Most industry professionals consider the Best Interest Contract Exemption (BICE) the most detested part of the Department of Labor fiduciary rule.
Yet some of them may end up using it to continuing selling fixed annuities without interruption, according to one analyst. Selling under the BICE will enable financial institutions to continue offering trips and other incentives, said Fred Reish, a partner at Drinker Biddle & Reath in Los Angeles.
The cost is a much tougher compliance regime that includes hefty disclosures, recordkeeping and a signed contract between advisor and client.
The other option is to sell fixed annuities under Prohibited Transaction Exemption 84-24. This route is the one most financial institutions will opt for, Reish said, as it is much less onerous.
“The analysis going on there from one financial institution to another, is do they want the difficulty of complying with BICE and the class action possibility, versus the simplicity and ease, relatively speaking, of complying with 84-24?” Reish asked.
At the heart of both exemptions is the requirement that any fiduciary advice provided must meet the "Best Interest Standard of Care" (also called the Impartial Conduct Standard).
The rule requires that advice must be provided:
• With the care, skill, prudence and diligence that a prudent person who is familiar with such matters would use;
• Giving appropriate consideration to the client’s objectives and goals, time horizon, risk tolerance and insurance needs, and whether or not the recommended product is reasonably designed to meet their interests;
• And without regard to the interests (typically compensation) of the financial institution, product provider or advisor.
Class Action Potential
The big different is the BICE includes class-action lawsuit potential.
“Do they weigh the ability to have these additional (incentive) programs for their advisors based on 84-24 compensation as a more important factor?” Reish asked.
Firms may see the BICE as a way to maintain attractive compensation for advisors. According to Wink’s Sales & Market Report, the average street level compensation for indexed annuities as of the second quarter 2016 was 4.6 percent, the lowest in more than a decade.
Published in April, the fiduciary rules establish a new standard of care for anyone delivering financial advice administered to retirement money. The DOL seeks to eliminate what it views as conflicts of interest with advisors and agents who are compensated on factors other than what is best for their clients.
The rule permits four entities to serve as “financial institutions,” which assume the liability for the transactions: banks, insurance companies, broker-dealers and registered investment advisors.
Reish represents several firms in the financial services industry and said Drinker Biddle has “a couple clients” who want to sell fixed annuities under the BICE.
InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected].
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