DOL Summary on Proposed New Regs

[DHK]

http://www.dol.gov/protectyoursavings/FactSheetCOI.pdf

A few points on this:

This is what they care about most:

A system where firms can benefit from backdoor
payments and hidden fees often buried in fine print
if they talk responsible Americans into buying bad
retirement investments—with high costs and low
returns—instead of recommending quality investments
isn’t fair.

In short, if you have a "backdoor revenue enhancement" available to you for recommending asset allocation into Franklin Templeton vs American Funds (as an example), then you have a conflict of interest.

At least that's how I read it.

I never really liked that aspect of the B/D business with having "preferred partners", so we were to recommend their funds & Variable Annuities where we can because the FIRM received "kickbacks" and whatever else.

For me personally, back when I was securities licensed, I used to use Thomson InvestmentView to look up fund symbols and compare MPT metrics and costs to help me measure recommendations... not "backdoor revenue enhancements".

Require more retirement investment advisers to
put their client’s best interest first, by expanding
the types of retirement investment advice
covered by fiduciary protections. Today large
loopholes in the definition of retirement investment
advice under outdated DOL rules expose many
middle-class families, and especially IRA owners,
to advice that may not be in their best interest.
Under DOL’s proposed definition, any individual
receiving compensation for providing advice
that is individualized or specifically directed to a
particular plan sponsor (e.g., an employer with a
retirement plan), plan participant, or IRA owner for
consideration in making a retirement investment
decision is a fiduciary. Such decisions can include,
but are not limited to, what assets to purchase or sell
and whether to rollover from an employer-based plan
to an IRA. The fiduciary can be a broker, registered
investment adviser, insurance agent, or other type
of adviser (together referred to as “advisers” here).
Some of these advisers are subject to federal
securities laws and some are not. Being a fiduciary
simply means that the adviser must provide impartial
advice in their client’s best interest and cannot
accept any payments creating conflicts of interest
unless they qualify for an exemption intended to
assure that the customer is adequately protected.
DOL’s regulatory impact analysis estimates that the
rule and related exemptions would save investors
over $40 billion over ten years, even if one focuses
on just one subset of transactions that have been
the most studied. The real savings from this proposal
are likely much larger as conflicts and their effects
are both pervasive and well hidden.

If this passes... then EVERYONE providing retirement advice... is a fiduciary, period.

For me, if I have a perceived conflict of interest, it is simply in the compensation arrangement of fixed indexed annuities. As long as the recommendation fits in the client's overall situation (and the client likes it), it won't be an issue.

I wonder what kinds of disclosures that non-RIA affiliated agents will have to disclose under the new fiduciary rule?

Preserve access to retirement education.
The Department’s proposal carefully carves
out education from the definition of retirement
investment advice so that advisers and plan
sponsors can continue to provide general education
on retirement saving across employment-based
plans and IRAs without triggering fiduciary duties.
As an example, education could consist of general
information about the mix of assets (e.g., stocks and
bonds) an average person should have based on
their age, income, and other circumstances, while
avoiding suggesting specific stocks, bonds, or funds
that should constitute that mix. This carve-out is
similar to previously issued guidance to minimize
the compliance burden on firms, but clarifies that
references to specific investments would constitute
advice subject to a fiduciary duty.

This does hammer home the point that a non-securities licensed person can provide general education without giving specific recommendations. We've mentioned this point many times on the forum.

Warrants that the firm has adopted policies and
procedures designed to mitigate conflicts of
interest. Specifically, the firm must warrant that
it has identified material conflicts of interest and
compensation structures that would encourage
individual advisers to make recommendations
that are not in clients’ best interests and has
adopted measures to mitigate any harmful impact
on savers from those conflicts of interest. Under
the exemption, advisers will be able to continue
receiving common types of compensation.

Interesting.

Clearly and prominently discloses any conflicts of
interest, like hidden fees often buried in the fine
print or backdoor payments, that might prevent
the adviser from providing advice in the client’s
best interest. The contract must also direct the
customer to a webpage disclosing the compensation
arrangements entered into by the adviser and firm
and make customers aware of their right to complete
information on the fees charged.

I'm curious as to how this will play out.



For me, I see all this as more of an attack on the broker/dealer business model over anything else, based on what I'm reading here.

 

[Glassesdude]

So how will this effect an insurance agent who isn't securities licensed?

 

[scagnt83]

So how will this effect an insurance agent who isn't securities licensed?

The only possible way it might is if you are transferring funds out of a 401k or Pension. But there is still a loophole built in to where you just get them to sign a disclosure that there is a possible conflict of interest.

There are some small changes with this, especially for BDs & RIAs. But at the end of the day it is just more of the same with some extra paperwork that the client will most likely never bother reading.

 

[DHK]

In short, all licensed professionals will be considered fiduciaries... within your product lines and licensing.

To me, this means that you'll need to have a documented process that shows how your recommendations are appropriate for your client and put them into a better position.

In addition, you may need to have a non-RIA disclosure of any conflicts of interest you may have, but we'll need to "wait and see" on that one.

In short - more paperwork and documentation.

 

[scagnt83]

In short, all licensed professionals will be considered fiduciaries... within your product lines and licensing.

To me, this means that you'll need to have a documented process that shows how your recommendations are appropriate for your client and put them into a better position.

In addition, you may need to have a non-RIA disclosure of any conflicts of interest you may have, but we'll need to "wait and see" on that one.

In short - more paperwork and documentation.

That is only partially correct.

First, this only applies to IRAs and other Qualified Retirement Plans.

Second.
The new regs contain an "Education Exemption". Meaning that you can "educate" them on their options without being considered a Fiduciary. So it is the same grey line that we walk when transferring securities over to an annuity. Only now it would apply to all IRA transactions.

Third.
If you do want to give specific recommendations you can enter into a BICE (Best Interest Contract Exemption). This basically says that the Advisor agrees to act in the best interest of the client. It also says that the Advisor has taken steps within their practice to mitigate conflicts of interest and disclose any conflicts of interest to the client.
Disclosing a conflict of interest would be along the lines of if you showed them 2 annuities, you would also disclose the comp or at least the difference in comp between the two products.

By entering into a BICE, the Advisor can still give specific recommendations and have a variable compensation structure from client to client.

 

[DHK]

ProducersWeb - Retirement - The proposed DOL fiduciary rule: Can someone help me out here?

John Olsen, CLU, ChFC AEP has reviewed the original DOL proposal and has highlighted various areas and given his own annotated notes.

To view a pdf of the rule with annotations by the author, click here.