Fiduciary Standard Refuses to Die; Should You Modify Your Sales Practices in 2018?
Many in the financial-services industry assumed that the election of Donald Trump as president in November 2016 would spell the end of the Department of Labor’s recently enacted Fiduciary Rule. And in part, they were right, since the agency has put important parts of the standard on hold until July 2019.
Despite this, the movement toward a uniform fiduciary standard apparently continues along three fronts: state securities departments, the Securities and Exchange Commission (SEC), and state insurance commissioners. Whether these efforts reinforce each other or produce a uniform standard is anyone’s guess. But it’s becoming clear that putting client interests first is becoming a core financial-services sales practice that may be difficult to water down. If you are an insurance agent or securities broker, 2018 may be the year to adopt a fiduciary orientation even though you aren’t legally required to do so.
One impetus for this is a movement among state securities administrations to require broker-dealers to uphold a fiduciary standard when recommending investment products. States such as Nevada took this position after they saw the federal government back away from the DOL standard after years of rule making. In April 2017, the Nevada securities department passed a law that expanded which financial professionals will be held to a fiduciary standard. Before April, only so-called “financial planners” were.
After the bill was enacted, broker-dealers and registered investment advisors were subject to the standard, as well. Nevada joined four other states that now require broker-dealers to operate as fiduciaries (through case law, not statute). These include California, Missouri, South Carolina, and South Dakota. An additional three states are currently developing fiduciary rules: New York, New Jersey, and Massachusetts.
The second impetus is that the SEC has announced it will be developing its own fiduciary standard, which may harmonize with the rule revision in process at the Department of Labor. This rule will not be confined to investment advisors in the retirement marketplace. It presumably will cover any entity providing investment advice and products in all contexts, not just retirement.
The third impetus is underway at the National Association of Insurance Commissioners, which guides individual insurance departments on the development of insurance statues. Its Life Insurance and Annuities Committee is now working on revising its Suitability in Annuity Transactions Model Regulation. One potential addition will be adding a best-interest standard to all agents selling annuities.
The current annuity suitability model law was approved in 2010 and is now in effect in 39 states and the District of Columbia. However, after members of the Annuity Suitability Working Group learned that President Trump intended to delay implementation of the DOL’s fiduciary rule, it decided to add a best-interests component to the annuity model law.
Broadly speaking, this would require life insurance agents to verify that the annuities they sell meet the needs of their clients. Based on language now being considered, they would have to “at the time the annuity is issued (act) with reasonable diligence, care, skill, and prudence in a manner that puts the interest of the consumer first and foremost.”
The draft rule revision would not require agents to sell annuities with the lowest possible commissions or the highest possible stated interest rates. However, it would prohibit agents from receiving “more than reasonable cash compensation. In a potentially explosive move, the measure will require agents to disclose their annuity commissions if they exceed a three percent threshold.
As these regulatory strands wind together over the coming year, how should financial professionals respond? Conservatively, says the National Ethics Association, sponsor of EOforLess. Even if you don’t sell annuities or other retirement products, it’s advisable to comply with the DOL’s best-interest standard, which went into effect this year. This involves always:
• Giving one’s clients advice that serves their best interests.
• Charging only “reasonable” compensation.
• Never making misleading statements.
Keeping your client’s best interests in mind at all times not only should keep you out of regulatory hot water in 2018, it should also help you to avoid damaging E&O insurance disputes. Bottom line: until the DOL, SEC, and state securities and insurance administrators determine their respective fiduciary postures, make sure your sales practices always align with the interests of your clients. As long as you’re sitting on the same side of the table as your customers, you should be fine wherever the regulators land.