help the advisor avoid litigation down the road as it pertains to the recommendations to their client. This will result in the client and advisor signing a Best of Interest Contract (BIC).

On June 9, 2017, the transition period for the new Department of Labor fiduciary rules began. “The reality is as a plan advisor, if you have a conflict related to either proprietary product, forms of compensation, or limitations of access to products that you offer your clients, you need to be affirmatively disclosing those conflicts to your client now,” said Andrew Besheer, a project leader for Broadridge’s DOL Fiduciary Rule Solutions program, during a webinar hosted by the firm (source BenefitsPro).

The full implementation of the DOL Fiduciary Rule must be completed by January 1, 2018. The Department of Labor is accepting feedback during the rest of 2017 from Advisors, Broker Dealers, Fund Firms and other participants in the qualified plan recommendation process. This could result in relaxing or tweaking some of the enforcement mechanisms and compensation rules. Fundamentally implementation of the rule as interpreted today is already in progress.

New Approach with Clients

Advisors must be more transparent on product fees and compensation. Will the client have more trust and confidence with his/her Advisor? Being more transparent may strengthen a new relationship between the Advisor and his/her client, however a client who has a long history with their financial advisor already assumes their Advisor is looking out for the client’s best interest and acting as fiduciary.

If you sell proprietary products, you don’t have to mention competitor products even if they have lower fees. Higher fee products like a Variable Annuity for an IRA can still be recommended to a client if you can demonstrate it is in their best interest. If you work for a big wire house for example, you may be required to push smaller accounts out because of costs to comply with the new rule. The client may then gravitate to a robo-advisor.

There will be additional paperwork that will involve your client. In the case where you are required to do a Best of Interest Contract, you must explain the BIC to your client and get a signature. As a broker who is now acting as a fiduciary working with a 401(k) plan, you may approach your investment options differently to the plan sponsor (employer) focused on Best Interest not just suitability.

Not everything will change when engaging with clients because there are things not covered in the DOL Fiduciary rule. It’s not considered financial advice if a client calls a financial advisor and requests a specific product or investment. An Advisor can provide education to clients, such as general investment advice based on a person’s age or income. Taxable transactional accounts or accounts funded with after-tax dollars are not considered retirement plans, even if the funds are personally earmarked for retirement savings.

Compensation Changes

Advisors will see changes in their compensation with the DOL Fiduciary Rule. Some companies will be moving away from commissions and compensation, and moving toward a flat-fee based model. A flat fee might be a subscription or an upfront payment. An asset under management model, in which the client might be charged one percent each year on all investment assets held with the advisor could be implemented by companies and brokerage firms.

Even though Advisors must change the way they approach clients, there are new “automated” tools for financial advisors and insurance agents that have been implemented ... to streamline the process

As mentioned above, the rule states that all fees and commissions must be reasonable. There isn’t a lot of clarity around the term “reasonable compensation”, however the advisor’s compensation will most likely be changing on qualified plans recommended including annuities using qualified money. Fiduciaries will be required to comply with Impartial Conduct Standard.

This includes providing advice which is in the best interests of their clients. Advisors must avoid making any misleading statement. As I have already stated several times above, advisors cannot charge more than reasonable compensation for services. As per a NAIFA Survey in April 2017, “The rule is already having an impact on advisors’ compensation.

The survey found that 43 percent of advisors have experienced reductions in the commission compensation arrangements, while an additional 49 percent expect reductions. One of NAIFA’s major concerns about the DOL rule is that it would force financial institutions to switch clients from commission-based to fee-based accounts for those clients to remain financially viable.

Approximately 77 percent of advisors said that more than half of their retirement planning clients would see increased costs if they had to switch from commission-based to fee-based accounts. Of those advisors, 41 percent said that more than 80 percent of their clients would see increased costs if forced to switch.” (Source – NAIFA.org). Bottom line compensation or other incentives by firms and leading with a specific product that may pay a higher commission will no longer be permitted or be available to Advisors.

New Automated Processes

Even though Advisors must change the way they approach clients, there are new “automated” tools for financial advisors and insurance agents that have been implemented by insurance companies and brokerage firms to streamline the process. In many cases the advisor starts from their Client Relationship Management System (CRM) and then launching into a product recommendation tool like Impact’s® PlanFacts, https://shop.planfacts.com/, which assesses the client’s financial profile and the answers provided by the client in an automated risk questionnaire (a repeatable, and documented process).

This assessment is analyzed in a rules engine containing the rules supplied and approved by the compliance department of an insurance company or broker dealer. The product recommendation is included in the PlanFacts financial planning report presented to the client by the advisor.

This goes from beyond suitability to best interest of the client, which results in a product type, like a Variable Annuity for example, to be recommended. Locking down the recommendation and keeping a permanent record along with the BIC document is part of the automated process enforcing the “Best Interest of the Client” as defined in the DOL Fiduciary Rule as well as being prepared to make available the evidentiary process and documentation in the future as needed. Once the product type for the best interest of the client has been established, then specific product comparison and quoting could be the next integrated step in the process.

Staying with the example of a Variable Annuity recommended, then a seamless integrated pathway to an automated Annuity Order Entry (AOE) Platform such as Ebix’s AnnuityNet, Insurance Technologies’ FireLight or iPipeline’s Affirm for Annuities for submitting the annuity application as the next step in the process. The AOE includes a compliance workflow at the Broker Dealer.

The data and forms are then transferred electronically to the insurance carrier by first passing through the Deposit Trust Clearing Corporation’s (DTCC) hub. DTCC transmits the annuity application and initial premium information from the distributor such as a Broker Dealer to the insurance carrier. The DTCC service provides an efficient, straight-through process for validating, formatting and submitting annuity applications and initial premium payments while incorporating same-day money settlement.

Here we are in the transition period of the new DOL Fiduciary Rule; and financial advisors, brokers and insurance agents are already experiencing a lot of change. Some of the changes for Advisors has been significant in the way they approach clients especially because of increased compliance costs. In many cases, Advisor’s compensation has taken a negative hit while there is more work involved in learning new processes. The final chapter of the DOL Fiduciary Rule has not been written yet, however we will learn about changes as we get closer to January 2018 and then adjust our course accordingly. ◊