If advisors can't offer clients a full complement of annuities and other lifetime-income products, the much-discussed retirement crisis will only get worse. That's the position the Insured Retirement Institute is taking with likely only a few months before the Department of Labor issues the final version of its fiduciary proposal covering advisors working with clients planning for retirement.
The IRI is asking the Labor Department for some key changes that would explicitly permit the commission-based advisory model and allow firms to promote the proprietary retirement products that they develop in-house.
"We believe that our member companies should be able to sell their products, and as the rule is constructed today they would not be able to do that," Lee Covington, senior vice president and general counsel at the IRI, told reporters on a conference call.
The question of commissions has been a flashpoint in the debate over the DoL's fiduciary rule. The department says investor protection is needed to guard against conflicted advice. As the rule is currently written, commissions would be permitted, provided advisors sign a contract with clients stating that they will act in their best interest. Industry opponents, including the IRI, have countered that the so-called best interest contract exemption is unworkable as written.
"They have indicated that it was not their intent to ban commissions and they do not believe the rule does that," Covington says. However, he adds, every expert in the matter that IRI has consulted with has "indicated that the rules effectively ban commissions."
"So that's an area where we just have a disagreement," Covington says.
The IRI says its advocacy is based on the premise that Americans aren't saving enough for retirement and that access to high-quality financial advice is a social good.
But if the Labor Department's fiduciary proposal -- as written -- becomes the law of the land, critics have warned that advisors will abandon the retirement market in droves, opting to cut off service to lower-income savers and small businesses that are best served by a commission model.
"We want to be sure that professional financial advice is available. We know that good financial advice leads Americans to save more and to better prepare for retirement and to be more mindful in working with a financial professional to achieve their goals," says Cathy Weatherford, president and CEO of IRI. "Research shows that those that prepare for retirement with the help of a financial professional do have better savings habits. They exhibit sounder financial planning behavior and take better care of their retirement money than others."
Weatherford says that IRI members are already making contingency plans for how they will change their businesses should the fiduciary rule take effect.
Investor advocates and other supporters of the DoL's proposal counter that the threat to abandon the vast market of small-scale investors is a bluff from an industry that is simply trying to stave off a new regulation and preserve a business model fraught with conflicts of interest.
For IRI, the DoL's regulation hits close to home, threatening member companies' bread-and-butter product lines, according to Weatherford.
"I think it's widely known that insurance products, especially the variable annuity, are impacted by this rule," she says. "What we want is to be sure that we have access for savers to be able to have conversations, to be able to get to a financial professional, because this is about holistic retirement planning, and we think that because the lifetime income [is] needed by millions of Americans that we want to be sure that these products receive equal or better treatment in the reg."
Weatherford and Covington say they are encouraged by the receptiveness of DoL officials. They hold out hope that the final rule will modify the BIC exemption and clarify that while advisors must put clients' interests first, they "do not have to completely disregard legitimate business interests."
The Labor Department has maintained that it is interested in constructive feedback and is not taking aim at any one business model or industry segment. It remains to be seen, of course, whether the IRI and other industry groups will be satisfied with the final rule expected this spring. And if the DoL were to promote a final rule that the industry found palatable, it likely would be attacked by fiduciary advocates for caving to the Wall Street lobby.
For industry groups, there is a backup plan. Opponents of the fiduciary proposal fought unsuccessfully to include a rider blocking the fiduciary rule in the bill to fund the government Congress passed late last year. Now, a bipartisan group of lawmakers has introduced standalone legislation that would supplant the Labor Department's proposal with a more industry-friendly fiduciary standard that would still mandate that advice be in the client's best interest, but would allow more flexibility in how advisors and other financial professionals can operate in the retirement space.
The fate of those bills will hinge on how the Labor Department crafts its final rule, Covington predicts. "If they're addressed in the final rule, there won't be need for legislation."
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