Wednesday, February 24, 2016

Dept of Labor Stepping Up to Fiduciary Responsibility for Retirement Advisers

Fiduciary Duty for Senior Investor Advisers

February 2016 update -
Proposed rule:  Labor Department proposes to hold retirement investment advisers to a fiduciary standard, forcing them to avoid conflicts of interest that include sales based on commission and sales performance compensation.  

Assuming the rule is added to the law books, variable annuity issuers will likely find themselves shifting from paying out upfront commissions (around 8%) to returns on investor paid on-going fees. The rule would affect large insurance companies such as MetLife, Prudential, and Lincoln National; smaller brokerages and advisers are similarly impacted. Industry wide concerns are the entire variable annuity retirement savings sector will be thrown into flux for the first year. Sales of variable based annuities have been close to $140 billion per year recently. More than half of these sales are attributed to retirement savings accounts.

Experts indicate variable annuities with guaranteed lifetime benefits are extremely complicated products and should be sold with caution. In recent years, high commissions on variable annuity investments have pushed advisers and insurance agents to sell the products even where the annuity may not be best suited for the investor. The result - regulators are issuing consumer advisories and taking increased regulation under their wing.  

Members of the financial industry threaten legal challenge once the final rule is in place. The change is huge for the annuity industry and some sellers may avoid the products going forward because of lower upfront compensation. Many advisers believe upfront commissions should remain the standard for variable annuities because most of the adviser work is done in the beginning when establishing the account. Others cite, the restrictions create an imbalance and disservice to consumers who benefit from annuities; and that the industry is already highly regulated.

The proposed rule by the Department of Labor is designed to reduce conflicts of interest by requiring brokers working with retirement funds to act in the client’s best interest. Retirement vehicles with annual fees of 3-4% and a surrender charge of 7% (or more) is too often recommended as the best retirement vehicle; and often results is retirees who own high-fee products that erode retirement savings.  

With the proposed rule back on the table and likely to pass, brokers and insurance agents will be pressed to update conflict of interest policies and procedures.  FINRA focus on senior and vulnerable investors has increased over the past years. In 2016 FINRA plans to make treatment of senior investors a priority and urges firms to monitor investor accounts for red flags like; overly aggressive investments, unusual asset movements, and an unusual number of high cost products driving unsuitable recommendations.

April 2015 FINRA launched a Securities Helpline for Seniors (HELPS) and a toll-free number where senior investors can call and get assistance about their brokerage accounts or raise concerns. Armed with information from over 2500 calls, FINRA released an end of year report on effective practices brokers  and investors can take to establish a healthy working relationship that provides for the best interests of the investor as well as a suitable role for the broker.

What do you think? Are these updates way overdue or right on time?

RND Resources Inc is a compliance and audit consulting firm serving broker-dealers, investment advisory firms, and fund managers.  We provide on-going compliance maintenance for firms as well as; #forensicanalysis, #mockaudits, #expertwitnesstestimony, suitability analysis, and custody compliance for securities regulated firms. Call #RNDResourcesInc for support (818) 657-0288 or visit our website at

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