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The DOL Fiduciary Rule is Here; Now What for Advisors and Insurers

If you invest in variable or fixed annuities, you will see some changes in the commission costs soon. That’s due to the Department of Labor’s new fiduciary rule that will begin taking effect over the coming months.

The investment advisors who sell the products and the insurance companies that employ them are all on alert about how much of an effect, or difference will make.

 · The need for the rule

 The thought behind the rule is that many advisors have promoted products with high commissions knowing full well that the product may not be needed by the client. This has especially been the case for annuity products, which are notorious for being complex for the average client. The rule is hoped to discourage advisors from pushing these high commissioned, products, and promote products that will best suit their client’s news, not just supply the advisor with high commissions.

That’s great for the client, but for advisors, it may lead to less money for them, and less money for the companies they work for. The chief of enforcement for Finra, the securities industry watchdog, has noted that variable annuities are complex and expensive products that are routinely pitched to vulnerable investors as a key component of their retirement planning.

Over the past few years, Finra has stepped in when clients were charged on an annual basis for holdings that would have been free of the trade costs.

For example, in 2005, Finra fined Morgan Stanley a reported $1.5 million and ordered it to pay $4.6 million in restitution to clients to make up for inadequately supervising its fee-based brokerage business.

Two years later Finra fined Wachovia Securities $2 million for a similar violation. Baird, SunTrust and Raymond James were also dinged by Finra for poor oversight of their clients’ fee accounts. So there was a need for the rule. Annuities are offered as variable or fixed in a client’s retirement account.

Generally, variable annuities charge explicit fees, while fixed annuities tend to embed their costs in the interest rate or income payout amount, according to Fidelity Investments. Under the new rule, advisors are expected to scale back their offerings of variable annuities, which can have high upfront commissions.

Annuity providers are expected to find ways to deliver products that meet both client needs and the new DOL standards. Some advisers are thinking about changing their account minimums, presenting new investment solutions to their clients, or transitioning appropriate clients from brokerage to advisory under the rule.

 · Choices for Advisors

What is clear is that if you provide advice pertaining to retirement savings, qualified plans, IRAs or IRA rollovers, this issue will affect you, and you will likely need help.

According to a study called “The Economics of Change,” the majority of advisers surveyed currently recommend annuity products in retirement accounts — nearly two-thirds use variable annuities, and two-thirds also claimed to use fixed annuities — products that, due to cost and complexity, will be thrown into flux in the coming years.

While researching the choices advisors have under the rule, I found the following from Think Advisor.

They can serve as a fiduciary under the Employee Retirement Income Security Act (ERISA) without conflicts. While serving as an ERISA fiduciary is the more restrictive of the two options, it is also the clearest as to what is allowed and what is not. I predict that many advisors will take this more conservative route.

The advisor can serve as an ERISA fiduciary with conflicts under the Best Interests Contract Exemption (BICE).

The contract exemption, while allowing advisors to make relatively minimal changes to their existing business model, comes with many uncertainties. Questions such as what is “reasonable” compensation, what fees must be disclosed and how, and what other forms of payment must be disclosed will be debated by every financial institution. I suspect many of the answers to these questions will not be known until the lawsuits are filed after the next bear market.

 · The Insurers

Among the affected companies are MetLife (NYSE:MET), AIG (NYSE: AIG) and Prudential Financial (NYSE: PRU).

In December 2015, those companies were among those in the annuity industry that authored an opinion editorial, claiming the DOL’s proposed rule would have a “potentially devastating impact” on Americans’ access to annuity products, particularly for low and middle-income earners.

The sum includes a $20 million fine and $5 million to be paid to customers for “negligent” misrepresentation and omissions, according to Finra. It has among those who have been increasing scrutiny of variable annuities, which can combine securities investments with guaranteed income, an arrangement that may generate attractive fees for insurers.

 · In Conclusion

Now, variable annuities and fixed indexed annuities have lost their coveted exemption. Advisors and insurers are now subject to the requirements of BICE. Compliance risks come into play, which means litigation could come into play. That should be considered if you decide to invest in a distributor of annuities.

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