Recent actions by the U.S. Department of Labor (DOL) are causing insurance and other financial services brokers to rethink their business models and how they communicate with their customers. That's because the DOL recently finalized a controversial new standard broadening the definition of who constitutes a "fiduciary" under the Employee Retirement Income Security Act (ERISA).
Essentially, the rule, with an applicability date of April 10, 2017, heightens the duty of financial advisers for 401(k) plans and IRAs who are considered "brokers," defined as registered representatives of a broker dealer paid commissions by the investments they recommend. Before the new rule, brokers were held to a standard of suitability, which meant that, when a broker recommended that a client buy or sell a particular security, the broker must have a reasonable basis for believing that the recommendation is suitable for that client. That standard allowed brokers to recommend an investment product that paid them a higher commission as long as it was suitable for the client, even though it may not be the best choice. Under the new fiduciary standard, brokers must put their clients' interests ahead of their own in recommending investments.
See also: Do Brokers, Agents Owe Fiduciary Duty?
The new standard for brokers puts them on par with investment advisers registered with the Securities and Exchange Commission or individual states, who were already required to meet the fiduciary standard. The change presents a challenge to the business model of brokers, who typically get paid from commissions, unlike registered investment advisers, who are paid a percentage fee based on the amount of plan assets under management.
New challenges for broker customer communications
The challenges the new rule poses for brokers don't end with compensation. The new duty will directly affect any information brokers provide to customers in print or digital form that might be deemed a "recommendation" under the rule. A fact sheet provided by the DOL describes a "recommendation" as follows:
“A ‘recommendation’ is a communication that, based on its content, context and presentation, would reasonably be viewed as a suggestion that the advice recipient engage in or refrain from taking a particular course of action. The more individually tailored the communication is to a specific advice recipient or recipients, the more likely the communication will be viewed as a recommendation.”
A holistic view of the customer communications ecosystem
In short, every broker customer communication will now need to be audited to determine whether it constitutes a recommendation and modified if it would violate the new standard. This could be an onerous task.
Customer communications management (CCM) processes will be essential for complying with this new rule. Adding personalization to communications is a huge advantage to the adviser, but it is now critical to have a process for reviewing these personalized communications to confirm that they conform to the new legal reality.
CCM becomes even more critical considering the efficiency and control that can be gained by centrally managing this content. Scattered, decentralized communications processes will make it far more likely that an adviser will send noncompliant content to a customer, exposing the company and the adviser to considerable risk.
Many insurance agencies and other brokers use legacy systems to generate their customer communications, which makes it costly and time-intensive to modify them to ensure compliance with the new rule. IT departments have the skills to make the needed changes, but not the time or full expertise to review and audit the updated customer communications. Insurance organizations should give careful consideration to the following to identify potential obstacles to compliance:
- Determine where customer information is stored. If it resides in multiple departmental systems, there is greater risk that advisers will send noncompliant communications to customers unless these systems are coordinated.
- Consider whether existing CCM processes and systems are flexible enough to incorporate compliance review for today's wide range of communications channels, including mobile, email, web pages and social media.
- Analyze how customer activities are supported by different channels in the organization. Channel communications may be intertwined from a customer's perspective, but managed separately within the organization. Achieving compliance will require understanding how communications appear to the customer.
- Ensure that compliance officers and other regulatory personnel are engaged early in communications creation and automate approval processes to speed time-to-market and create audit trails.
