DOL fiduciary rule: How it affects the insurance industry

DOL Fiduciary Rule: How it affects the insurance industry

Presented by:Johan Joseph, Principal Melissa Dimitri, Director

© 2016 Grant Thornton LLP. All rights reserved. 2

Protect investors from conflicting financial advice1

2

3 Minimize disruption to industry practices

On April 8, 2016, the Department of Labor (DOL) issued a final rule expanding the definition of fiduciary investment advice for advisers to retirement plans, participants and beneficiaries. Objectives of the rule:

Increase transparency


…is about fiduciary obligations.• Advisors act in their clients' best interests

• No financial incentives that could create conflicts of interest

• Disclosures • Ensure customers are aware of their right

to all fee information• Written documentation that they are acting

in their clients' best interests

What is the new DOL fiduciary rule?The DOL rule…• Expands the definition of what constitutes

fiduciary investment advice• Covers all financial professionals offering

investment advice to retirement accounts• Precludes advisers from receiving payments

that create conflicts of interest, unless they fall under one of the exemptions outlined in the rule


What is the new DOL fiduciary rule?The DOL rule does not apply in certain circumstances… • When transactions are between independent

parties that have financial expertise• When advisers offer basic education

information and not specific, individualized advice

• When non-compensated advice is provided to employees of a fiduciary

• For valuation opinions provided for statutory requirements

• For providers of independent platforms that only act as plan aggregators

…and includes key exemptions.• Best interest contract exemption (BICE): In

cases when there is a need to offer protection from certain aspects of the brokerage model that could create conflicts

• Principal transaction exemption: In cases when financial advisers are also acting in the capacity of principals and are providing access to debt securities from their own inventory

• Level fee exemption: In cases when the fiduciary charges a fixed fee or a level fee based on a fixed percentage of assets under management


What are some implications of the current insurance infrastructure?

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2

Product offerings

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Business processes and controls

The rule affects:

Workforce training and accreditation

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Distribution channels


Product offerings

Commissioned retirement investment products, especially variable and indexed annuities, will be phased out in favor of fee-based products.

Insurers may start to emphasize financial planning services and managed accounts versus pure product sales.

Some insurance carriers and producers may cease selling investment products in favor of more traditional insurance products that are generally exempt under the rule.

Product manufacturers and distributors will look to level set fees and commissions across similar product types.


Distribution channels

Some FMOs are launching broker/dealers to gain financial institution status; others are partnering with broker/dealers to sell products under their umbrellas.

Many independent insurance producers sell products via field marketing organizations (FMOs), but FMOs were denied financial institution status in the rule, leaving them unable to sell most commissioned retirement investment products.

Roboadvisory platforms will grow due to their low cost and ability to provide objective investment advice. Some roboadvisers will need to be modified in order to comply with the rule as they only sell proprietary products and/or do not offer level fees.

Broker/dealers will need to carefully evaluate and potentially rationalize their distribution models to manage risk.


Workforce training and accreditation

Some producers may choose to become registered investment advisers to be better equipped to provide fiduciary advice. Others may leave the industry entirely.

Many insurance producers that sell retirement products are used to a suitability-only standard and may not have the background/education to provide fiduciary retirement advice.

Adviser compensation should be closely evaluated to ensure it is motivating the right behaviors while preserving income potential.

Insurance training programs will need to be revamped for the higher standard of care and should include all employees who could potentially interact with a client.


Business processes and

controls

Some emerging leading practices:• Standard frameworks for advice across the

organization• Prescribed data-gathering procedures for client service • Leveraging true level fees, objective roboadvisory

platforms• Technology tools/platforms with built-in fiduciary-

friendly features • Implementing a comprehensive HR strategy that

addresses hiring, fiduciary training and appropriate compensation models

Organizations should develop processes and controls that minimize the risk of potential conflicts of interest and/or inappropriate advice.


Timing is key

The issuance of the DOL’s final rule ushers in a new era of regulation and oversight in the world of retirement planning and advice. And the stakes are high if organizations can’t adapt quickly to this new paradigm.

• April 10, 2017: Rule becomes effective.

• Jan. 1, 2018: Full implementation of the BICE occurs.


Start preparing nowLeadership at all levels must understand the scope and magnitude of the changes to come. To adequately prepare, institutions should take the following steps:

Create and administer training courses for all personnel affected by

the rule.Stat to go here

[Icon here]Ensure technology platforms are DOL

compliant, and compatible with those

of your strategic partners and vendors.

Update policies, procedures and internal

controls to help manage risk.

Rationalize and optimize product

portfolios and distribution channels.


Help is hereContact these individuals for your DOL fiduciary rule needs:

Johan JosephPrincipalT +1 312 602 8618E [email protected]

Melissa DimitriDirectorT +1 312 602 8367E [email protected]

Deborah HowardManagerT +1 980 282 1993E [email protected]

Bill AheronDirectorT +1 704 632 3545E [email protected]

mailto:[email protected]





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DOL fiduciary rule: How it affects the insurance industry

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