Business Ethics and the New DOL Fiduciary Rule

For the better part of 40 years my mother was a pioneer in the insurance and investment profession in Maryland.  Three years ago, at the age of 75, she sold her business.  She agonized over who to sell it to as she placed a high value on her clients (which were cultivated over decades).  Her primary concern – that the new owner would treat them with the same concern for their best interests that she upheld for years.  Initially she was pleased with her choice of who to sell it to.  Then…well perhaps that’s why the new DOL fiduciary rule was enacted.

Let’s put it this way – within 3 months the buyer (a man much younger in age) began “churning” her former accounts claiming that in the interest of diversification he felt it best to sell substantial segments of (now his clients) their portfolios and replace it with funds that he deemed better.

My mother was furious.  His motive?  Create a new cash flow stream in order to make it easier to pay for the business he purchased.

With the new DOL Fiduciary Rule, investors will be able to sue their advisers if they believe their interests haven’t come first.

Was he acting in his client’s best interests or his own?

The new DOL fiduciary rule is aimed at stopping actions just like those shared above. The concept is that the new DOL Fiduciary Rule will stop advisers from putting their own interests in earning high commissions and fees over their clients’ best interests.

Thousands of insurance, brokerage and advisory firms will, under the new DOL fiduciary rule, have to adjust their operations and processes/procedures to meet a host of new compliance rules.  The impact is that the investment advisory landscape will change.  For example, one insurance client I am consulting with has elected to actively sell no more of a group of products recognizing that the risk is not worth the reward or potential for penalties.  I suspect they will not the be the only ones making similar decisions.

Those who are “independent broker-dealers” are the group that faces the greatest disruption.  Not only with they have to face changes in how they are paid, but there will be a whole host of new administrative changes and training that will be required estimated to costs millions.

The Past vs. the Future…

While some past actions are still allowed (sort of) TRANSPARENCY is king!  The DOL doesn’t ban commissions or revenue sharing, but it does require investment advisors who accept them to disclose it to their client, have the client sign a best interest contract exemption (called a BICE).  In addition, transparency requires that the client be informed about the advisors fees and any conflicts of interest they may have.

In the past it was common for advisors to push high commission load mutual funds or annuities.  Obviously they were in the advisors best interest (not saying they were bad for the client).  In the future however the advisor will have to meet the following standards with the signed BICE:

• Attempt to act in their best interest.
• Disclose all potential conflicts of interest.
• Provide a detailed breakdown of their collected commission.

The facts of the new DOL fiduciary rule is that the ground rules have changed tilted in the favor of the investor vs. the investment advisor.

In a recent article the following summarized the impact of the new DOL fiduciary rule.

“What consumers crave is transparency,” said Mitch Caplan, CEO of Jefferson National, whose variable annuity business already is sold in the fee-based space. “This rule puts the consumer in the driver’s seat.”