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Designed to Fail? An Update on the DOL Regulation

usdepartmentoflaborOn September 23rd, InvestmentNews published an article titled “DOL fiduciary rule to cost the securities industry $11B by 2020: study” with most of the cost borne by independent broker-dealers.

While recently speaking with a large independent broker-dealer, they shared with us that they have allocated 7,000 hours of information technology (IT) work for 2017 to implement the new DOL guidelines. At a very conservative $100/hr, that’s $700,000.

Who’s going to pay for that? We’re also hearing that because of the new DOL regulations, E&O insurance will increase 8-10% next year, plus there will be additional fees for IT implementation with one broker-dealer thinking of an additional $250 IT compliance charge per representative.

Even forgetting the additional paperwork to process fixed indexed annuities after DOL implementation, “reasonable” compensation hasn’t been addressed but it certainly means that it will not be increasing. So, registered representatives and broker-dealers will not be happy.

What about non-registered producers not affiliated with a broker-dealer or registered investment advisor? They may be able to still sell fixed indexed annuities if they fall under the jurisdiction of a Financial Institution (FI). Some organizations have filed for FI status but there are no set guidelines in determining what qualifies as a FI and no time frame for approval. Plus, we haven’t seen E&O coverage availability for FI status. And, since the FI is taking on significant risk for a non-registered producer selling these products, compensation will be split in some way. So, non registered producers will not be happy.

What about the carriers? If they do nothing, they may lose significant qualified business. Can they afford to do nothing? We don’t think so. They will at the very least have to retool products and procedures at significant cost perhaps just to maintain existing sales levels. So, carriers will not be happy.

What about consumers? The initial fear before the new DOL regulation is implemented would be that middle class America would not get the advice they desperately need as it may be unprofitable for advisers to give that advice in the future. State Farm just announced that all their registered representatives will need to give up their securities licenses and that customers, if they need investment advice will be able to call an 800#, receive information (not advice), so the customer can then make their own investment decision. What will other distributors do in the future? Will they follow the State Farm lead and cut out investment advice to their customers? Customers will not be happy.

Maybe the federal government is smarter than we think. Maybe this new DOL regulation was designed to fail. The federal government has been seeking to wrest control of fixed indexed annuities away from state insurance regulators and wanting them under federal control. This battle has gone on for years and just a few days ago, an Illinois appellate court panel ruled that fixed indexed annuities are insurance and not securities products under state law. And you thought this issue was resolved years ago?

Maybe, just maybe, if a regulation goes into effect that seemingly upsets just about all constituencies, there will be such clamor for change that true change may come – complete Federal regulation of fixed indexed annuities as well as all qualified funds, or simply one’s retirement money.

About Mike Gorlick

President & CEO, Zenith Marketing Group, Inc.

One comment on “Designed to Fail? An Update on the DOL Regulation

  1. The destruction of the capitalistic system and of the middle class is approaching chaotic levels. If this government doesn’t change it’s ways I fear a backlash by the public. I personally will advocate that when a client calls me for advice on their I.R.A’s or any retirement questions I will tell them that I am prohibited from giving them an opinion because a rule called the fiduciary rule puts me at great risk for just an opinion. I will then give them a letter addressed to their congressman or their representative that says they cannot get advice from their financial advisor because of this rule. Lets fight fire with fire. This country did not become great by being silent.

    Frank A. Ammirato ChFC,CLU E.A.

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