You may have heard there is a Department of Labor (DOL) proposal in the works that could change insurance agents’ responsibilities. Under this proposed ruling, the true winner could be the independent agents and brokers. Why? The proposal favors fiduciary practices where brokers or agents offer the best products and NOT one-size-fits-all high commission products. What is a fiduciary? A fiduciary is a legal duty to act solely in another party’s best interests. Parties owing this duty are called fiduciaries. The individuals to whom they owe a duty are called principals. Why is this important? It holds the fiduciary legally responsible for upholding clients’ needs and wishes before profits, personal motives or conflicts of interests.
All insurance agents should closely watch the unfolding of this DOL ruling because it could potentially impact your level of responsibility. Currently, insurance agents and advisors operate under the “suitability standard,” which allows insurance agents to ensure the investment is suitable for the client at the time of the investment1. Under the DOL proposal insurance agents who deal in retirement products could be held to higher standard with fiduciary legal obligation. Meaning, when you present your retirement plan to your clients you MUST disclose any conflict of interests such as, if you only offer/contract with Product A, but Product B would actually be a better way to invest. As part of the potential change of responsibility, you would operate with total transparency. You would have to reveal what your agency earns, your commission, and any fees the client would be paying.
How would this affect your bottom line? Under this ruling, acting as a fiduciary insurance agent it is possible you would surrender your commissions and move to a fee-for-service business model. Instead of a financial or insurance company influencing the retirement market with high commission offerings, decision would (in theory) be based on the strongest product available to your clients. The potential upside of this model is the predictable income of fee-for-service and heightened client confidence. With a client knowing you are legally bound to provide advice and plans in their best it raises confidence, trust that could develop a long-term relationship quicker. The potential downside is bad advisors could became fiduciaries and earn total client trust, but still make bad investment decisions.
A catalyst to this DOL initiative is the advertising financial institutions and even insurance companies (brokers/agents) have under taken to portray company as a “client centric business model.” According to the DOL this advertising is incredibly misleading to clients who assume these institutions operate under fiduciary standards with client needs as first priority. They argue if companies advertise putting the client first, they must actually then do so and take on the risk and liability. Companies can’t portray fiduciary responsibility without taking on the legal responsibility for clients’ investments. The DOL wants financial and insurance institutions to live up to the standard they advertise so people’s financial livelihood won’t continue to slip through the cracks.
This DOL proposal is complicated and all of the details of implementation are not clear just yet. However, it does seem brokers and agents will need to diversify their product portfolio to offer clients a solid financial forecast. At NCC we encourage each agent to contract with a variety of products that are competitive in your market. Your clients are not all the same so stop giving them all the same solutions. As the proposal continues to develop we will continue to update all of our agents. But we encourage everyone to read up on it and continue to monitor this proposal as well.