by Lisa A. Grimaldi | July 01, 2016

When President Obama asked the Department of Labor last February to update the rules designed to protect U.S. citizens' retirement funds, he stated, "It's a very simple principle: You want to give financial advice, you've got to put your clients' interests first." Fourteen months later, the DOL revealed its so-called "Conflict of Interest rule".  It specifies that financial advisers, consultants, brokers and agents who sell or offer advice on retirement products -- such as an IRA or a 401(k) -- must be able to prove that they acted in their clients' best interests.

While the rule, to take effect on Jan. 1, 2018, might give retirees peace of mind, it's causing headaches for companies and professionals who provide incentives for financial and insurance firms. A joint statement released last March by Financial & Insurance Conference Planners and SITE, the association that represents incentive travel professionals, noted that "financial-services firms will likely be forced to eliminate certain incentives or significantly change compensation structures" due to the new requirement.

To understand how the rule will affect incentive programs in 2018 and beyond, M&C reached out to three industry leaders who are closely following this topic: Steve Bova, executive director of FICP; Kevin Hinton, chief excellence office of SITE; and Larry Niland, senior regulatory adviser to LIMRA, a research, learning and development organization for financial services firms. Following are key points for planners.

Who is affected by this change?
The ruling applies to anyone who receives a fee or other compensation -- such as trips or gifts -- directly or indirectly, for providing investment advice for retirement accounts, including employer-sponsored retirement programs, IRAs and many Health Savings Accounts.

Larry Niland
Senior Regulatory Advisor

 What's the significance of a "ruling"?
Rulings represent an "authoritative decision, decree, statement, or pronouncement made by an empowered authority or influence," as outlined by SITE and FICP. According to Larry Niland, it gives individuals the right to sue their adviser if they feel he or she didn't act in their best interest.

How is this expected to affect incentive programs?
Firms might decide to cut certain incentives or significantly change compensation structures that currently are in place. "These changes could well reduce opportunities to foster business growth, support the economy, and motivate and reward top-performing employees," said FICP's Steve Bova and SITE's Kevin Hinton in their joint statement.

Does this mean financial companies no longer can sponsor incentives related to retirement products?
"This rule wasn't meant to be clear black and white," says Niland. Rather than giving up on incentives, Niland recommends changing the goals and focus. "Instead of offering prizes, including incentive travel, for new sales, you can offer prizes for different things, such as rewarding advisers whose customers' accounts grew the most. Companies need to create incentives that align with customers' interests, rather than the sellers'."

In addition, the DOL has outlined a feature, known as the "best interest contract exemption," for companies that want to continue offering rewards for annuity sales (see sidebar, "A Way Around the Rule?," below). Niland, however, feels the exemption puts too much legal burden on advisers and firms to prove they made the best recommendations for their clients.