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How Annuity Compensation Will Change Under DOL Rule

The Department of Labor fiduciary rule was published more than four months ago, but analysts say broker/dealers and their advisors still don’t fully understand how the rule affects compensation. 

The rule allows commissions if they meet certain disclosures and the recommended investment product is in the client’s best interest.

But it isn’t quite that easy to put those words into practice and be in compliance, said Bradford P. Campbell, counsel at Drinker Biddle & Reath in Washington.

“I think what people read into that is ‘OK, well maybe we can still operate largely as we have been. We’re just going to have to jump through additional hoops to do so,’” he said. “That’s not the case. The BIC exemption does not preserve the status quo with additional conditions.”

Critics say the DOL is trying with its 1,023-page rule to force the industry to move from a commission-based model to a fee-based model.

Opponents filed three lawsuits, the first of which was scheduled to be heard Aug. 25 in the District of Columbia District Court.

“We’ll probably have some sort of court ruling, at least on that initial set of motions, in September,” Campbell said. “Throughout the fall, we’ll probably be learning more about where the litigation is going.”


Ways to Set Advisor Compensation

Broker/dealers have a couple of options for advisor compensation under the BIC, said Fred Reish, a partner with Drinker Biddle, calling it “the single most disruptive change” under the BIC.

The key word in the rule is “reasonable,” meaning that all compensation must be reasonable. It has many in the industry concerned about the potential for vagueness.

When it comes to the compensation paid to the broker/dealer by the insurance companies, mutual funds and others, Reish is unconcerned. In time, benchmarking standards will emerge to define reasonable compensation to broker/dealers, he said.

“I have a fairly high degree of confidence that that will work itself out more easily than people think,” Reish said, adding that although agents and advisors can still be paid by commission, that payment will fall under a new standard.

Instead, broker/dealers can opt for one of two compensation methods: charging a level fee or establishing a compensation structure based on “neutral factors.”

The latter option will permit more freedom of payment, but carries the potential for a class-action lawsuit against the broker/dealer if compensation isn’t done right, Reish said.

He recommended that broker/dealers hire a third-party consultant to do an analysis of service factors and create a fee structure based on those neutral factors.

Examples of “neutral factors” might include the complexity of the product, the amount of work involved, how long it takes to work with a customer and to explain the product, the advisor’s accreditation and other aspects.

“They have to be factors that are not based on the fact that you sold this product versus that product,” Reish explained. “They have to be factors that are neutral as to the product or the sale.”

The fee structure would apply to all products sold within a category.

There’s still risk in creating those compensation grids, Campbell said, even if done with an outside consultant.

“Your expert says that it should be two times the compensation for an annuity as it is for an indexed fund or a mutual fund because there’s more work,” Campbell said, citing a hypothetical case. “The plaintiff is going to have an expert that says, ‘Well, that’s great, but it really was 1.2 times. Let’s sue about it and find out who was right.’”

While the broker/dealer is allowed to accept variable compensation, the advisor must be agnostic with regard to products sold within a category, Reish said.


Speedy Schedule

Both Campbell and Reish are working with clients struggling to get into compliance with the fiduciary rule. The initial fiduciary rule mandates take effect April 10, 2017, with the remainder of the rule effective Jan. 1, 2018.

“They don’t even have enough time under the current time frame to get into compliance by April 10,” Reish said. “Therefore, they can’t wait to see what the outcome of the litigation or any of these other eventualities might be.”

The Aug. 25 hearing, on the National Association for Fixed Annuities v. Labor Department lawsuit, will be followed by a Sept. 21 court date on the Market Synergy lawsuit in Kansas District Court.

Three lawsuits filed by several plaintiffs in the U.S. District Court for the Northern District of Texas were consolidated by the court and will be heard on Nov. 17.

Opponents sought first and foremost to delay the rule implementation into the next administration. But even that strategy might prove ineffective.

Democratic nominee Hillary Clinton has said she will pick up the fiduciary rule fight without interruption.

As for her Republican opponent, “most of us don’t really know what Donald Trump thinks about this rule, if anything,” Campbell said.

The industry would happily accept any changes and concessions the Department of Labor is willing to make, Campbell said. But the realities are forcing companies into full-speed compliance mode.

“We have to prepare as if the rule that we’re going to have to comply with in April is essentially the rule we have now,” he said. “We have nine months now until compliance, and that’s just not enough time to change a ship of this size.”


InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. Follow him on Twitter @INNJohnH. John may be reached at [email protected].

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