Why the proposed DOL fiduciary rule could lead to an agent exodus

The Department of Labor's proposed fiduciary rule in respect to retirement planning advice is bad news for the industry. Unless changed, it could lead many life insurance and financial service professionals to exit the business or revamp their practices. And the proposal could leave consumers most in need of retirement planning advice in the cold.

That's the view of Phillip Harriman, past president of the Million Dollar Round Table and co-owner of Lebel & Harriman, a financial services company. During the MDRT's annual meeting in New Orleans, held June 13-17, Harriman offered a perspective on the DOL proposal, as well as a host of other issues — on technology, compliance, captive reinsurers and the rule-making process — during an interview with LifeHealthPro Senior Editor Warren S. Hersch.

The following are excerpts.

Hersch: What compliance or regulatory challenges are of concern to you this year?

Harriman (pictured at right): The most glaring reality for financial advisors is the notion that the government, particularly policymakers in Washington, feel that they know best how to help manage retirement plans. While I can appreciate their concerns, I'm also worried that their zeal for new policies and procedures is making retirement planning a lot more complex and confusing for the consumers.

Take the fiduciary rule proposed by the Department of Labor; it's an assault on the professional financial advisor. Maybe what the DOL is trying to do is weed out financial professionals who, licensed to sell products on commission, are just trying to close deals and make a quick buck.

In the DOL's effort to identify those areas where consumers are not getting the best advice or are paying extraordinary costs for retirement planning products, they're also creating a [hostile] environment for those of us who have dedicated a career to this profession. The rule, as now proposed, implies that prices must come down dramatically; and that scrutiny and potential liability must increase dramatically.

Hersch: If the DOL rule is implemented as now drafted, do you expect the industry will suffer the same fate as the UK, which saw an exodus of advisors after the phase-out of commissions?

Harriman: Yes, the proposal is a recipe for chasing a lot of competent and talented advisors out of our space. Consumers will pay the ultimate price for the DOL's regulatory agenda — more than they realize.

Of course, certain advisory firms, such as ours, will adapt to the new regulations. But our relationships with clients will become more formal; we'll have to bill for our time or charge a flat fee for services. We're migrating in that direction as we speak.

The transition will be good for our cash flow because the compensation is more predictable and stable. But I fear that people most in need of retirement planning will not be able to afford — or will choose not to pay for — fee-based advice. Commissions will go by the wayside; and retirement planning will become a do-it-yourself project.

Hersch: The DOL rule aside, are you leveraging technologies to try to alleviate the compliance workload?

Harriman: Technology has helped a lot. And so has the relationship we have with our broker-dealer, Valmark Securities. They keep us in the loop respecting our regulatory responsibilities. We also have a person on payroll who just deals with compliance issues — down to the smallest details. That can range from preparing compliant-ready radio ads to drafting letters to send to clients and prospects.

Hersch: There's a growing interest among carriers and advisors in electronic processing of insurance applications, in part to reduce compliance issues. How much do you use e-apps in your practice?

Harriman: More e-apps are coming to market. I'm optimistic they will offer a more effective and efficient way of issuing life insurance policies. At present, we're still processing most apps on paper with our partner carriers; only a few offer electronic processing. I don't know why more haven't made the transition to digital.

The life insurance profession gathers the most sensitive financial, personal and medical info that a person could be asked to reveal. And it does so in an insensitive way. So any technology that makes that policy application process less cold and bureaucratic for the client would be a big step in the right direction.

I'm hearing, for example, that some insurers now recognize they can uncover more info about someone's potential life expectancy from blood and saliva tests than they can from doctors' records of patients. That certainly would help make medical underwriting less invasive and more efficient.

Hersch: Compliance aside, what industry developments are of concern to you?

Harriman: State insurance commissioners are, in my opinion, outmanned and outgunned by hedge funds and private equity firms that are buying up life insurance companies.

Several life insurers over the past two years, such as Lincoln Benefit Life, have been purchased by these entities. What the acquiring firms have done is to strip the insurers of their capital reserves, using the cash to pay dividends to shareholders.

The companies then establish a captive reinsurer in some jurisdiction to meet state regulators' capital reserve or other requirements. Legally, the insurer and reinsurer are separate entities. But because the same people oversee both companies, the financial risk — of not being able to maintain the cost of insurance and expense charges or making good on investment guarantees and policy claims — hasn't really been off-loaded.

Iowa is leading the charge among states nationwide in accommodating such captive reinsurance agreements. These deals are good for a state's economy, but whether they're financially sound is a big question mark. For me and others in the industry who are watching these developments, they're also a growing concern.

Hersch: Has your experience as a state senator in Maine given you a window into regulators' mindset as it relates to their oversight of financial services firms or companies in other industries?

Harriman: Not in respect to financial services; I felt that, ethically, it would be a conflict of interest for me to be weighing in on financial services issues while also serving as an advisor. But I did during my eight years as a state senator get to see the bureaucratic process in action across many public policy issues.

Whether you're talking about natural resources or insurance, there are a lot of similarities in the legislative and rule-making process.

Here's an analogy: Congress passes a bill creating the game of football and the President signs it into it law. We now have a law on football, but there have to be rules promulgated to run the game. These rules are established by unelected people who are interpreting the law. And so the rules reflect what they think Congress meant when it invented the game.

The rule-makers, thus, have extraordinary power. Yes, the role they play is a necessary one. But the natural inclination of rule-makers is to establish new regulations — often simply to justify their existence. When they go too far, constituents complain to their congressmen and senators, who in turn sponsor a new bill to change the rules.

So now you have legislation impacting rules established as a result of an earlier law that was enacted. This process can go on and on.

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