Final DOL rule could place indexed annuities under variable umbrella

Despite this, the rules do not require the advisor to enter into a formal contract with the client. The proposed revisions further revoke the exemption as it applies to variable annuities and other contracts that are treated as securities.

If the DOL does decide that fixed indexed annuities should be governed by the same rules that apply to variable annuities, advisors who sell these products will need to abide by the best interests contract exemption (discussed below) in order to avoid liability.

The best interests contract exemption

The best interests contract exemption, or BICE, which is expected to govern variable annuity sales and potentially fixed indexed annuity sales, allows financial advisory firms to continue to set their own compensation practices as long as certain requirements are met.  Specifically, the exemption requires that the advisor enter into a formal contract with the client that commits the advisor to act in the best interests of the client. The advisor must avoid any misleading statements about fees, commissions and conflicts of interest generally.

Further, the advisor must warrant that the firm has adopted policies designed to mitigate any conflicts of interest (meaning that the firm has identified conflicts and compensation structures that could cause the advisor to fail the bests interests standard, and has adopted procedures to mitigate their impact). Any conflicts, including hidden fees, must be clearly disclosed to the client. The exemption also specifically requires that compensation charged by advisors be "reasonable."

Conclusion

While the final version of the DOL fiduciary rules is not expected until at least the spring of 2016, advisors and firms must begin preparing for the possibility of their application now in order to avoid potential conflicts down the line.