OK, maybe I was dreaming that this was actually an Aretha Franklin song.
In an era where regulatory changes happen at the speed of the wind here in Chicago, there is a new ruling with the potential impact of knocking down buildings. What am I talking about?
First, let’s find out how a fiduciary is actually defined.
Under the Department of Labor (DOL) and specifically ERISA (Employee Retirement Income Security Act) a fiduciary is defined as someone who acts prudently and solely in the interest of the plan's participants and beneficiaries, prohibits self-dealing, and provides judicial remedies when violations of these standards cause harm to plans.
What we are talking about today is the new Department of Labor (DOL) Fiduciary Standard for Insurance Advisors. As of this writing, this new ruling has been passed along to the Office of Management and Budget for further review. The expectation is that the ruling will be announced sometime in the first half of this year with some sort of scaled implementation that would occur over the next 12 to 18 months.
As it stands right now, the rule allows for one of two paths for advisors to sell annuities into qualified plans or IRAs.
- The advisor acts under the existing ERISA rule. In this instance the payment of commissions would not be allowed. Under ERISA an advisor is only allowed to charge a percentage of assets under management, a flat fee, or an hourly rate.
- The advisor acts under the BIC (Best Interests Contract). While this Exemption is still undergoing definition, it will require a type of contract, prior to the sale with the client, where the advisor discloses the commission with a statement that the recommendation is not biased in any way. It also requires that the commission is “reasonable”.
For carriers, the impact is that under the first rule, products will need to be developed that follow the fee-based structure.
In the second rule, there might be a requirement for a new set of disclosure documents as well as a look at how commissions are defined as “reasonable” or not.
Does that mean that upfront commissions of 7% for many indexed annuities are now going to be changed?
Will it mean that carriers will have to review trailing commissions as a better means of compensation for their advisors?
What impacts will changes in compensation mean for caps, participation rates, spreads, etc.?
Additionally, what does this mean for surrender charges for annuities? Will 10-year surrender charges change significantly under this ruling? What happens to 14-year surrender charges?
How do these product changes impact the carrier’s ability to illustrate the product, administer the products, and keep records of what advisors are following which of the two rules?
Whew, all of these questions have my head spinning. I think I’ll sit down and listen to my favorite Aretha songs focused on insurance…
Fiduciary (Sock it to me)
Chain of Evidence
…and of course…
(You Make Me Feel) like a Natural Sales Person