Anticipated Commission Product Changes If DOL Fiduciary Rule Not Delayed
As you know, there is a great amount of uncertainty surrounding the rule. Based upon direction from the Trump administration, the DOL has proposed a 60-day delay to the April 10 applicability date of the rule to have more time to research issues raised in the President’s executive memo to review the rule. Realizing the short time frame the industry has before the April 10 applicability date and that a final decision may not be reached regarding delaying the rule, the DOL issued a field assistance bulletin saying they would not enforce the rule on April 10. And even if the decision were to ultimately not postpone the rule, the DOL indicates firms will have a reasonable amount of time after the decision to come into compliance with the Rule.
So though the prospects for a delay in the rule are likely, they are not guaranteed, and there is no certainty how long the delay would last. For this reason, we feel the time is right to brief you regarding plans contemplated for our commissionable business platform.
The most important tenet of the DOL rule impacting commissionable business is the requirement that compensation be level within product types. For example, all variable annuities need to pay the same upfront commission and trails, and all mutual funds need to pay the same upfront commission, trails and have identical breakpoints. The principle behind this requirement is that level compensation reduces the conflict of interest to select one product over another because of its compensation. While we certainly appreciate the principle behind the requirement, achieving level compensation is difficult because product manufacturers create products and share classes and set compensation; without their cooperation, achieving level compensation is impossible.
We have been fortunate that product sponsors for alternative products and variable annuities have worked together to develop new compensation standards for their products that achieve level compensation. These changes are generally being implemented industry-wide and applied to qualified and non-qualified business, and will advance regardless of what happens with the DOL rule.
Sponsors for other products, such as fixed index annuities (FIA) and fixed annuities, have done little to work together to present the industry a level compensation solution. Unfortunately, this likely means achieving level comp for these products if the rule advances would require us to place restrictions on the number of products and sponsors available for qualified accounts, limiting it to a smaller subset that provides identical compensation. Over time we believe the industry would work together to come up with a uniform compensation solution that would again allow us to expand our product shelf. Regardless of whether the rule advances, we anticipate regulatory scrutiny surrounding the supervision of FIA products to increase, making it more important that Field Marketing Organization (FMO) partners are able to meet requirements to assist us in efficiently supervising business.
Achieving level compensation within mutual funds is also presenting some distinct challenges. The industry’s current proposed solution for level compensation is a new class of shares generally called T-shares. The good news is these shares pay an identical compensation and have identical breakpoints from one sponsor to another. The bad news is that they typically do not provide for rights of accumulation or exchanges. So though they help comply with the level compensation requirement, some of their features are disadvantageous compared to other share classes. Because of this ambiguity, many fund sponsors have delayed launching their T-share to see what happens with the DOL rule. Should the DOL rule advance in its present form, we would likely be forced to adopt T-shares as the only approved share class for commissionable qualified account business at some point in the near future. Even a short delay of the DOL rule, however, would provide the industry more time to address some of the shortcomings of this proposed share class, and it is possible a better solution could arise to help firms achieve the level compensation requirement.
The above items illustrate many of the complexities surrounding the DOL rule and its impact on commissionable products. Over the next few weeks, some of the items surrounding these challenges will become clearer, and the best course of action will become more apparent. Still, with the effective date pending, we feel we must notify you at this time how we are thinking about these challenges and contemplating complying with level compensation requirements.
We realize the potential delay has caused a great deal of frustration throughout the industry due to the quickly approaching implementation date, and we know you are anxious to understand the new policies and procedures for a post-DOL world. We will provide definitive policies on these items if the rule ultimately advances and they become necessary.
If you have questions regarding the DOL Fiduciary rule, please send an email to AsktheDOLexpert@Ladenburg.com.