National Association of Insurance and Financial Advisors

Financial Advisors Say DOL Rule Would Reduce Access to Advice and Harm Client Relationships

NAIFA members concerned ‘best-interest contracts’ required under rule would confuse clients

A survey by the National Association of Insurance and Financial Advisors (NAIFA) found that a majority of insurance and financial advisors are concerned that the Department of Labor’s proposed “investment advice fiduciary rule” will harm advisor-client relationships, interfere with advisors’ ability to serve retirement investors and increase costs.
Under the proposal, advisors receiving commissions, revenue-sharing and other third-party compensation would be required to sign complicated and confusing “best interest contracts” with clients before making any recommendations.
According to the survey, two-thirds of advisors said they anticipate that the proposed rule would result in their losing clients because they believe clients would be intimidated or unwilling to sign the contracts required under the proposal, and because the burdensome data retention and disclosure requirements  would make it impossible for advisors to affordably serve small or medium-size accounts.
More than six out of 10 respondents (61 percent) said the contract requirement is likely to harm their relationships with existing clients. Some 35 percent said the harm done to those relationships would be “significant.” Only 4 percent of respondents said the contracts would improve relationships with existing clients, while 36 percent said either the contract will have no effect on relationships or they are not sure.

“Requiring a person to sign a contract while you are asking them to open up to you about their financial situation would be very disruptive for some clients,” said NAIFA President Juli McNeely. “They may not understand why they need to sign something just to have a conversation, especially if this is a person you’ve been working with for years. More paperwork does not always mean more peace of mind.”

DOL rule would impact small businesses’ ability to serve clients with minimum account balances
Nearly 87 percent of advisors who responded to the survey said they anticipate that implementation of the DOL rule would result in higher errors and omissions insurance premiums for their practices. Of those, 58 percent said they expect E&O premiums to increase “substantially.” The rule would increase liability for advisors by requiring them to enter into legal contracts with clients and opening them to lawsuits in both state and federal courts. Only 4 percent of respondents said they do not believe the DOL rule will result in increased E&O costs, while 9 percent are not sure.
The exemption would also require an annual disclosure document for each client detailing all transactions, fees and expenses, and the advisor’s direct and indirect compensation. On top of that, financial institutions would have to maintain and update web sites that show the total costs of all investments available to retirement account holders.
“Increased paperwork and electronic disclosures equal increased costs, and this would be particularly burdensome for smaller firms with limited resources,” McNeely said. “Add to that the increased liability and the potential for advisors to be sued in both state and federal courts and many may have no choice but to shift their business to wealthier clients who can afford higher fees or to leave the retirement space altogether.”
Increasing costs and contractual obligations are likely to impact advisors’ relationships with existing clients. Currently, only 26 percent of respondents require clients to maintain minimum account balances. Some 46 percent of those who currently impose no account minimums said they would likely do so, should the DOL rule go into effect, and 41 percent said they are not sure. Of this group, 21 percent said they would require minimums of $100,000 or more.
The Rule Would Limit Advice on Annuities
The DOL favors monthly lifetime income projections for plan participants (as does NAIFA) yet, ironically,  the proposed DOL fiduciary rule would make it much more difficult for consumers to receive advice on the purchase of annuities.  Annuities are the only product that can guarantee a lifetime income.  If enacted, the proposal would create different rules and conditions for various types of annuities and for various types of plans (IRAs/401(k)/DB plans).  For some annuities, the definition of "commission" would be changed.  At a time when the SEC and FINRA seek to reduce customer confusion, the DOL rule would do the opposite.
The 1,111 NAIFA members who responded to the survey provide a number of important retirement planning products for their clients. Respondents each complete an average of 153 fixed annuity sales, 627 variable annuity sales, 3,895 401(k) plan rollovers and 3,235 IRA rollovers in a year. 
  • Posted June 23, 2015 IN
  • Comments (4)

Shane W
Being in the industry for 25+ years, holding a AEP, CLU, LUTCF, LTCP, and several other designations, and having over $2B AUM under management, trading stocks, bonds, ETF's, many other investment options including commission loaded mutual funds, I do hold myself out as a Financial Advisor and Accredited Estate Planner Professional and do not consider myself a "bum" or a "con man." Although, I do agree there are some in the industry who may not "always do the right thing" they are far and few between and normally get found out. I have met hundreds of quality professional ethical advisors, insurance agents and professionals including wall street stock traders in this industry. Every industry has a few who do not uphold ethics or professional standards, but even with that, I do not agree we need additional regulation. I report to several oversight compliance bodies now, not to mention management, broker dealers, insurance companies and industry organizations i belong like NAIFA, EPC, FPA, FSP, GAMMA, MDRT and a list of I do not support more regulation by the DOL, as they have no understanding of the investment and insurance world professionally and would prefer they stay focused on areas they should monitor, labor issues, and not our industry.
6/24/2015 3:56:36 PM
Bob Quinlan
Ryan, Frank is right, stockbrokers are not "advisors." I do not know what wealth managers you interned at, but in my 26 years in this business, I have only seen a couple of non honest advisors and they were not members of NAIFA. That is why I belong to NAIFA and have met hundreds of the very best advisors in our industry and if more "brokers" would join NAIFA they would understand what a true advisor is.

Also, the DOL rule is not just about signing 1 more piece of paper for an annuity. That is only 1 small piece of it and it would be very harmful to the average middle American saving for retirement as they need it now more than ever from qualified advisors and not stockbrokers.
6/24/2015 12:00:15 PM
"More than six out of 10 respondents (61 percent) said the contract requirement is likely to harm their relationships with existing clients. Some 35 percent said the harm done to those relationships would be “significant.” Only 4 percent of respondents said the contracts would improve relationships with existing clients..."

Do you know how much paperwork a client needs to sign for the average annuity contract? Its farcical to think one additional signature will be the straw that breaks the Camel's back. Early in my career I interned at several wealth managers, the 4% of respondents who replied that the extra disclosures would improve client relations sounds about right. I met very few honest brokers in the industry.

The industry is long overdue to clear the bums and the con men out!!
6/24/2015 9:51:49 AM
Frank Delgado
Don't call stockbrokers "advisors." Please follow the proper industry term.
6/24/2015 9:15:37 AM