New Rules for Incentives

What financial firms need to know about rewarding top sellers

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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.

 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.

A Way Around the Rule?
The "best interest contract exemption," according to the Department of Labor, allows firms to continue to set their own compensation practices, as long as they, among other things, commit to putting their clients' best interests first and disclose any conflicts that might prevent them from doing so.

Common forms of compensation in use today in the financial-services industry, such as commissions and revenue sharing, will be permitted under this exemption, whether paid by the client or a third party such as a mutual fund. To qualify for the exemption, the company and individuals providing retirement investment advice must enter into a contract with clients that meets very specific criteria. For details, go to

What should planners be doing now to be prepared?
"Companies that sell these products are meeting on this every day to get the procedures in place," says Niland. He recommends that planners attend such meetings and work closely with key departments -- compliance, legal and sales -- for guidance on how to handle incentive programs going forward.

Are other changes on the horizon that might impact financial incentive programs?
Yes. Expect more standardization and scrutiny of annuity sales, as the Securities and Exchange Commission has indicated it plans to set similar regulations for retirement funds -- and all investments -- by next year.

SITE's Kevin Hinton says the SEC's expected move "reminds me of the PhRMA code" -- the far-reaching rules that regulate pharmaceutical meetings. "We are assuming we will see similarly universal adoption in the finance industry in the future."

How are FICP and SITE reacting?
"We want to raise awareness among our constituencies about the ruling and its potential unintended consequences, [such as an AIG-effect kind of backlash]," says Bova. "We want to be prepared in case the issue has a trickle-down effect that could negatively impact the perception of all meetings or incentive travel."

Most importantly, Bova adds, "Whatever happens with regard to how people qualify does not tarnish the importance of meetings or incentives, which are a proven way to communicate, share information, educate, build morale and reward top performers."


Three things all parties must promise in writing

The Department of Labor will allow firms to file for a "best interest contract exemption" to get around the new rule. To qualify, the company and individuals providing retirement investment advice must enter into a contract with clients that meets the following specific criteria.

• Commits the firm and adviser to providing advice in the client's best interest. Committing to a best-interest standard requires the adviser and the company to act with the care, skill, prudence and diligence that a prudent person would exercise based on the current circumstances. In addition, both the firm and the adviser must avoid misleading statements about fees and conflicts of interest. These are well-established standards in the law, simplifying compliance.

• Warrants that the firm has adopted policies and procedures designed to mitigate conflicts of interest. Specifically, the firm must warrant that it has identified material conflicts of interest and compensation structures that would encourage individual advisers to make recommendations that are not in clients' best interests, and has adopted measures to mitigate any harmful impact on savers from those conflicts of interest. Under the exemption, advisers will be able to continue receiving common types of compensation.

• Clearly and prominently discloses any conflicts of interest, like hidden fees often buried in the fine print or backdoor payments, that might prevent the adviser from providing advice in the client's best interest. The contract must also direct the customer to a web page disclosing the compensation arrangements entered into by the adviser and firm and make customers aware of their right to complete information on the fees charged. -- L.A.G.