Attrition fears play into broker-dealers’ hesitation to detail new commission schedules under DOL fiduciary rule

One main theme emerged amid discussion about the Labor Department’s fiduciary rule at the Insured Retirement Institute’s annual conference this week: Broker-dealers are either still determining the annuity commissions that would likely satisfy the rule’s “reasonable compensation” requirements, or they’ve made that determination but have taken a vow of silence.
While it’s likely not broker-dealers’ primary motivation for keeping mum, fear of adviser attrition plays into their strategy, insurance and brokerage executives said.
Let’s take a step back for a second to set the stage.
The Department of Labor’s regulation, released in April, makes a fiduciary of anyone receiving compensation for providing investment advice in retirement accounts such as IRAs and 401(k)s.
The rule, which aims to eliminate conflicts of interest, says advisers and financial institutions must only receive reasonable compensation for the recommendation of investment products such as variable and indexed annuities on a commission basis.
However, the DOL wasn’t prescriptive in terms of what’s meant by “reasonable.” So, broker-dealers must weigh how to price their products in a way that fits with the spirit of the rule.
That’s proving to be a delicate balancing act. Pricing higher than peers could ultimately draw unwanted attention; pricing lower could lead advisers to depart for higher-paying competitors.
So, consequently, no one wants to be a first-mover.
“It’s a reasonable fear for broker-dealers to go out and show their cards right now,” Kevin Loffredi, senior product manager of annuity solutions at Morningstar Inc., said.
Insurance companies have a bird’s-eye view of what brokerages are considering by way of reasonable compensation. Many broker-dealers, especially larger firms, are requesting customized commission schedules from insurers that fit within their compensation framework.

‘WAIT AND SEE’
Carolyn Johnson, chief executive of insurance solutions at Voya Financial Inc., said she’s heard from some, but not all, brokerages regarding their commission decisions.
Although she declined specifics, she described why some might be taking a “wait-and-see” approach.
If one broker-dealer announces it will pay brokers a 4% upfront commission on a variable annuity under the DOL-fiduciary regime, and then its peers come out at 4.5%, the former’s registered representatives may move their practice to a new home, Ms. Johnson said on the sidelines of the IRI conference, which occurred Sept. 25-27 in Colorado Springs, Colo.
Other conference attendees privately agreed with that notion.
Some made the point that adviser attrition probably isn’t a primary motivator for brokerages playing their cards close to the chest.
“I think whether it’s DOL or anything else you’re always worried about people moving around,” Philip Pellegrino, executive director and head of annuities at UBS Financial Services Inc., said. He added that while he could “appreciate” attrition being a consideration, “I don’t think we should exaggerate it.”
More than attrition, Mr. Pellegrino believes firms are being deliberately cautious about announcing things too quickly, and are more concerned about “getting it right.”
“It’s good people are taking their time to do what they think is most appropriate,” he said.
Morningstar’s Mr. Loffredi also believes attrition is a secondary consideration.
“The primary issue is they still don’t really know what fair compensation is,” Mr. Loffredi said. “I think that’s the biggest problem, and a side effect could be if they come out with too low a number they could see attrition.”
Plus, decisions made today could change as firms recalibrate or get a better handle on what peers consider reasonable.
Bernie Gacona, senior vice president and director of annuities at Wells Fargo, for example, said the firm knows what its annuity commission schedule will look like in April 2017, when the DOL rule goes into effect, but declined to provide specifics because they could ultimately change.

HINTS
There are hints as to what some firms are considering, though.
Some have increased compensation as a result of the rule, which many say is a consequence that runs counter to the DOL’s intent.
Although she declined to identify the specific firm, Ms. Johnson of Voya offered one example of a brokerage planning to go this route on annuity products.
Whereas a traditional variable annuity with a seven-year surrender period may have an upfront commission in the range of 4%-4.5%, the firm in question has requested a 5% upfront commission from Voya. Plus, the firm wants to add an additional 1.5% for wholesaling costs, meant for the firm rather than the adviser, due to the additional risk the firm faces in selling the product under the DOL framework.
Taken together, that’s a “huge percentage increase,” Ms. Johnson said.
Some have levelized commissions — or, made commissions the same — for certain product lines, in order to avoid appearance of a conflict of interest when recommending an investment.
UBS levelized its variable-annuity compensation in January, for example, Mr. Pellegrino said. Declining to offer specific figures, he said there are three commission options available, which vary in the level of upfront versus trailing commissions, in order to provide flexibility for advisers.
LPL Financial levelized compensation across multiple product lines, including variable annuities, in May, according to Warren Posner, senior vice president of complex product management. Similar to UBS, LPL also decided on three commission options, the difference being proportion of upfront and trailing compensation to the adviser, Mr. Posner said. He declined to provide specific figures.