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New Exemptions May Make DOL Rule Easier to Stomach

by Precise Leads

July 19, 2017

Will two pending DOL exemptions lessen its future impact on FAs and other sellers of fixed indexed annuities?

Financial advisors and fixed indexed annuity (FIA) sellers now await a final decision by the Department of Labor (DOL) regarding exemptions for the sale of FIAs. In particular, the DOL is currently soliciting comments on two exceptions to the recently instituted fiduciary rule that could have a significant impact — the Best Interest Contract Exemption (BICE) and Prohibited Transaction Exemption 84-24, or PTE 84-24.

Although the DOL’s fiduciary rule went into effect on June 9th, the agency allowed a transition period until January 1, 2018 for BICE and PTE 84-24 implementation while it gathered input from industry stakeholders on those exemptions. The comment period ends July 21st.

Currently, FIAs and variable annuities fall under the BICE standard, which mandates an advisor or agent serve as a fiduciary by avoiding conflicts of interests when selling a financial product like annuities to a client. An advisor must disclose his or her compensation (and whether it is reasonable) and refrain from making any misleading statements. BICE also requires a signed contract between the advisor and client — a provision some industry observers believe might lead to expensive litigation.

Annuity advocates would prefer FIAs shifted to what they consider the less stringent PTE 84-24 rule. And they may find a willing partner in a Trump administration amenable to striking down burdensome regulations. President Trump previously ordered a review of the impact of the fiduciary rule on the marketplace. “We’re still looking forward to working with the new (DOL) team and rolling up our sleeves,” Judi Carsrud, Government Affairs Director for the National Association of Insurance and Financial Advisors, told InsuranceNewsNet.com.

The Status of IMOs

Also to be decided is the status of independent marketing organizations (IMOs) and field marketing organizations (FMOs) responsible for the bulk of FIA sales. IMOs contract with insurers to distribute FIAs, and then recruit independent insurance agents to sell the products.

The BICE rule, as now written, permits only financial institutions such as banks, broker-dealers, insurers, and registered investment advisors (RIAs) to oversee the sale of FIAs and variable annuities. Most IMOs fail to classify as financial institutions because they don’t meet annuity contract premium thresholds.

Carsrud explained the DOL can either place FIAs under the PTE 84-24 provision, or craft a fix so IMOs will be able to continue selling the product. Another solution would be to change the definition of a financial institution, she added.

Some industry professionals contend during the transition period, IMOs and FMOs may be allowed to conduct FIA sales. “My understanding from the department is during this period they don’t plan to put IMOs and FMOs out of business,” Michael P. Kreps, Principal at Groom Law Group, said during a recent webinar sponsored by the Insured Retirement Institute. “They want to give them a path, so the BICE is the path.” However, he added a ruling on whether marketing organizations can serve as financial institutions is “unlikely to be finalized in the near future.”

Facilitating FIA Sales

A recent survey by Aite Group, “DOL Fiduciary Rule: Survey on Financial Advisor Sentiment,” uncovered several “pain points” advisors are experiencing as the DOL takes effect. The hurdles mainly involve increased documentation, expanded client data collection, and questions about compensation.

New tech engines may ease those challenges and enable advisors and agents comply with the new DOL fiduciary standard. Recently, Beacon Annuity Solutions, the software and analytics arm of Beacon Research, launched AnnuityNexus. Building upon a 20-year database of fixed annuity research, AnnuityNexus furnishes agents with historical and comparative data so they can document their recommendations were made in the best interest of the client. Other data platforms, including Envestnet, eMoney Advisor, Riskalyze, RiXtrema, AssetMark and fi360, have either spun out or improved their annuity research tools.

In other instances, insurers have reconfigured their fixed indexed annuity offerings to satisfy the fiduciary requirement. Voya Financial, Pacific Life, Allianz Life, and Lincoln Financial have all debuted fee-based FIAs in recent months. Fee-based investment products are viewed as more compliant with the DOL rule since commission-based sales are subject to BICE.

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