There's been much conversation since the 2016 presidential election about whether the Department of Labor’s fiduciary rule will be abolished or remained active for possible adoption in April of 2017. It’s a valid concern given, the administration changes underway in Washington, D.C.
Politics aside, we continue to hear from clients that the intention behind the new rule — to protect the investing public — is a positive step, and one that is likely to come to fruition in some form.
Looking closely, very few pieces of legislation have had as significant an impact on the insurance and finance industry as the DOL fiduciary rule, released on April 6, 2016. The rule expands the definition of an investment advice fiduciary under the Employee Retirement Income Security Act (ERISA) of 1974. When the rule takes effect next year, it will require all who provide retirement investment advice to abide by a fiduciary standard. That means advisors and IRAs will be legally bound to put their clients’ best interest before their own benefit.
The rule also adjusts the available exemptions, and introduces a new level of disclosure for insurers, distributors and other parties engaged in the sales and service of retirement products.
Few take issue with the overarching goals of the rule. These include:
- Preventing conflicts of interest in retirement advice; and
- Protecting, educating and empowering retirement investors as they make retirement savings choices.
The latter is a cornerstone principle of our industry. However, complying with the legislation is no easy task due to the scope of information that needs to be shared, the new policies and practices that distribution organizations must develop, and the varying product structures that have evolved over the past 50 years in our industry.
In addition, the complicated technical environment that can exist today, at all levels of the industry, presents many significant challenges to the development and deployment of the solution needed to meet the rule requirements.
So while exemptions to the rule like the Best Interest Contract (BICE) permit firms to continue to rely on current compensation or fee practices, the rule's specific conditions for financial organizations, like disclosing fee and expense information, will require a combination of revised standards, updated technology and unprecedented information sharing.
Having the right technology in place to facilitate the flow of information is essential in this transition. The new ruling will dramatically change how insurers and their distribution partners approach sharing data and information. The distribution community will be most impacted by the rule, and there are multiple exemptions requiring different data sets that they will need to have to support education, acquisition and ongoing service to their customers. Insurers’ technology will be impacted. Those organizations that anticipated the changes and proactively prepared to help their distributors comply will be well placed when the rule takes effect.
Sophisticated technology can help these organizations comply with the rule while also fostering innovation.
Keep reading for five steps that firms can take to ensure they’re in good standing well in advance of the 2017 and 2018 fiduciary rule compliance deadlines.
The rule is all about moving large amounts of data from carriers to distributors for disclosure to investors. (Photo: iStock)
No. 5: Address data issues now.
In essence, the fiduciary rule requires distributors to be transparent about expenses and costs when they provide product suggestions to their investors. The rule is specific — requiring disclosure of fees and expenses along with other product and policy level data. Clean data allows for the best possible result so reviewing the basic information available, ensuring accuracy of that data and developing the tools to extract and send the data are critical. Once carriers identify all the pieces of information they need to extract from their platforms, they need to consider how to present that information. Support for data exchange must consider transforming that data into different distribution models. Finally, the means of delivering the data are wide and varied. Delivery through file, fact sheets, web and mobile services should be anticipated. It’s essential that carriers are proficient at sharing information across multiple entities.
Financial institutions must disclose information to meet the rule requirements. (Photo: iStock)
No. 4: Understand the importance of industry standardization.
Over the past year, industry groups, carriers, financial institutions, distributors and solutions vendors have collaborated to create a standard industry solution enabling the sharing of information between carriers and distributors. The industry went with this approach because it uses existing channels like the DTCC — a cooperative and objective organization — to drive standardization. It’s an automated strategy that integrates easily with distribution platforms. It also requires less effort to implement, and it can be achieved at a reasonable cost. Carriers using a standardized format not only save on costs, but boost service satisfaction, are able to more accurately control and manage information and also increase the speed of delivery to multiple distribution partners.
Effective communication is key to compliance. (Photo: iStock)
No. 3: Determine the best ways to get information out to consumers.
It’s crucial for carriers to provide financial institutions with the right information so they can in turn disclose it to customers. Many organizations have immature means bordering on antiquated processes that they utilize to reach out to customers and it’s now imperative to leverage modern technology to optimize communications. These companies need to take a simplistic approach to examining communications. They need to look at the ways the organization gets messages to customers – and distributors’ customers. They need to be proactive and include the right level of communication for the right customer communication.
Many carriers operate with large, expansive platforms and surround systems around those platforms. (Photo: iStock)
Tech Solution No. 2: Explore and consider investing in new technologies.
Because of their complex environments, many carriers find it challenging to collect pertinent information. Technology can help by applying certain rules. Building a business rules facility can help organizations understand when they need to make changes in how they distribute data, rather than having to code each service to do it for them.
Tech Solution No. 1: Partner with the right organization.
It’s essential for financial organizations to choose a technology partner with extensive domain expertise. A provider should bring a deep understanding of the financial services market space and the rule. This expertise, combined with technology modernization and transformation experience, make for a superior solution.
Our counsel for clients is that until some definitive news, amendment or cessation of the fiduciary rule emerges, their MO should be full steam ahead as outlined above.
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