Insurance-based broker-dealers plan to use BICE under DOL fiduciary rule

Some firms are rethinking a shift to fee-based compensation and instead are sticking with commission structures that will trigger the need for best interest contract exemptions.

Insurance companies with affiliated broker-dealer networks are slowly coming out of their hibernation phase that followed release of the Labor Department’s final fiduciary rule in early April, with some announcing plans to comply with portions of the regulatory text.
Specifically, insurers such as Massachusetts Mutual Life Insurance Co., Lincoln National Corp., Primerica Inc. and Ameriprise Financial Inc. have noted or strongly hinted at intent to use a part of the rule called the best interest contract exemption (BICE), which exposes firms to extra compliance requirements and litigation risk.
“We’ll embrace the BIC standard,” John Vaccaro, senior vice president and head of the MassMutual Financial Network, the firm’s sales and distribution network, told InvestmentNews. “I think if [brokers] want to participate in the qualified marketplace, the BIC standard is the best way to go. I don’t see another alternative.”
Will Fuller, president of Lincoln Financial Distributors and Lincoln Financial Network, as well as Lincoln National’s annuity solutions team, iterated similar plans during an investor call last month.
“In our own B-D, LFN, we have already made this decision. We announced about a month ago to our advisers that we will operate to the BIC,” Mr. Fuller said. “And we are working towards that process as we speak.”
This sort of sentiment is a far cry from feelings harbored by brokerage executives under the proposal of the Department of Labor’s fiduciary rule, which raises investment advice standards for retirement accounts such as 401(k)s and IRAs.

(More: Everything you need to know about the DOL fiduciary rule as it develops)

Brokers need to use the best interest contract exemption with sales to qualified accounts resulting in variable streams of compensation, such as commissions and 12b-1 fees. This is significant to brokers selling insurance products such as variable and fixed indexed annuities because they are largely sold on a commission basis.
The insurer American International Group earlier this year sold AIG Advisor Group, one of the largest networks of independent broker-dealers in the country, in part due to the looming fiduciary regulation. MetLife Inc. subsequently sold its U.S. adviser unit to MassMutual.
Some of the BICE disclosures and other requirements perceived as particularly onerous in the rule’s proposal were removed or amended by regulators, and these changes make the BICE more palatable, insurance executives and analysts said.
“It seems with that the changes that were made, brokers are willing to use it in order to preserve the commission system,” Steven Schwartz, an analyst at Raymond James & Associates, said. Less disclosure equates to less potential to make a mistake and provide a road map for attorneys to bring a lawsuit, Mr. Schwartz said.
Prior to such changes, some firms contemplated shying away from compensation structures that would trigger use of the BICE, and instead embrace fee-based compensation to achieve level compensation and avoid BICE compliance.
“While we have been preparing to use a levelized fee platform in lieu of an exemption, we are now considering whether the use of BICE would provide us with more flexibility,” Glenn Williams, Primerica’s chief executive, said during the company’s first-quarter earnings call.
“In the final rule that was released on April 6, the DOL made changes to the best interest contract exemption that addressed several of the reasons we were reluctant to use the exemption as originally proposed,” Mr. Williams said.
Jim Cracchiolo, chairman and chief executive of Ameriprise Financial Inc., implicitly acknowledged the firm’s plans to use the BICE, saying during the firm’s Q1 earnings call that its advisers will be able to continue selling proprietary variable annuities in qualified accounts due to changes made in final regulatory language.
Many firms have been mum, at least in public statements, about plans to comply with the rule. But it seems a matter of time before the broader broker-dealer community follows suit, executives said.
“Frankly there’s either firms that have announced it, intending to announce it or working towards an announcement. I’m not and I don’t believe my team is aware of a partner that’s choosing not working towards the BIC,” Lincoln National’s Mr. Fuller said. “I would add that firms were slow to make that announcement because they really wanted to check and double check.”
Because so many insurance brokers rely on commission-based income, and would be “seriously negatively affected,” at least for the first few years after DOL rule implementation, “it’s not surprising that the companies would do their best to make [the BICE] work if at all possible,” Mr. Schwartz said.