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When ‘Best Interest’ Might Not Be Best for Consumers

The Department of Labor’s proposed fiduciary standard rule is likely to leave everyone at least a little unhappy, which often is the mark of a successful regulation in Washington, D.C. When the DOL proposed its rule, it did so as the regulator of private industry pension plans under the Employee Retirement Investment Security Act, better known as ERISA. By extension, it was dictating what kind of representative can deal with all qualified money, such as individual retirement accounts (IRAs), even though IRAs are not pension plans.

Opponents of the proposal on retirement fund care say the rule extends the federal administration’s reach into other jurisdictions, limits consumer access and disrupts a well-functioning system. Proponents of the rule argue that exemptions to the rule will undermine the goal of protecting consumers from unscrupulous salespeople.

For a bit of background from the DOL, the department’s Employee Benefits Security Administration (EBSA) issued the rule in April to:

Define who is a “fiduciary” of an employee benefit plan under the Employee Retirement Income Security Act of 1974 (ERISA) as a result of giving investment advice to a plan or its participants or beneficiaries. The proposal also applies to the definition of a “fiduciary” of a plan, including an individual retirement account (IRA), under Section 4975 of the Internal Revenue Code (Code).

If adopted, the proposal would treat persons who provide investment advice or recommendations to an employee benefit plan, plan fiduciary, plan participant or beneficiary, IRA, or IRA owner as fiduciaries in a wider array of advice relationships than the existing ERISA and Code regulations, which would be replaced.

The EBSA also proposed new exemptions and amendments to existing exemptions from the prohibited transaction rules applicable to fiduciaries under ERISA and the Code. If adopted, these proposals would allow certain broker/dealers, insurance agents and others who act as investment advice fiduciaries to continue to receive many common forms of compensation that otherwise would be prohibited as conflicts of interest. 

The proposed rule, and related exemptions, would increase consumer protection for plan sponsors, fiduciaries, participants, beneficiaries and IRA owners.

Of course, both sides disagree with their opponents’ position. Rule opponents say that without the exemptions, the ordinary Americans whom the rule is trying to protect will actually be harmed because advisors would refuse to take on low-net-worth clients. Proponents say that broker/dealers and insurance agents just want to be able to hustle high-commission products to the most vulnerable consumers without interference.

A main reason why the DOL called the proposal a “conflict of interest” rule is commissions. Some in the fee-only part of the fiduciary duty spectrum say that accepting commissions while giving financial product advice is “conflicted” because the advisor would be likely to recommend the highest-commission product without regard for the client’s best interest.

In fact, an internal White House email message from January that preceded the DOL’s proposal shows an extreme bias against commissions and the entire regulatory system overseeing the suitability standard, which is overseen by states and the Financial Industry Regulatory Authority (FINRA). 

The message was in an email from members of the White House’s Council of Economic Advisors to circulate its memo in support of the then-pending DOL rule. The message said that “consumer protections for investment advice in the retail and small plan markets are inadequate, and the current regulatory environment creates perverse incentives that ultimately cost savers billions of dollars a year.”

What are the “perverse” incentives? The message makes it clear that the White House advisors prefer the direction other nations have taken, namely, “banning conflicted payments (also known as commissions) entirely.” They added that parenthetical note in case people did not understand that they meant commissions.

Besides leading advisors to push clients to higher-commission products, commissions also encourage churning to yield more payouts for the seller, according to the memo. 

Of course, this position and the rule itself have been opposed by people covered by the suitability standard, but also by more neutral analysts who have taken the time to look at the evidence. 

Fitch Ratings issued an opinion on July 7 that said the rule would limit consumer access to advisors and add unnecessary complexity to compliance. 

“Limitations on commission structures could have a disproportionate impact on the sale or fee structures of investment and retirement products sold in the middle market, which generally tends to have more fee-sensitive customers,” Fitch said. “Effectively, the rules may encourage some brokers to adopt advice-for-fee models for their advisors as a means of compensating them for the compression (or elimination) of their commissions.”

Consumers would suffer, but sellers would lose in a number of ways. One of those ways is the vehicle of enforcement. It would not be the DOL enforcing the rules, but consumers themselves through lawsuits. 

That translates to lawyers looking for a big payday with massive litigation. Often it’s the lawyer who gets the big prize at the end of that process and the litigant who gets a small slice of the pie.

And who in the sales distribution channels are most affected by the rule? According to Fitch, it’s pretty much everybody, from insurance agents and broker/dealers on over to registered investment advisors (RIAs) already under the fiduciary standard. That’s because everybody will have to jump through more hoops to show that they are meeting the best-interest standard.

Typically, those hoops are made out of disclosure forms that nobody reads but that salespeople need to get signed and filed anyway. Anybody disagreeing with the nominal value of disclosure forms should think back to when they bought a house.

So, along with broker/dealers and RIAs, annuities and life insurance agents and companies would endure a significant impact.

“Annuity products, arguably viewed by some investors as costly relative to lower-priced products, could see fees pressured and/or commissions reduced under greater scrutiny,” according to the opinion. “Adding to the challenge is the complexity of annuities, with guarantees that are difficult to value. Obtaining affirmations from clients that all features of any complex product are understood could become more common, but also burden the sales process and hurt volumes.”

That explains how the rule would reduce sales but not why it matters. The lower-priced products typically don’t offer the kinds of guarantees that Americans need now. Where else but with an annuity would consumers get a reliable promise for an income they cannot outlive?

If they get a mutual fund, they are OK if they die the moment the last dollar is spent from the fund. The same goes for a certificate of deposit or any other financial product. 

Is that in the best interest of the client? Consumers are generally underestimating how long they will live. They are also not planning for their long-term care (LTC) needs. These two factors alone ensure that the wealth of millions of families will no longer go to the next generation but to the health care industry. 

When individuals and families run out of money for LTC, who pays? Taxpayers, of course. As much as some demagogues like to portray Americans as benefit-

sucking vampires, the truth is that we are a country built on self-sufficient individuals. Not only is public funding affected when people lose everything, but national pride suffers. 

The publisher of InsuranceNewsNet, Paul Feldman, teamed up with the former head of the National Association for Fixed Annuities, Kim O’Brien, to start a new organization to advocate for annuity access. The group is the Americans for Annuity Protection (AAP), and the DOL proposal is its main focus right now. 

AAP’s website,, has set up a service so advisors and others can find their representatives’ contact information and help in crafting a message to them. Visitors can also find access to a report that AAP commissioned from Jack Marrion, an annuity industry researcher. The report shows in detail the shaky foundation on which the DOL built its case for the rule.

Advisors and others in the industry have just a few more months to make their concerns known before the rule is formally adopted. After that, it is a matter of damage control. 

Steven A. Morelli is editor-in-chief for InsuranceNewsNet. He has more than 25 years of experience as a reporter and editor for newspapers, magazines and insurance periodicals. Steve may be reached at [email protected] Follow him on Twitter @INNSteveM. [email protected].

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