Despite DoL Delay, The Push For Higher Fiduciary Standard Gains Steam
February 15, 2018 by Rich Blake
Over the next year, a fierce debate will play out across the country. It will involve state and federal regulators, financial institutions and their lobbyists, as well as consumers and advocacy groups, all weighing in on a crucial question: What level of responsibility needs to be borne by dispensers of financial advice and services?
At the center of the debate is the Department of Labor, which is reviewing its fiduciary rule and most likely will float proposed revisions later this year. This still-to-be-hashed-out rule, particularly whether a “suitability” standard will be replaced by a “best interest” standard, could, like ERISA in the 1970s, reshape the advisory industry for generations to come. Whether this review period results in a softened, streamlined — or perhaps even emasculated — version of the rule remains to be seen. However, based upon actions taken by a range of industry players, there’s a growing indication that the bar is going higher.
In December, regulators in New York proposed inserting a best interest standard of care to the state’s annuity sales rules. A comment period surrounding this proposal — which could also eventually apply to life insurance products — will conclude in mid-February.
The National Association of Insurance Commissioners’ Annuity Suitability Working Group is in the midst of collecting feedback on whether to include a precisely defined best interest provision to its model rule. Thirty-nine states and the District of Columbia currently adhere to NAIC’s sales standard (suitability).
It’s not just the states and the Department of Labor wading into the fray. Later this year, the Securities and Exchange Commission is expected to propose its own version of a best interest standard governing variable annuities and other insurance offerings which contain securities. Such a move would, in turn, prompt the Financial Industry Regulatory Authority to change its rules, so as to be in lockstep with the SEC.
Meanwhile, some companies are staying ahead of the regulatory pace, voluntarily embracing a higher bar.
“Much like the rest of the industry, we spent enormous amounts of time and energy improving our client engagement process,” says Jack Kennedy, a MassMutual vice president who oversees the company’s strategy with respect to the Department of Labor fiduciary rule implementation.
The Springfield, Mass.-based mutual life insurance company spent nearly two years preparing for the onset of the rule change, which would have gone into effect this past summer had the White House not asked that its full implementation be delayed. Still, MassMutual saw no reason to change course.
Here’s a quick snapshot of how they’ve re-wired their approach.
Digital Experience
One of the biggest changes adopted by MassMutual is in the creation of a digital experience showing that the proper sequence of questions — taking stock of a client’s whole financial picture, not just one piece of it — have been addressed, thus setting the stage for a set of decisions that reflect the client’s priorities.
To both enhance its interactive engagement model, while also documenting a record of a client-first process, MassMutual works with a reflexive-technology tool, Rightbridge, to create a digital questionnaire aimed at capturing a client’s full financial picture.
“This is something that our advisors appreciate,” Kennedy explained. “Now they have a record that the process was done the right way. Change can be difficult, but really the upside is evident. Our people get it. This helps them do their job better.”
Driving the holistic approach and the need to codify it, says Kennedy, are twin “standard of care” objectives: First, to eliminate and mitigate conflicts of interest; and, additionally, to demonstrate that an ERISA-level “duty of loyalty” is applied. Streamlining the client interaction process dovetails with airtight compliance. For example, certain product conversations can’t be held unless certain thresholds are met, and this goes back to knowing the full picture. Thresholds can be reached if the right questions are asked. The new system ensures they do — and that there is a record of it.
Conflicting Standards?
“The amount of work necessary to implement a change in the standard of care is remarkable,” wrote the Association for Advanced Life Underwriting in commenting earlier this year on the NAIC Model Rule amendment proposal. “Not only must training materials be developed and thousands of producers trained and certified, but the infrastructure behind developing and processing applications must be redesigned and new compliance procedures developed and implemented.”
The AALU is asking for reconsideration of moving beyond the suitability standard, or for a longer transition period than the six-month window for change that was put forth the NAIC proposal. With the NAIC, DoL, SEC and FINRA all weighing in on the fiduciary rule, the prospects for conflicting standards are real, the AALU says.
The DoL fiduciary rule officially took effect in June 2017. However, in what amounts to an extended transition phase (through July 2019), the DoL adopted a temporary enforcement policy: it will not pursue claims against investment advisors who are “working diligently and in good faith to comply with the fiduciary duty rule and exemptions.” Or, put another way, the legal fiduciary standard, at least for now, is technically still set at impartial conduct. The debate over what constitutes a higher standard, and whether to aspire to it, rages on.
MassMutual’s Kennedy says his company’s move to a heightened standard reflects both the way regulatory winds are blowing but also an attitudinal shift among younger people who desire, indeed expect, customized services.
“Rolling out the tech tools helps with back-office considerations, but the more important result is that our reps are now that much more equipped to offer a unique consultation,” he says. “We think that is something everyone can get behind, no matter what the DoL ends up saying.”
