JPMorgan Abandoning Commissions … Or Not?

March 15, 2017 | By Think Advisor

The firm told clients they have to move to fee-based or self-directed accounts, unless there is a delay in the DOL fiduciary rule

JPMorgan seems to be in a state of flux, along with other broker-dealers, in terms of what to do with plans to drop commissions in retirement accounts as part of its compliance with the Department of Labor’s new fiduciary standard.

A letter sent to clients earlier in March said they would be moved into self-directed accounts by April 7, if they had not already moved into a fee-based managed account or chosen the self-directed option. However, the letter also said any delay in the implementation of the rule would put a hold on the automatic shift.  

“Regardless of the ultimate path that Bank of America chooses to take, Pandora’s box has been opened, and the fee discussion is now front and center for clients, so whether or not the fiduciary rule is implemented in its current state may be a moot point,” Kleinhanzl and Brown said at the time.

The KBW analysts say there are advantages and disadvantages to a shift in Merrill’s previous fee-only approach.

 

 

E&O Part of your Business Continuation Plan

March 15, 2017 | By Sheri Pontolillo,

 

The road you choose toward your goal of “sailing into the sunset” after a successful career can vary.  It could be a gradual transition as you bring a family member up and into the business for a hand-off.  You may choose to sell your business to an associate or other buyer.  Or, you could simply retire outright.  E&O is a very important part of your transition plan. Imagine this!  You’ve been in the business for 20 years, you retire, and while sipping on a very dry martini on the back of your yacht, you get a call from your attorney “You’ve been sued!” for something that happened five years ago.  Panic? or Peace?  I can tell you it will depend upon how well you prepared for that moment.

Here’s how it works, hold on as I speak “insurance lingo”.   There are generally two types of policies 1. Claims-Made and 2. Occurrence.  You’ve probably heard of a “claims-made” policy because most E&O policies are of this type.  This means the policy will only respond if the claim is made against you (and reported) to the insurer during the 12 month policy period.  This is very different than occurrence policies, which is where you report a claim to the policy you had when the alleged error occurred.  General Liability is typically written on an occurrence policy form.

Now, back to our example.  When that claim arrives, you do NOT report the claim to the insurer you had when the alleged error occurred (which is what most people assume).  Rather, you must have coverage at the time a claim is made against you. 

Are you going to maintain a policy indefinitely into your retirement No.  You’re looking for what is called an Extended Reporting Period, or informally called a “tail” option.  This is a window of time attached to your last E&O policy that allows you to report a new claim that arises from activities you performed before you retired.  You purchase this as an add-on to your last E&O policy.

Here’s the kicker the availability of the ERP option must exist in the last policy you bought when you purchased it.  It’s not something you can ask for if you retire in the middle of the policy.  And, not all policies offer an ERP or “tail” as we call it.

Here are our recommendations:
1. Start Early One to two years prior to retirement or sale, start looking for an E&O policy that offers a tail option.

2.  Plan On The Expense of An ERP ERP’s are for a definite period of time typically 1 year, 3, years, 5 years and occasionally an Unlimited Period (forever).  Obviously, you want the longest period available.  The costs vary 75% to 500% of your last annual premium, depending upon the length of the ERP.  This sounds expensive, but it is a one-time charge.  Personally, I would pay almost any amount to protect my retirement assets in my Golden Years.  Note to self Don’t be fooled into thinking that a statute of limitations is going to protect you.  The statute is of little help.  This is because they start running “when your client first knows of the problem”, which can be when they finally read their statements, decide they’ve lost money and you’re to blame, when their kids second-guess what mom & dad have done with their retirement, or when their son-in-law becomes a lawyer.

3. Buy A Policy You Control When you’re finally ready to think about making the transition in a year or two, it is best for you to be in a policy that you control, for example an agency policy, or if you’re an RIA, one in the entity name.  This is important so you can negotiate the terms of the desired ERP, changes to the entity name if you sell to another firm, changes in the officers/directors or controlling parties, etc.

4. Find A Good E&O Broker – The approach you will take to the ERP will depend upon the type of retirement transition.  You’ll want to work with a good E&O broker at that time.  You may be able to creatively save money on the ERP by employing a temporary strategy.  For example, adding the new owners or changing the name while you remain on the policy for a year or two if you’re not fully exiting the business right away.  Good ERPs are expensive, and the time period is finite, so you want to make the most of your insurance dollar and a good E&O broker can help you do that.

5. Tell Your Heirs – Most of the better policies available will cover your spouse, heirs or executors.  This is important for them to know in the event of your incapacity or death.  Your assets will most likely be their assets, and E&O can help protect them.

In summary, the goal is to put the right tools in place to give you control of your ERP options, flexibility to consider different exit strategies and save premium dollars if possible as you protect your retirement assets and provide peace of mind for you and your loved ones.

Merrill Lynch Opens ‘Pandora’s Box’ With Shift on Commissions: Analysts

March 10, 2017 | By Think Advisor
 
 

Merrill Lynch told its Thundering Herd Thursday that it plans to explore “options” for at least some clients who might benefit from commissions in retirement accounts, a shift from its earlier fee-only approach to the new Department of Labor’s fiduciary standard.

Analysts say this step represents a sea change in the approach it outlined in October.

“Regardless of the ultimate path that Bank of America chooses to take, Pandora’s box has been opened, and the fee discussion is now front and center for clients, so whether or not the fiduciary rule is implemented in its current state may be a moot point,” according to Brian Kleinhanzl and Michael Brown, CFA, of Keefe, Bruyette & Woods.

(The Labor rule is expected to be delayed by 60 days; a 15-day comment period on plans to move the rule’s first compliance date from April 10 to June 9 ends March 15.)

Upside, Downside

The KBW analysts say there are advantages and disadvantages to a shift in Merrill’s previous fee-only approach.

Allowing some clients to use the best interest contract (or BIC) exemption could “mitigate financial advisor attrition,” they point out, since many rival firms – including Morgan Stanley and Wells Fargo Advisors – are poised to give its clients the option of using fee-based or commission-based retirement accounts.

Over the week, for instance, Janney Montgomery Scott and Raymond James said they had recruited advisors from Merrill Lynch with over $285 million in client assets. Also, Focus Financial lured a pair of Merrill reps to its independent RIA platform with some $575 million in assets.

On the other hand, not moving all clients to fee-based accounts “removes the operational benefits from opting not to use the BIC (i.e., compliance documentation),” Kleinhanzl and Brown point out, referring to best interest contracts.

Plus, the move to a more flexible approach means Bank of America may be “more exposed to legal fallout should the company experience breaches in the BIC.”

For clients, they analysts state, the shift seems to be a net positive.

“The company's self-directed brokerage platform, Merrill Edge, was the only option for those who wanted to maintain a commission-based retirement account with BAC,” they explained.

While self-directed brokerage accounts are good options for many clients, they are not “the ideal replacement for all clients, in our view,” the analysts say.

Overall, more changes at Merrill are on the horizon.

 

What independent financial advisers need from broker-dealers when it comes to the DOL fiduciary rule

March 10, 2017 | By Think Advisor

 

Predicting what may happen to the Department of Labor's fiduciary rule has become the industry's favorite parlor game. Every week we see industry pundits, third-party recruiters and other consultants publicly opining about the rule.

And with each of the latest public predictions, anxiety potentially increases among many independent advisers who have been on pins and needles about where the DOL rule will ultimately land.

Unfortunately, too many independent firms have chosen to communicate on a minimal level with their advisers on all things DOL-related pending greater clarity.

Yes, the current DOL rule and implementation timeframe are what the industry must assume will be the case until the official word changes. Yes, there isn't much more factual detail beyond that basic point that anybody can offer.

But factual detail is just the tip of the iceberg when regulatory uncertainty strikes. As independent business owners whose livelihoods and client relationships will potentially be most impacted by the future of the rule, these advisers need and deserve more from their firms by way of engagement during this time period.

Here are the top forms of support that independent advisers should be getting from their broker-dealers right now:

1. Active engagement with advisers, with an emphasis on personalized, consultative meetings. Obviously, whether it's the DOL rule or some other piece of regulation, firms can't put their head in the sand and hope it goes away. By the same token, implementing top-down strategies to address these challenges are often ineffectual, resulting in solutions that are too broad-based to benefit more than a select few. Mindful of this, firms should actively create opportunities to consult with and engage their advisers directly about regulatory issues — whether it's through regular electronic communications, carving out time at yearly conferences, setting up monthly or quarterly update calls or making home visits in the field. Of course, no IBD will have all the answers. But it is possible to gain a better appreciation of what advisers are thinking and, when possible, attempt to craft future policies and procedures to reflect such input.

2. Frequent and candid communications that strike the right balance between admitting what the industry doesn't know, while stating what might be reasonable for advisers to assume or expect. Some firms have their legal and compliance teams take full lead with field force communications about the DOL. Such communications tend to be conservative and succinct to the point of being terse. This sort of communications approach doesn't help to quell adviser anxieties. By contrast, a more open approach could ratchet down the level of anxiety among advisers. For example, if a regulatory question is still unsettled, the IBD should admit it — but also state any related operating assumptions that the firm is making. In these communications, IBDs should pledge to follow up with advisers at a preset date, even if no regulatory clarity has yet been achieved, and then do so, even if it's just to touch base and establish another update commitment. The fear of the unknown can be a paralyzing force, and IBD communications to advisers can mark a crucial difference between feeling like you have a true partner, versus feeling like you're facing the unknown alone.

3. A strategic and operational approach that hopes for the best, but prepares for the worst. While we all lament the escalating regulatory complexities that have hovered over our space in recent years and hope the future will be easier to navigate, independent firms need to formulate and communicate about contingency plans that anticipate continued challenges and how they will be addressed. Just as it's critical for students at a school to know what to do in the event of a fire, advisers need to know the worst-case scenario for their business vis-à-vis regulatory challenges and whether their IBD has such a strategy in place were that to occur.

The sad fact is that our industry likely faces a prolonged period of regulatory ambiguity.

This is an opportunity for independent broker-dealers to step up and fulfill their ideal role as trusted partners and information providers to their advisers, who need such support more than ever right now.

Voya CEO: DOL rule or no rule, it’s time to upgrade your game

Mar 02, 2017 | By Warren S. Hersch LifeHealth Pro

 

Carolyn Johnson shares thoughts on the direction of protection and retirement plan products, prospects for life insurance and annuity sales, and innovative initiatives underway within Voya’s business units

 

Whether or not the Department of Labor’s now delayed fiduciary rule goes into effect, this much seems evident: Agents and advisors are increasingly migrating from commissions on product sales to a fee-based investment advisor model that engenders holistic planning, acting in the client’s best interest and, thus, adherence to aspects of the rule.

Why the shift? Because adoption of a fee-based advisory model, by bringing greater trust and professionalism to the client relationship, is ultimately good for business.

 

This was an overarching theme of remarks by Carolyn Johnson, chief executive officer of annuities and individual life at Voya Financial. Over a nearly 50-minute phone interview with LifeHealthPro, Johnson shared her thoughts on the direction of protection and retirement plan products, prospects for life insurance and annuity sales amid changing market dynamics, and innovative initiatives underway within Voya’s business units. The following are excerpts.

 

LHP: What are Voya Financial’s current priorities in respect to life insurance and annuities?

Johnson: We’re leveraging our businesses to better tailor solutions to the market served by retirement and investment advisors; we want to be a player in this space. In recent years, our distribution channels have expanded to include broker-dealers, banks and other organizations with registered reps, many of whom are becoming investment advisors. So it’s important for us to have products that fit their needs.

LHP: Last October, I attended a media briefing at which the company unveiled the Voya Behavioral Finance Institute for Innovation, which I understand plans to test concepts that might help defined contribution plan participants save more and achieve better retirement outcomes.

Do you have an update on the initiative and the work its new head, ULCLA professor and behavioral economist Shlomo Benartzi?

Johnson (pictured at right): The initial focus of Benartzi and his team has been our retirement plan business. Many individuals aren't contributing to their plans or they’re not contributing enough to be prepared for retirement. Professor Benartzi is helping our plan sponsors and our customers better understand behavioral finance techniques that can induce participants to engage and contribute more actively to their retirement plans.

We've established internally a steering committee to expand the institute’s behavioral finance techniques and approaches across all of Voya’s businesses. These include our asset management, employee benefits, and life and annuity businesses.

We've also invested substantially in digital tools to help people understand better their retirement plans. Over the next 6 months, expect to see a lot more retirement-focused initiatives leveraging the institute’s insights.

A rise in interest rates in recent months has bolstered sales of annuity and life insurance products, says Voya's Carolyn Johnson. (Photo: Thinkstock)

LHP: Turning to the economic and business environment, what changes do you foresee impacting the life insurance and annuities spaces in the coming months? 

Johnson: On the regulatory front, we expect that the DOL fiduciary rule will have a big impact on annuity sales. We’ve done a lot of work to prepare and believe we’re well positioned for the rollout.

That said, most of our annuity business comes through registered reps, many of whom are affiliated with independent marketing organizations. Under the rule, these IMOs will have to secure the DOL’s approval to be classified as a financial institution — a status they need to sign off on fixed indexed annuity sales. For all but the largest IMOs, becoming an FI could be challenge due to the steep requirements of a proposed class exemption under the rule for these organizations.

One bit of positive news has been the recent upward movement in interest rates. The increases help our annuity and life insurance businesses by making them more competitive [with other investment vehicles] available to consumers. Yields on the 10-year U.S. Treasury Notes [in mid-February] were about 2.5 percent a nice improvement on the lower rates of earlier months.

The rise has helped fuel rising consumer interest in indexed life and annuity products, which have really taken off. Also on the upswing are fee-based products. Producers and broker-dealers migrating to an advisory model want not only investment products on an advisor-friendly fee platform, but also protection products.

Also fueling sales are advances in digital, straight-thru processing of life policy applications. Voya has invested a lot in this technology because it allows new business to be processed so much more quickly and conveniently.

LHP: To your earlier point, the move to fee-based products is a result of advisors adopting an investment advisory model, with or without the DOL rule, correct?

Johnson: Yes. Many brokers are already moving to this model. The DOL rule is only accelerating this shift.

Regardless of whether and when the rule is implemented, advisors will continue along this path. That’s good for customers because an advisory model demands ongoing servicing of clients and a holistic planning focus.

LHP: Do you also envision more direct-to-consumer initiatives — as opposed to selling product through advisory channels — at least for the middle market?

Johnson: A number of carriers — but not Voya —are testing different direct-to-consumer methods. Most of these initiatives are happening on the life insurance side; we don't see meaningful movement in the annuity market. For our part, we remain focused on driving business through advisors and migrating to advisory services.

LHP: Last year, indexed universal life sales increased despite industry concerns about increased regulation of the products. Among the worries is the NAIC actuarial guideline AG 49, which since September 2015 has imposed new restrictions on maximum illustrated rates for IUL policies. Could these limits put a damper on IUL sales?

Johnson: Indexed UL products continue to thrive in a [post AG-49 environment] because they provide attractive benefits, including significant cash accumulation potential. But they don’t carry the capital burden of other permanent life products, such UL policies with secondary guarantees. Because of these underlying drivers, and growing consumer demand, I think we’ll continue an intensified industry focus on IUL.

Another factor fueling IUL sales is, paradoxically, the regulation of investment products. Many producers started out selling life insurance, then moved on to securities. Some are now migrating back to life products to avoid burdensome regulations — including the DOL rule — governing investments.

If pot use continues to rise, Voya might seen an impact. For now, the insurer underwrites occasional marijuana users as a preferred risk. (Photo: Thinkstock)

LHP: How have e-cigarettes and marijuana affected your life business, if at all?

Johnson: We're not seeing a significant increase in policy applicants who use these products. In respect to e-cigarettes, we underwrite them like we do any tobacco product because they contain nicotine.

Cannabis is growing in popularity, in part because of the success of ballot initiatives in recent years: Marijuana use for medical purposes is now legal in 28 states and the District of Columbia.

If pot use continues to rise, we might see some impact. For now, we can and do underwrite occasional marijuana users as a preferred risk. Frequent users, whether for medical or recreational reasons, are more likely to be rated like a smoker, the underwriting factoring in both elevated health and accident risks.

By leveraging data analytics tools and consumer research, Voya Financial is able to gain a clearer understanding of the “voice of the customer.”

LHP: Voya and Lincoln Financial just launched new annuities. How have customer demands changed for annuities? And what has been the impact on product development?

Johnson: Nearly all — 97 percent — of the annuities we sell today we developed in the last three years. We've been very active in building out an annuity portfolio with a variety of innovations. Our most recent solution, Voya Journey Index Annuity, is a fixed indexed product that offers 100 percent participation in the growth of one or more dynamic indices over a 7-year period.

Fixed indexed annuities have seen spectacular growth over the last few years. The products resonate well with folks looking for upside potential and principal protection — key benefits for individuals whose suffered significant investment losses during the 2007-2009 financial crisis.

Many of our products — though not all — also boast income benefit guarantees. As a result, there’s much greater acceptance by banks and brokers-dealers of these products in the last several years.

LHP: How has product development at Voya changed during this period? To what extent do new technologies, research and data analytics underpin your ability to innovate?

Johnson: Traditionally, much of product development is based on feedback from those at the top of the distribution hierarchy. Such limited feedback is filled with biases.

In 2015, we launched Voya’s Strategic Relationship Management group and the Customer Solution group to better leverage company-wide relationships with key customers and strategic partners, and to innovate and deliver new products, services and tools. By leveraging data analytics tools and consumer research, we’re able to gain a much clearer understanding of the “voice of the customer.” The additional knowledge and insights let us build products that customers, advisors and distribution partners can adopt and support.

We also do a lot of testing and learning through product prototyping. And we use data analytics to understand more about in-force customers so we can target them at the right time and with the right info. This year, we also kicked-started a tech-based community to elicit feedback from advisors and customers on product ideas we're thinking about.

 

LHP: The DOL rule keeps shifting. What should advisors be aware amid such uncertainty?

Johnson: Our advice to advisors is to be ready. Yes, there's a lot of confusion now about what will happen given the delay in the rule’s implementation. But advisors and distribution partners need to be prepared to implement aspects of the rule. As I noted earlier, we’ll continue to see a migration among firms to an advisory-oriented and planning model. There will also be greater standardization of compensation across product lines.

Under President Trump's Direction DOL Moves To Delay Fiduciary Rule

March 1, 2017: By Forbes

InterWeb Insurance can cover you for all your E&O

 

The Department of Labor (DOL) announced today that it is moving forward, under the direction of President Trump, with its efforts to delay the applicability date of the new fiduciary rule, which was designed to require all financial advisors providing investment advice regarding retirement savings to act in the best interest of their clients. The DOL, in its proposed rule delay, which will likely be published on March 2, 2017 in the Federal Register, seeks a 60-day delay of the fiduciary rule, currently set to start on April 10, 2017.  The proposed 60-day rule delay is also a new rule and will have a short 15-day public comment period ending on March 17, 2017. This action is in direct response to a February 3, 2017 memorandum by President Trump, directing the DOL “to examine the Fiduciary Duty Rule to determine whether it may adversely affect the ability of Americans to gain access to retirement information and financial advice.” Furthermore, the memo directs the DOL to “prepare an undated economic and legal analysis concerning the likely impact of the Fiduciary Duty Rule.”  Ultimately, President Trump’s memo also directs the DOL to move forward with “rescinding or revising the Rule” after undergoing the proper reviews and rule making procedures.

So where does the DOL’s new proposal leave the rule? Well, according to fiduciary expert Peter Gulia, whose Fiduciary Guidance Counsel law firm advises retirement plan fiduciaries and investment advisers, “the proposed rule – if adopted, published, made effective, and not enjoined – would extend the applicability date of the 2016 investment-advice fiduciary rule from April 10 to June 9, 2017.  It would likewise extend the expiration date of the 1975 investment-advice fiduciary rule.  The proposed rule would extend the availability date of the Best Interest Contract Exemption from April 10 to June 9, 2017.  Likewise, relevant dates for other new and revised exemptions published on April 8, 2016 would change to June 9, 2017.” However, Mr. Gulia also notes that the DOL is on a tight deadline to get a final rule published before the April 10 “compliance” date. The DOL needs to read and analyze all of the comments on the proposed rule delay within two or so weeks in order to have the new rule delaying the current rule published by early April.

Under President Trump's Direction DOL Moves To Delay Fiduciary Rule

President Donald Trump addresses a joint session of Congress on Capitol Hill in Washington, Tuesday, Feb. 28, 2017, as Vice President Mike Pence and House Speaker Paul Ryan of Wis., listen. (Jim Lo Scalzo/Pool Image via AP)

So why is this important? Simply put, the DOL fiduciary rule was designed to make sure that, if you hire a financial advisor to help with your retirement planning and assets, the financial advisor acts in your best interest, avoids conflicts of interest when possible, and is transparent with you about his or her compensation and fees. Many people are surprised to learn that such a rule does not already exist for financial advisors since financial advice, at its core, would appear only to be needed precisely to ensure the best interests of the consumer. While the fiduciary rule was not supported by everyone in the financial services industry, it has been hailed as a workable rule that is a step in the right direction for financial services, and the delay in implementation is expected to be the first step in terminating the rule as it exists today. The delay of the rule, and potential revision or rescinding of the fiduciary rule, is an overt attempt to protect the status quo of financial advice in the United States.

 

The fiduciary rule, which is set to go live in April, has been debated and in the works for approximately seven years. Even after all that time, many financial advisors remain split on the current rule, with some pushing the benefits of having a more uniform fiduciary standard across the board and others saying it will harm consumers by raising the cost of receiving financial advice. The reality is that the rule is a bit of both. A best interest standard is needed for financial advice, and really, no one disagrees with that point. However, many advisors and financial service professionals contend that the current rule pushes out low and middle income Americans by making the use of commission based accounts and products harder to use as a financial advisor. Furthermore, the fiduciary rule would open up liability for financial service firms and advisors, potentially increasing overhead and costs associated with providing advice, which would likely be passed down to consumers over time.

It appears, with a new Administration pushing against the rule, the status quo and no expanded fiduciary rule might be the most likely outcome. As such, the version of the fiduciary rule set to go live in April will likely never see the light of day. However, the DOL still has a lot of work to do in order to delay the rule and then to suspend or revise the rule. This leaves many Americans and the financial service industry in limbo. So stay tuned for further updates on the fiduciary rule, as changes and developments will likely continue far past April.

Contact us today and let’s talk!