Demystifying the DOL Part 2: Key Decisions for the Advisor

DOL Fiduciary Rule Key Decisions for the AdvisorContinue to Sell Products for Qualified Assets?

At the highest level, financial advisors must decide whether the cost and effort of enhancing operations to accommodate all of the expectations of the DOL are such that it makes sense to remain in the business. Advisors who sell predominantly life insurance, LTC, or DI products with the occasional annuity sale may consider exiting the qualified fund business altogether. Although the legal liability is borne by the Financial Institution entering into the Best Interest Contract, the implications to the financial advisor may be considerable if the business practice must be altered substantially to continue to sell products for qualified funds.

Continue to Sell Qualified Assets for Variable Compensation?

The second consideration for an advisor is whether to accept variable compensation (i.e. commissions, marketing allowances, etc.) for the sale of annuities and mutual funds for qualified accounts. If the advisor alters his or her practice to accept a levelized compensation approach across asset classes and products, the impact of the DOL is minimized considerably, but there are a few cases in which it will still be necessary to operate under a “streamlined BIC” or “BIC Light.” The primary remaining impact is if the AUM fee differs for qualified assets rolled over from one account type to another with a higher cost for the targeted rollover account. An RIA that accepts new money “off the street” through a rollover into a qualified account will also have to execute a Best Interest Contract with that client to place the funds. Finally, if a client is being moved from commission-based accounts to a fee-based arrangement, a BIC must also be executed. In this instance, the advisor must provide a disclosure to the investor indicating that it is acting as a fiduciary and document the reason for the rollover recommendation.

Who Will Be My Distribution Partner?

Many impacted by this law are insurance agents who sell fixed and fixed indexed annuities but are not registered representatives. Many agents over the years have actually dropped the designation and the attendant oversight. As of the writing of this paper, there are 6 Independent Marketing Organizations (IMOs) that are seeking to become Financial Institutions. These institutions will have to employ significant tools and processes to the advisors with whom they are affiliated. The majority of BGAs and IMOs that remain in the fixed indexed business will affiliate with an independent broker-dealer to provide oversight. In this situation, it is most likely that the advisor will have to become a registered representative and submit to the compliance processes which will also be updated to incorporate BIC oversight. If an advisor wants to continue to sell indexed annuities, the selection of a partner is a critical choice.

The DOL Fiduciary Rule is also likely to have a major impact on the ability of an advisor to effectively retain multiple, independent distribution relationships. For many advisors, it is common practice to work with multiple BGAs and marketing organizations and to select one on the basis of factors such as underwriting expertise, service, case design support, and, yes, compensation. It is this latter selection that is verboten when it comes to selecting a distribution partner for support with an annuity sale. In addition, the relationship between an advisor and the Financial Institution is much tighter—by necessity for the Financial Institution—than current advisor and BGA/IMO relationships. The Financial Institution must have insight into communications/recommendations, needs analysis or financial plans, and other details of the day-to-day aspects of an application. The Financial Institution must also create fiduciary standards for operations by which the advisor must abide. For these reasons, the selection of a distribution partner in the form of a Financial Institution will be more like a marriage or a long-term relationship than the casual-dating approach currently employed by many advisors.

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