Ethics Center: Sales & Marketing

DOL Rule to Annuity Agents: "Defend Your Recommendations!"

It’s probably not hyperbole to say that the new U.S. Department of Labor Fiduciary rule is completely changing the financial services sector. The rule, which started implementation on June 9, is altering the way many annuity salespeople do business. 

Unless your head has been in the sand, more than likely you are aware that the DOL fiduciary rule now requires all financial professionals to adhere to a fiduciary duty when servicing clients' qualified retirement assets. 

This means that financial professionals must disclose any existing conflicts of interest, disclose compensation, and make recommendations that are in the client’s best interest. This is a heavier burden than existed under the previous suitability standard and requirements. If you are in the financial services business, don't underestimate the difference this rule makes on how you conduct business and the increased liability you now take on.


DOL Rule

Many people have assumed that all financial advisors were required to put client interests first all along. However, for many people who sell annuities, this has not been the case at all. There is a big difference between the legal responsibility of acting as a fiduciary vs that of the suitability standard.

With the suitability standard, a salesperson could recommend an annuity as long as the recommendation met a client’s general needs and objectives and it would be considered a suitable recommendation. But just because it was a suitable recommendation, does not mean it was the best recommendation for them.

A “fiduciary duty” is the highest standard of care for financial professionals. This means that those acting as a fiduciary have a duty to act in a client’s best interest, to eliminate all possible conflicts of interest and to disclose those that cannot be eliminated. If the financial professionals required to uphold a fiduciary duty are found to have put their own self-interests first, it’s possible that they’ll be liable for any ill-gotten profit or damages.

Until June 9, the higher fiduciary standard only applied to a select group of financial professionals who held specific securities registrations, including the Series 65. After June 9, the fiduciary standard applies to all financial professionals providing advice or recommendations relating to ERISA plans or individual retirement accounts.


Old World Transition to New World

Many annuity salespeople previously touted their “independence,” implying to the public that they had access to a wide array of annuities, to help address the unique needs of their clientele and show they’ve looked through many options to come up with a great solution for them.

In reality, they may have had access to a variety of products, but many were generally selling only one, two, or a limited number of their favorite products. They held themselves out as independent, but if every client problem or need is given the same product solution, it would be hard to substantiate the claim that they are acting as a fiduciary. In the new post-DOL Fiduciary Rule world, this likely isn’t going to fly and could very well be considered misrepresentation.

So with this new rule, not only comes the potential for increased liability, but increased responsibility at the same time. Advisors need to offer what’s best for their clients’ needs, but, in order to do that, they have to first be aware and understand what products and solutions are available to fit their needs. If you only look at one product to fit a need, you will only offer one product. The more you are up to speed on products, and the more access you have to those products, the better you’ll be able to uphold the fiduciary duty.

A prudent approach to adjust to the new DOL Fiduciary Rule may be for advisors to expand their product knowledge and access on a continual basis. Offering only one product or a very limited number of products may make it difficult to substantiate that the fiduciary duty has been upheld. This means, the old “one trick ponies” will have to evolve, or they are destined to become extinct.


How to Comply

Annuity salespeople will need to increase their due diligence in solving their client’s needs, but they’ll also need to have a set process in place that they follow in order to determine the best products for their clients. This process that they use and the rationale and justifications for their recommendations should be fully “documented” and saved for later as well.

In fact, this documentation is required by law, to be saved for at least six years.

As the potential for liability increases, it’s likely only a matter of time before advisors are questioned about their recommendations. And if their file is empty or if the process they used to come up with recommendations for clients doesn’t make a clear case that they did the right thing by them. Then they are putting themselves in an untenable position with exposure to paying damages to the client.

Going forward in order to comply with the new fiduciary rule, a good rule of thumb might be to ask yourself these two important questions.

  • If you were put on the stand and asked why you recommended a specific product or to your client, would your claims hold up?

  • Can you validate your claims with documentation that you took at the time you made the recommendation showing your due diligence?

If the answer is no, you might want to rethink the recommendations that you are making and how you’ve come up with those recommendations.

This article first appeared in the July 20, 2017 issue of ThinkAdvisor. Reprinted with permission. Not for redistribution or for commercial use.

Shawn Sparks is a financial services consultant and author of the book The Advisor Breakthrough. You can instantly download the first five chapters of his book for free here.

For information on affordable E&O insurance for low-risk insurance agents, investment advisors, and real estate broker/owners, please visit EOforLess.com. For information on ethical sales practices, please visit the National Ethics Association’s Ethics Center.