Four Impacts of the DOL Fiduciary Rule

On June 9, 2017, the Department of Labor implemented its Fiduciary Rule. The Rule expands the “investment advice fiduciary” definition under the Employee Retirement Income Security Act of 1974 (ERISA). The DOL’s definition of a fiduciary requires advisors to act in the best interests of their clients and to put their clients’ interests above their own. Prior to the rule, financial agents such as brokers, planners and insurance agents were only subject to the standard of suitability and not considered fiduciaries.

The distinction lies in the fact that suitability requires only investment recommendations that are needed to meet a client’s goals, not necessarily recommendations that are in the client’s best interest. Since “fiduciary” has been expanded to include anyone who gives advice regarding retirement plans, the affected financial agents will now be held to a stricter standard. The new rule goes into effect on January 1, 2018 and is expected to have a significant impact on agents as well as consumers.

It is essential for financial professionals in Baltimore to understand the scope of this rule and how it affects their industry. The Baltimore fiduciary litigation attorneys of the Heyman Law Firm can provide strategic guidance regarding the DOL Fiduciary Rule and how to effectively comply with it. To discuss how our attorneys may be able to provide guidance, please call (410) 305-9287.

The DOL Fiduciary Rule’s Effects on Business

1. Commission and BICE

Many financial professionals who work on commission, such as brokers and insurance agents, were previously held only to the standard of suitability. Now that they are considered fiduciaries under the DOL Rule, they are still able to work on commission, but with additional requirements. Those working on commission now need to provide their clients with a Best Interest Contract Exemption (BICE) in situations where a conflict of interest could potentially exist. This contract guarantees that the agent will work in the client’s best interest, even if those interests conflict with those of the agent. The DOL has provided guidelines for agents regarding how commission structures can be implemented under the BICE.

2. Annuity Providers

An annuity is an insurance contract that insures against you living too long. In return for a lump sum, an annuity provider will give you an annual income for the rest of your life. With the implementation of the DOL Rule, annuity providers now have to consider whether their product is a practical choice for their client. A provider is now required to contemplate the client’s particular goals and whether the client’s expected life and likelihood of staying with the product make the annuity justified. The DOL has stipulated a list of considerations a provider must have an understanding of in order to assess the prudence of a particular annuity. These include the scope of any downside risk, the insurer’s authority to revise terms and charges over the life of the investment, and the specific methodology used to compute the index-linked interest rate, among several others. Between these additional burdens and the BICE for commission-based services, the annuity market may experience substantial changes.

3. Insurance Only Providers

Insurance-only providers might be tempted to think that they are not affected by the rule, but there are implications for them as well. Though the DOL language is vague as it relates to some aspects of the insurance industry, it appears that the DOL will consider insurance agents fiduciaries if the insurance product relates to the investment needs of their client. If insurers are selling annuities, they should be prepared to comply with the rule and conform to the standard applied to fiduciaries. Advice as to the purchase of health, disability and term life insurance policies to provide benefits to plan participants or IRA owners if the policies do not have an investment component are not considered fiduciary investment advice under the ruling.

Overall, the DOL rule is expected to have at least some effect on all financial advisors, with those who work on commission feeling the most impact. The higher level of accountability will likely mean additional costs to comply with the regulations imposed on fiduciaries. In fact, some large brokerage operations have already sold that aspect of their business in anticipation of lost commission revenue and additional costs.

The DOL Fiduciary Rule’s Effects on Consumers

Despite the fact that the new rule requires financial agents to act in their clients’ best interest, consumers still have significant concerns.

4. Orphaned Investment Accounts

The Insured Retirement Institute (IRI), a trade association whose members include insurance companies, asset managers and brokerage firms, tens of thousands of “orphaned” investment accounts have already been reported since the announcement of the Rule. These accounts are no longer being overseen or serviced by an adviser, possibly due to the above-mentioned increased costs and new accountability procedures imposed on agents. The IRI expects this number to grow dramatically as the implementation of the rule proceeds. The American Council of Life Insurers also reported to the DOL that the new rule is hampering consumers’ access to annuities.

Work with Experienced Business Litigation Attorneys in Baltimore

The implementation of the DOL Fiduciary Rule is expected to have a significant impact on financial professionals in the Baltimore area. These new regulations can be confusing and it’s important to check in with an experienced business litigation attorney to ensure that you’re in compliance. The Baltimore bustiness litigation attorneys of the Heyman Law Firm can provide trusted, strategic representation and guidance to business professionals in Baltimore. To schedule a confidential consultation, please call us today at (410) 305-9287.