Full implementation of The Department of Labor’s (DOL) Fiduciary Rule is on the verge of being delayed yet again—from January 2018 to July 2019 – and this begs two obvious questions.
Is the proposed delay — recently submitted by the DOL to the Office of Management and Budget — good or bad? And does this likely action, expected to lead to a softening of the rule, mean it was ultimately much ado about very little?
The answer on both accounts is that it depends. Specifically, it hinges on what kind of annuity shopper you are. If you do your homework, shop around, ask questions and embrace a bit of skepticism, the rule means little. On the other hand, if you do little or no homework and are on the gullible side, the delay and its implications is a bad thing.
Most important, all prospective annuity shoppers should comparison shop with preferably three brokers, at least one of which should be an independent. If you do this, the Fiduciary Rule is probably of only marginal benefit.
Some background is in order. The Fiduciary Rule means that all advisors to retirement investors must give advice in the best interest of the investor, not their own. They must also charge reasonable compensation and make no misleading statements, and they must sign a contract with the client for each retirement account over which the planner is offering advice.
Registered investment advisors (RIAs) already had to act in a fiduciary regard. Under the new rule, all investment professionals — brokers, planners and insurance agents, as well as RIAs — are also now held to the fiduciary standard when making financial recommendations for retirement accounts. Before implementation of the rule, some insurance agents, for example, commonly misrepresented and wantonly sold fixed indexed annuities (FIAs) to retirees solely because they pay among the highest commissions.
What is being delayed repeatedly is the penalty aspect of the Fiduciary Rule – per the contract requirement, the ability to sue the broker if he or she doesn’t abide by the new rules.
The idea behind the delay is too simplify and streamline the rule. It’s not as simple as this, however. The Labor Department is considering loosening restrictions on types of transactions prohibited under the rule. Annuities, for example, could become exempt. In particular, that would be problematic regarding the sale of popular FIAs – high-commission products prone to exaggeration.
This, in particular, is why shopping around is so important…FIAs are popular because they pay more when the markets rise and insulate owners from losses in bad markets. They can do this because they only pay a percentage of market gains, sometimes a small one, and buyers are not always told this.
The good news is that the Fiduciary Rule has attracted a lot of media attention. As a result, many potential new clients are now aware of what it means to be a fiduciary and, more important, are increasingly demanding a higher standard of care. Many now will work only with fiduciaries. This means financial services providers are increasingly under pressure to uphold the fiduciary standard or face repercussions, regardless of what happens to the Fiduciary Rule.
There is, after all, a lot of pressure to follow the money.
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