Insurance firms can qualify for an exemption to recently heightened fiduciary standards for financial advisers, the US Labor Department clarified late last week.
The agency made 13 technical changes to the rule, which applies to investment advice standards for retirement accounts. One of these changes deleted six words disputed by the insurance industry, which didn’t clarify whether insurance firms could use the best-interest contract exemption.
Under the provision, financial advisers are given some autonomy in how they charge for their services. To qualify, they must sign a legally binding contract that requires them to act in the best interests of their clients.
The rule, released in April, originally defined an insurance firm as a financial institution as long as the state requires an annual audit of its reserves “by an independent firm of actuaries “independent actuary. The changes delete those words because many states do not require that insurers use independent actuaries, the Labor Department said.
“Our intent was to enable insurance companies to use the exemption,” a DOL official told Investment News.
Several insurance trade groups have opposed the new rule, arguing that it would make it harder and more expensive for average Americans to get savings advice on retirement planning.
The industry-funded website ProtectMyRetirementChoices.org says those with lower asset levels would be forced to use “robo-advisors” rather than brokers, and cites a similar rule in the UK that allegedly meant 310,000 investors lost access to personal advice.
The group is backed by the American Council of Life Insurers, the National Association of Insurance and Financial Advisors and other stakeholders.
Elsewhere, industry professionals say the heightened standards could cause shrinking in the market for professional liability for retirement brokers.
“Any time you have new, stricter laws that require higher standards of duty and care, it can cause some to exit the market and certainly cause carriers who provide these products to have more scrutiny with the agents who are selling these products,” said Roxanne Westfall, vice president of professional lines with Golden Bear Insurance Company. “I anticipate a closer review of the business coming in, beginning with the underwriting department.”
Westfall urges agents working with retirement advisors to educate themselves and their clients on the new rule, and pay attention to any further developments on the Federal Register.
“I think it’s very important to make sure broker-dealers fully understand the requirements under the DOL law, and to make sure they have the materials and knowledge to be compliant,” she said. “You also need to make sure the insured’s clients understand the pros and cons of the retirement coverage so they can make careful decisions.”
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