DOL Rule concerning Proprietary Products

As I mentioned in the previous post, if you offer proprietary products, the new Department of Labor rules are about to rock your world, and not in a good way. As the DOL explains, " Proprietary products are products which the firm or its affiliate manage, issue, or sponsor, and an adviser may face increased conflicts of interest with respect to advice on such products due to the benefit to the firm. Advisers/financial institutions offering a limited set of proprietary products must fully disclose that they are offering only a restricted menu of products, and also disclose the associated conflicts of interest, adopt measures to protect investors from those conflicts, and insulate the adviser from conflicts when making recommendations from the restricted menu. In addition, advisers that recommend a limited set of products must consider what is in the retirement investor's best interest, and, if it is a product that they do not offer, they cannot recommend a product from their limited menu." That means it's going to be very difficult to sell an equity-indexed annuity to a retirement investor. And, if the broker-dealer sells mutual funds that their related investment advisory arm manage, or if they sponsor the funds as wholesalers, they are going to have to rethink that whole business model from top to bottom. This is big stuff here, people. Huge, in fact. Get Help on your Series 7 Exam

What does the new Department of Labor Fiduciary Rule mean to you?

The new Department of Labor Fiduciary Rule is too complex to handle in one blogpost. But, I can still address the basics in a few words. As the Department explains, "When the basic rules governing retirement investment advice were created in 1975, 401(k) plans did not exist and IRAs had just been authorized. These rules have not been meaningfully changed since 1975. The Proposed Regulation is intended to take into account the advent of 401(k) plans and IRAs, the dramatic increase in rollovers, and other developments that have transformed the retirement plan landscape and the associated investment market over the four decades since the existing regulation was issued. In light of the extensive changes in retirement investment practices and relationships, the Proposed Regulation would update existing rules to distinguish more appropriately between the sorts of advice relationships that should be treated as fiduciary in nature and those that should not." What that means is that if any of your customers is investing in a retirement account, you will not be able to treat him as a customer to whom any suitable product can be offered and sold. Rather, you will have to figure out a way to work with the investor as a fiduciary, with a contract stating that you intend to act as a fiduciary. A fiduciary can be sued for breach of contract if he fails to disclose all potential conflicts of interest. In other words, a fiduciary can't act like a salesman. Rather, a fiduciary has to place the needs of the client first. As the DOL states, "In order to protect the interests of the plan participants and beneficiaries, IRA owners, and small plan sponsors, the exemption would require the adviser and financial institution to contractually acknowledge fiduciary status, commit to adhere to basic standards of impartial conduct, warrant that they have adopted policies and procedures reasonably designed to mitigate any harmful impact of conflicts of interest, and disclose basic information on their conflicts of interest and on the cost of their advice." That's a sea change right there in the way registered representatives have dealt with customers up to now. Further, the DOL explains that "The adviser and firm must commit to fundamental obligations of fair dealing and fiduciary conduct—to give advice that is in the customer's best interest; avoid misleading statements; receive no more than reasonable compensation; and comply with applicable federal and state laws governing advice." BTW, for purposes of the rule, anyone who works with a retirement investor is an "adviser" going forward, whether he's licensed as a life & health-plus-securities representative, an RIA or an IAR. If you work with retirement investors you are an "adviser" under the new rules, period. Beyond the best-interest-contract with customers, registered representatives and their firms are going to have one heck of a time selling proprietary products, but this is already running longer than I intended. Need help with Series 7?