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January 2017
DOL Fiduciary Rule – Anything but just
a compliance exercise
2 top issues
DOL Fiduciary Rule – Anything but just
a compliance exercise
In April 2016, the US Department
of Labor (DOL) released a
regulatory package that
established a new standard for
fiduciary investment advice. Under
the Fiduciary Rule (“the Rule”),
investment recommendation given
to an employee benefit plan or an
individual retirement account
(IRA) is considered fiduciary
investment advice and therefore
must be in the “best interest”
of the investor.
As a result, financial advisors who
provide investment advice under the new
standard now face limits on receiving
commission-based compensation.
Considering 50 percent of US financial
assets is held in retirement accounts,
the impact of the Rule is significantly
affecting insurers, broker dealers, and
investment managers.
Purpose of the Rule
The DOL has long been concerned
that people rolling over assets from an
employer sponsored pension plan to an
IRA are not being well advised and, as a
result, are investing in products that are
not most suitable for their needs and/
or are unnecessarily expensive. Central
to the DOL concern is what it perceives
to be a lack of transparency around
the standard under which an advisor
is providing advice and how he/she is
compensated. This is not surprising since
advisors operate under multiple standards
with a majority of asset flows falling
under a “suitability” rather than fiduciary
standard.
To address these concerns, the DOL
expanded the definition of the term
“investment advice” under ERISA,
thereby imposing fiduciary status under
both ERISA and the Internal Revenue
Code on firms and advisors who provide
investment advice under this expanded
standard. A fiduciary is subject to the
duties of prudence and loyalty and is
prohibited from acting for his/her own
interests or in a manner adverse to those
of the ERISA plan or IRA. Accordingly,
fiduciary status will have a fundamental
impact on advisor compensation, as
advisors who are fiduciaries may not use
their authority to affect or increase their
own compensation in connection with
transactions involving an ERISA plan
or IRA1
.
The Fiduciary Rule is a catalyst
for change that goes far
beyond compliance – in many
cases, change that insurers
and distributors are in the
process of making or have
contemplated making for some
time.
1	 For our perspectives on the technical details
of the Fiduciary Rule, please see PwC’s April
2016 regulatory brief from the time of the Rule’s
enactment. For our perspectives on the Rule’s
status in the wake of the 2016 election, please see
PwC’s November 2016 regulatory brief.
3 top issues
A catalyst of widespread organizational
change
The DOL Rule is causing and
contributing to significant changes
to the insurance industry that go
well beyond compliance. While the
industry needs to be prepared for
the April 2017 applicability date,
the Rule (even if delayed) is also a
catalyst for more meaning change
for both insurance manufacturers
and distributors. In many
cases, these changes have been
contemplated for some time.
Compensation – For starters, in order to
mitigate any actual or potential conflicts
of interest resulting from distribution
compensation, insurers should inventory
current compensation and understand
the impact of changing models to
various distribution channels. The
industry has been focusing on the issue
of compensation for some time, anyway
(e.g., moving to flat commissions for
annuities), and the DOL Rule provides
further impetus for change. This change
will not be easy, not least because the
industry has a variety of products and
uses different distribution models. To
facilitate their transition to the new
environment, carriers and distributors
will need to:
1.	Understand the current hierarchy and
how it might change:
	 a)	What is the distribution channel?
Is the distributor a fiduciary? If so,
what exception or exemption is the
distributor using?
	 b)	How will changing the hierarchy
impact agents’ livelihood?
	 c)	Do you risk losing agents to a
carrier that will pay “conflicted”
compensation?
	 d)	How do you factor in outside
compensation (e.g., marketing fees
 allowances, 12-B1 Fees)?
	 e)	Depending on the product shelf,
there will be different types of
conflicts.
	 f)	Determine which transactions are
prohibited. Determining “red” and
“green” transactions should be
relatively easy, but determining
“yellow” ones will be much more
difficult, especially because the Rule
is fairly ambiguous in this regard.
	 g)	Understand each other’s point of
view. Distributors will create rules
for types of compensation they will
allow in their systems. Although
they are currently uncertain about
how they will have to adapt,
carriers will have to change their
compensation structures and
communicate them to distributors.
4 top issues
2.	Safeguard against personal and
organizational conflicts of interest:
	 a)	How do we pay our workforce and
others?
	 b)	What is non-cash compensation?
	 c)	How do we incentivize agents to sell
products and sell certain product
classes over others?
	 d)	What is the difference between
suitability and fiduciary?
	 e)	Inventory products and create a tool
to identify potential conflicts. This
will be a complex undertaking, but
it will enable carriers to determine
who and how much carriers pay
and why, as well as if conflicts are
permissible or need to be disclosed.
	
	 f)	Perform a compensation impact
analysis; assess the performance
of distribution compensation as it
currently exists and what seems
likely in the future. This should
include an assessment of the
future model’s effect on revenue,
profitability, market position,
channel attractiveness, overall
company performance.
	 g)	As part of a change management
strategy, ensure that there is
regular, clear, and informative
communication – both internally
and externally – on impending
change.
Changes in agent training
Once the Fiduciary Rule is in effect, agents will need to be advisors first and
sellers second. Even though many insurers, especially ones with captive sales
forces, have already tightened sales practices in recent years, this does represent
a genuine cultural shift and a novel convergence between compliance and sales
 distribution. As a result, agents will need more training on their fiduciary role
– all the way down to call center scripts – and, with rationalized product lines,
most likely less product training than in the past.
Some carriers are experiencing impacts they didn’t foresee.
Because of their increasing need to respond to fiduciaries’
requests, they’re having to adopt their distributors’ policies and
procedures (including access data requests), and change their
product portfolios, share classes, and fee structures. And, if they
don’t do this, they risk losing shelf space to insurers that do.
5 top issues
Product rationalization – Related,
the DOL Rule is intensifying carriers’
and distributors’ focus on product
rationalization. Smaller product
portfolios and resulting streamlined
distribution models will facilitate carrier
understanding of its product suite and
compliance risks when providing “best
interest” advice to consumers, reduce
training required for agents, and help the
industry reduce costs and increase scale.
For example, with annuities:
•	There are many providers providing
many similar products, and oftentimes
riders emulate characteristics of other
carriers’ products that companies can’t
build themselves. The Rule provides
the industry further incentive to
address the inherent inefficiency in this
state of affairs.
•	When determining which products
to sell, financial strength is going
to be a key product rationalization
consideration for distributors because
compensation will be more normalized
with fewer products. When product
portfolios shrink, lower-rated carriers’
products aren’t going to receive shelf
space, especially if distributors can’t
clearly demonstrate their benefits
to customers. As a result of portfolio
rationalization and likely decreases
in commissions, both carrier and
distributor consolidation is likely to
increase.
•	Moreover, this isn’t just a business
decision but also a compliance one;
distributors will have monitoring
policy procedures to confirm
adherence to this policy. Accordingly,
distributors will have to establish
a product selection methodology
for each segment that accounts for
appropriateness and applicability.
Portfolio rationalization
and expected decreases in
commissions are likely to
increase both carrier and
distributor consolidation.
However, regardless of product, the
challenges of rationalization also
represent an opportunity for insurers to
have more profitable product portfolios
because they can focus on what they’re
best at. They also should be able to create
products that are less capital intensive
and, with a level fee/different fee
structure, potentially profitable in earlier
years. In addition, rationalization can
help solve the challenge of a shrinking
captive and independent agent workforce;
fewer and more transparent products
should reduce the need to replace many of
the agents who are at or near retirement
age. Related, because of its ability to
inexpensively manage small accounts
and automatically comply with fiduciary
6 top issues
standards, as well as its potential to
increase scale as needed, robo-advisors
should become an even more popular way
for insurers to sell products.
Data and technology – Moreover,
the DOL Rule makes capturing and
maintaining new types of data a high
priority for carriers and distributors.
Agents will need to track from the
time contact is made with a client how
they acted in his/her best interest, and
this record – which should be readily
available to customers – will demonstrate
that agents are being compliant (i.e.,
defensibility), as well as facilitate ongoing
monitoring. Automating data capture,
which should be especially effective via
the robo-advisor channel, is the easiest
way to ensure data is repeatable and
transparent (again, defensible). This
requires automating certain process to
maintain compliance and be competitive
in the future. Most of the industry has
been aware of the need for technological
changes, namely process automation, for
some time – and many have been making
them – but the DOL Rule serves as yet
another catalyst, especially for those
companies that have been hitherto slow
to act.
Facilitating effective compliance
Distribution traditionally has had little to no involvement in regulatory
compliance, and the DOL Rule represents a new challenge for most
organizations. We recommend that compliance should:
1.	Oversee distribution;
2.	Provide quarterly “health checks” to the board of directors in order to review
compliance on a quarterly basis;
3.	Maintain a traceability matrix that outlines key strategic and operational
decisions related to Rule requirements and thereby provides the company
defensible documentation to minimize and mitigate losses.
7 top issues
Implications: Far beyond compliance
The Fiduciary Rule is playing a
significant role in the structural
and operational changes taking
place at affected companies. Many
insurers have already undertaken
significant evaluations of their
business and operating models,
including customer segmentation
analysis and consideration of
different channels for fiduciary
and non-fiduciary advice.
As a result:
•	The industry is likely to increase its
already growing investments in and
use of digital and online channels,
including robo-advice.
•	Some insurers are divesting their
broker-dealers; as a result, we expect
to see consolidation among smaller
insurance broker-dealers, independent
broker-dealers, and regional
brokerages over the next three years.
•	The DOL’s move to increase
transparency and eliminate conflicts of
interest is helping drive convergence of
regulation towards a broad fiduciary
standard. Whether or not the SEC
proposes to cover non-retirement
accounts given the mandate for a
federal uniform fiduciary standard
under the Dodd-Frank Act, some
fiduciary agents have already started to
consider extending the DOL standard
to an increased scope of accounts in
order to avoid potentially awkward
double standards for investors who
hold both retirement and non-
retirement accounts.
Lastly, regardless of political
developments, we believe the Rule’s
core framework will remain intact. The
industry has already made significant
progress toward complying with it,
and there is general recognition of the
importance of removing conflicts of
interest between financial advisers and
retirement investors. As a result, financial
advisers and firms should continue their
work to meet the Rule’s requirements, not
least considering the still extant April 10,
2017 deadline.
www.pwc.com/us/insurance
At PwC, our purpose is to build trust in society and solve important problems. We’re a network of firms in 157 countries with more than 208,000 people who are committed
to delivering quality in assurance, advisory and tax services. Find out more and tell us what matters to you by visiting us at www.pwc.com.
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information
contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy	
or completeness of the information contained in this publication, and, to the extent permitted by law, PwC does not accept or assume any liability, responsibility or duty of
care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
© 2016 PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is
a separate legal entity. Please see www.pwc.com/structure for further details.
Contacts
Ellen Walsh
US Insurance Regulatory
Advisory Services Leader
+1 646 471 7274
ellen.walsh@pwc.com
Chris Joline
Insurance Advisory Principal
+1 646 471 5659
chris.joline@pwc.com
Jay Kaduson
Insurance Advisory Principal
+1 617-448-0021
jay.kaduson@pwc.com
Juneen Belknap
Insurance Advisory Principal
+1 407 236 5102
juneen.belknap@pwc.com
PwC insurance senior manager Eric Trowbridge also contributed to this section.

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2017 Top Issues - DOL Fiduciary Rule - January 2017

  • 1. www.pwc.com/us/insurance January 2017 DOL Fiduciary Rule – Anything but just a compliance exercise
  • 2. 2 top issues DOL Fiduciary Rule – Anything but just a compliance exercise In April 2016, the US Department of Labor (DOL) released a regulatory package that established a new standard for fiduciary investment advice. Under the Fiduciary Rule (“the Rule”), investment recommendation given to an employee benefit plan or an individual retirement account (IRA) is considered fiduciary investment advice and therefore must be in the “best interest” of the investor. As a result, financial advisors who provide investment advice under the new standard now face limits on receiving commission-based compensation. Considering 50 percent of US financial assets is held in retirement accounts, the impact of the Rule is significantly affecting insurers, broker dealers, and investment managers. Purpose of the Rule The DOL has long been concerned that people rolling over assets from an employer sponsored pension plan to an IRA are not being well advised and, as a result, are investing in products that are not most suitable for their needs and/ or are unnecessarily expensive. Central to the DOL concern is what it perceives to be a lack of transparency around the standard under which an advisor is providing advice and how he/she is compensated. This is not surprising since advisors operate under multiple standards with a majority of asset flows falling under a “suitability” rather than fiduciary standard. To address these concerns, the DOL expanded the definition of the term “investment advice” under ERISA, thereby imposing fiduciary status under both ERISA and the Internal Revenue Code on firms and advisors who provide investment advice under this expanded standard. A fiduciary is subject to the duties of prudence and loyalty and is prohibited from acting for his/her own interests or in a manner adverse to those of the ERISA plan or IRA. Accordingly, fiduciary status will have a fundamental impact on advisor compensation, as advisors who are fiduciaries may not use their authority to affect or increase their own compensation in connection with transactions involving an ERISA plan or IRA1 . The Fiduciary Rule is a catalyst for change that goes far beyond compliance – in many cases, change that insurers and distributors are in the process of making or have contemplated making for some time. 1 For our perspectives on the technical details of the Fiduciary Rule, please see PwC’s April 2016 regulatory brief from the time of the Rule’s enactment. For our perspectives on the Rule’s status in the wake of the 2016 election, please see PwC’s November 2016 regulatory brief.
  • 3. 3 top issues A catalyst of widespread organizational change The DOL Rule is causing and contributing to significant changes to the insurance industry that go well beyond compliance. While the industry needs to be prepared for the April 2017 applicability date, the Rule (even if delayed) is also a catalyst for more meaning change for both insurance manufacturers and distributors. In many cases, these changes have been contemplated for some time. Compensation – For starters, in order to mitigate any actual or potential conflicts of interest resulting from distribution compensation, insurers should inventory current compensation and understand the impact of changing models to various distribution channels. The industry has been focusing on the issue of compensation for some time, anyway (e.g., moving to flat commissions for annuities), and the DOL Rule provides further impetus for change. This change will not be easy, not least because the industry has a variety of products and uses different distribution models. To facilitate their transition to the new environment, carriers and distributors will need to: 1. Understand the current hierarchy and how it might change: a) What is the distribution channel? Is the distributor a fiduciary? If so, what exception or exemption is the distributor using? b) How will changing the hierarchy impact agents’ livelihood? c) Do you risk losing agents to a carrier that will pay “conflicted” compensation? d) How do you factor in outside compensation (e.g., marketing fees allowances, 12-B1 Fees)? e) Depending on the product shelf, there will be different types of conflicts. f) Determine which transactions are prohibited. Determining “red” and “green” transactions should be relatively easy, but determining “yellow” ones will be much more difficult, especially because the Rule is fairly ambiguous in this regard. g) Understand each other’s point of view. Distributors will create rules for types of compensation they will allow in their systems. Although they are currently uncertain about how they will have to adapt, carriers will have to change their compensation structures and communicate them to distributors.
  • 4. 4 top issues 2. Safeguard against personal and organizational conflicts of interest: a) How do we pay our workforce and others? b) What is non-cash compensation? c) How do we incentivize agents to sell products and sell certain product classes over others? d) What is the difference between suitability and fiduciary? e) Inventory products and create a tool to identify potential conflicts. This will be a complex undertaking, but it will enable carriers to determine who and how much carriers pay and why, as well as if conflicts are permissible or need to be disclosed. f) Perform a compensation impact analysis; assess the performance of distribution compensation as it currently exists and what seems likely in the future. This should include an assessment of the future model’s effect on revenue, profitability, market position, channel attractiveness, overall company performance. g) As part of a change management strategy, ensure that there is regular, clear, and informative communication – both internally and externally – on impending change. Changes in agent training Once the Fiduciary Rule is in effect, agents will need to be advisors first and sellers second. Even though many insurers, especially ones with captive sales forces, have already tightened sales practices in recent years, this does represent a genuine cultural shift and a novel convergence between compliance and sales distribution. As a result, agents will need more training on their fiduciary role – all the way down to call center scripts – and, with rationalized product lines, most likely less product training than in the past. Some carriers are experiencing impacts they didn’t foresee. Because of their increasing need to respond to fiduciaries’ requests, they’re having to adopt their distributors’ policies and procedures (including access data requests), and change their product portfolios, share classes, and fee structures. And, if they don’t do this, they risk losing shelf space to insurers that do.
  • 5. 5 top issues Product rationalization – Related, the DOL Rule is intensifying carriers’ and distributors’ focus on product rationalization. Smaller product portfolios and resulting streamlined distribution models will facilitate carrier understanding of its product suite and compliance risks when providing “best interest” advice to consumers, reduce training required for agents, and help the industry reduce costs and increase scale. For example, with annuities: • There are many providers providing many similar products, and oftentimes riders emulate characteristics of other carriers’ products that companies can’t build themselves. The Rule provides the industry further incentive to address the inherent inefficiency in this state of affairs. • When determining which products to sell, financial strength is going to be a key product rationalization consideration for distributors because compensation will be more normalized with fewer products. When product portfolios shrink, lower-rated carriers’ products aren’t going to receive shelf space, especially if distributors can’t clearly demonstrate their benefits to customers. As a result of portfolio rationalization and likely decreases in commissions, both carrier and distributor consolidation is likely to increase. • Moreover, this isn’t just a business decision but also a compliance one; distributors will have monitoring policy procedures to confirm adherence to this policy. Accordingly, distributors will have to establish a product selection methodology for each segment that accounts for appropriateness and applicability. Portfolio rationalization and expected decreases in commissions are likely to increase both carrier and distributor consolidation. However, regardless of product, the challenges of rationalization also represent an opportunity for insurers to have more profitable product portfolios because they can focus on what they’re best at. They also should be able to create products that are less capital intensive and, with a level fee/different fee structure, potentially profitable in earlier years. In addition, rationalization can help solve the challenge of a shrinking captive and independent agent workforce; fewer and more transparent products should reduce the need to replace many of the agents who are at or near retirement age. Related, because of its ability to inexpensively manage small accounts and automatically comply with fiduciary
  • 6. 6 top issues standards, as well as its potential to increase scale as needed, robo-advisors should become an even more popular way for insurers to sell products. Data and technology – Moreover, the DOL Rule makes capturing and maintaining new types of data a high priority for carriers and distributors. Agents will need to track from the time contact is made with a client how they acted in his/her best interest, and this record – which should be readily available to customers – will demonstrate that agents are being compliant (i.e., defensibility), as well as facilitate ongoing monitoring. Automating data capture, which should be especially effective via the robo-advisor channel, is the easiest way to ensure data is repeatable and transparent (again, defensible). This requires automating certain process to maintain compliance and be competitive in the future. Most of the industry has been aware of the need for technological changes, namely process automation, for some time – and many have been making them – but the DOL Rule serves as yet another catalyst, especially for those companies that have been hitherto slow to act. Facilitating effective compliance Distribution traditionally has had little to no involvement in regulatory compliance, and the DOL Rule represents a new challenge for most organizations. We recommend that compliance should: 1. Oversee distribution; 2. Provide quarterly “health checks” to the board of directors in order to review compliance on a quarterly basis; 3. Maintain a traceability matrix that outlines key strategic and operational decisions related to Rule requirements and thereby provides the company defensible documentation to minimize and mitigate losses.
  • 7. 7 top issues Implications: Far beyond compliance The Fiduciary Rule is playing a significant role in the structural and operational changes taking place at affected companies. Many insurers have already undertaken significant evaluations of their business and operating models, including customer segmentation analysis and consideration of different channels for fiduciary and non-fiduciary advice. As a result: • The industry is likely to increase its already growing investments in and use of digital and online channels, including robo-advice. • Some insurers are divesting their broker-dealers; as a result, we expect to see consolidation among smaller insurance broker-dealers, independent broker-dealers, and regional brokerages over the next three years. • The DOL’s move to increase transparency and eliminate conflicts of interest is helping drive convergence of regulation towards a broad fiduciary standard. Whether or not the SEC proposes to cover non-retirement accounts given the mandate for a federal uniform fiduciary standard under the Dodd-Frank Act, some fiduciary agents have already started to consider extending the DOL standard to an increased scope of accounts in order to avoid potentially awkward double standards for investors who hold both retirement and non- retirement accounts. Lastly, regardless of political developments, we believe the Rule’s core framework will remain intact. The industry has already made significant progress toward complying with it, and there is general recognition of the importance of removing conflicts of interest between financial advisers and retirement investors. As a result, financial advisers and firms should continue their work to meet the Rule’s requirements, not least considering the still extant April 10, 2017 deadline.
  • 8. www.pwc.com/us/insurance At PwC, our purpose is to build trust in society and solve important problems. We’re a network of firms in 157 countries with more than 208,000 people who are committed to delivering quality in assurance, advisory and tax services. Find out more and tell us what matters to you by visiting us at www.pwc.com. This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PwC does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. © 2016 PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. Contacts Ellen Walsh US Insurance Regulatory Advisory Services Leader +1 646 471 7274 ellen.walsh@pwc.com Chris Joline Insurance Advisory Principal +1 646 471 5659 chris.joline@pwc.com Jay Kaduson Insurance Advisory Principal +1 617-448-0021 jay.kaduson@pwc.com Juneen Belknap Insurance Advisory Principal +1 407 236 5102 juneen.belknap@pwc.com PwC insurance senior manager Eric Trowbridge also contributed to this section.