Think Advisor (April 25, 2024) - By Allison Bell

Seth Friedman, who once distributed annuities himself, is wondering how the Labor Department’s new final retirement investment fiduciary definition regulation will actually affect the flow of cash through the annuity distribution ecosystem.

The Investment Company Institute is still going through the 466-page regulation packet.

A group that represents investors’ lawyers is happy.

Many groups in the life insurance and annuity sector are furious that the department is disrupting the mechanisms they use to provide retirement planning products and advice at a time when tens of millions of U.S. workers have no retirement savings at all.

The Labor Department set off a wave of reactions by completing work on its fourth effort to expand efforts to regulate people and companies that help retirement savers make investment decisions.

The department has used the retirement investment advice fiduciary definition to apply Employee Retirement Income Security Act fiduciary requirements on anyone who regularly provides investment recommendations for people who are using 401(k) plan accounts, individual retirement accounts or similar arrangements to build their nest eggs.

Department officials say they are able to set broad standards because ERISA gives them strong authority to regulate the assets accumulated in accounts that benefit from federal retirement savings tax incentives.

Here’s a sampling of reactions to the final rules. The comments and statements have been edited for length.

Practitioners

Seth Friedman, a former annuity wholesaler and owner of AdvisorSquawk.com:

No one whom I have spoken with believes this regulation will cut [annuity industry] fees, unless this perspective is based on the advisor and their affiliated insurance agency forgoing commission as a result. If that’s the case, I suspect the industry will react by increasing interest rates on multi-year guaranteed annuities and participation rates on fixed indexed annuity products.

This regulation will likely be revenue-neutral for annuity providers with one exception: Both insurance companies and broker-dealers will likely end up having to add personnel in their compliance departments to address outcomes brought by these new rules. Aside from that point of view, the rest of what occurs is up in the air.

One unknown effect of the regulation is how this issue will impact errors and omissions coverage for all related entities. Clearly, these costs are going to increase for all parties as a result of the enhanced regulatory risk.

Finally, the broker-dealer industry is very adept at squeezing the last dollar out of any opportunity. These firms are likely to seek enhanced revenue-sharing funds as a result of commission being left on the table.

Annuities are frequently referenced as being sold rather than bought by a given client. Once this regulation goes live, I suspect there will be a lot of focus on how the funds that were previously used to pay commission are allocated.

Jack Elder, senior vice president of advanced markets at CBS Brokerage: 

Many Americans are financially unprepared for retirement, with the retirement gap in the trillions. Yet, the DOL’s Fiduciary Rule 3.0 would disproportionately impact savers in lower-income brackets by limiting consumer choice.

The rule classifies commissions as “junk fees” in favor of a fiduciary-only model.

This one-size-fits-all approach may make it harder for advisors to provide some clients with comprehensive financial advice. Moreover, the rule unnecessarily overlaps established federal and state consumer protections.

Howard Sharfman, senior managing director at NFP Insurance Solutions:

Some companies will not want that fiduciary liability. The industry will shrink.

I believe in regulation, but this is too much.

Organizations

Eric Pan, CEO of the Investment Company Institute:

ICI is reviewing the DOL’s final rule, bearing in mind the concerns we raised that it may raise costs and interfere with middle-class savers’ access to the guidance, products and innovative tools they rely on to meet their retirement goals.

We have always strongly supported the principle that financial professionals should act in their clients’ best interests when offering personalized recommendations, as the SEC’s Regulation Best Interest for broker-dealers already requires.

We will examine the rule in detail to see how the DOL has responded to the hundreds of comment letters it received providing detailed public input on the proposal.

Supporters

Micah Hauptman, director of investor protection at the Consumer Federation of America:

Financial professionals, including most prominently insurance professionals, consistently characterize themselves as in relationships of trust and confidence with their customers who rely on their advice.

These financial professionals’ business models shouldn’t be structured to bilk those customers out of a secure and independent retirement, then evade accountability for those actions.

We expect industry opponents who don’t want to or aren’t capable of competing for customers based on the cost and quality of their services will try to defeat these landmark rules in both Congress and the courts, as they did the last time the DOL attempted to strengthen protections for retirement savers. This time, however, the industry opponents’ efforts will not be successful.

David Lau, CEO of DPL Financial Partners, a web-based platform for commission-free annuities:

Investment recommendations for retirement savings need to meet a fiduciary standard — this should be self-evident and inarguable. Retirement is a critical and vulnerable financial time for most Americans, and they need to be confident that their financial advisor is giving them the best advice for their circumstances.

We applaud the Department of Labor’s Retirement Security Rule as an important step toward ensuring that retirement investment advice is delivered in a fiduciary manner. The rule adds a critical layer of definition and transparency, which will provide retirement investors with assurance they are receiving advice in their best interest and an understanding of how the person making a retirement investment recommendation is being compensated.

We strongly believe this rule will increase the availability of fiduciary retirement advice and solutions. Oftentimes, regulation can spur market innovation.

Over the past several years, insurance carriers have been bringing commission-free products to market for fiduciary advisors to use with their clients at the same time as advisors increasingly embrace fee-based compensation models and fiduciary commitments; this rule will only accelerate that innovation and transition.

Annuities are critically important financial tools for retirement savers tasked with funding retirements that can span 30 years or more. But a non-fiduciary sales approach has tarnished their reputation and limited adoption.

The insurance industry has lagged behind the larger trend: Most of financial services has moved away from commissions to fee-based, fiduciary models, and it is only a matter of time before consumers demand that insurance does the same.

The Retirement Security Rule reflects common-sense best practices. It is time for the industry to put consumers first by aligning with modern compensation models and transparent business approaches.

This rule is a win for retirement investors who need advice they can trust. In the short term, it will protect investors from the impacts of conflicted advice. In the long term, it will reduce consumer skepticism and engender trust, which will instill consumer confidence in these important products.

Joseph Peiffer, president of the Public Investors Advocate Bar Association:

The newly finalized DOL rule, which imposes a fiduciary duty on advisors, ensures that they will have to put their clients’ financial interests ahead of their own. It’s not a minor issue. Conflicted advice costs Americans billions of dollars a year. This rule will finally put a stop to that.

We’re going to be hearing from Wall Street and the insurance industry that the sky is falling and that their businesses are in jeopardy. That couldn’t be farther from the truth. Financial advisors are not going to go extinct.

In fact, advisors already benefit from the widespread public perception that it’s their job to act in their clients’ best interests. Frankly, it’s an insult to the intelligence of hard-working Americans when advisors claim their jobs are threatened by the prospect of providing the unconflicted advice they know their clients already expect.

PIABA strongly urges Congress to reject the inevitable industry efforts to block this rule to perpetuate its multibillion-dollar cash grab from unsuspecting families.