The Department of Labor’s proposed fiduciary rule on retirement account investment advice is bad for the industry and bad for consumers.

This is the overwhelming consensus of industry associations that have submitted last-minute letters in advance of a comment deadline set by the DOL. Among the organizations voicing concerns: the Association for Advanced Life Underwriting (AALU), the American Council of Life Insurers (ACLI), the National Association of Insurance and Financial Advisors (NAIFA) and National Association of Independent Life Brokerage Agencies (NAILBA).

Read: Opponents say DOL fiduciary rule unworkable

“In its current form, the proposed rule presents major—and in some cases, insurmountable—obstacles for NAIFA members serving middle-market retail investors,” NAIFA states in its comment letter. “The proposal portends a dramatic shift in the way our members will interact with their clients and conduct their businesses, and a significant increase in the cost of conducting their business.”

That view is echoed in the joint comment letter submitted by AALU and NAILBA, which label the complex rule “unworkable” and not compatible with the industry’s business models.

“The proposal imposes unreasonable limitations, requirements and additional costs on life insurance companies and agents, making it difficult to provide advice and financial products to retirement savers that need them the most,” the letter says.

Among other provisions, the proposal requires that advisors put their client’s best interest first by providing impartial retirement plan advice. To receive commissions on product sales, they must qualify for a best interest contract exemption or BICE.  That means inking a contract with clients that: (1) commits them to providing advice in the client’s best interest; (2) warrants that the firm has adopted practices and procedures designed to mitigate potential conflicts of interest when providing advice.

Read: Fitch warns of potential disruptions from DOL rule

The proposal also calls on brokers to “clearly and prominently” disclose conflicts of interest, including hidden fees buried in the fine print or backdoor payments. Brokers must also direct the clients to a webpage disclosing their compensation arrangements; and communicate that clients are entitled to complete information on the fees they charge.

One consequence for advisors who don’t comply with the rules will be an excise tax on transactions produced by conflicted advice.

Read: What DOL fiduciary rule means for plan communications

Just how costly will the rule be to the industry? Citing U.S. Chamber of Commerce figures, the AALU and NAILBA peg the actual tab at “5 to 10 times” the DOL’s estimate of $792 million over 10 years.

The two associations also view as unrealistic (1) the DOL’s estimate (60 hours) of the time required by a provider’s in-house attorney to draft and review BICE-related disclosures; and (2) the number of brokers who would rely on the BICE exemption to maintain commissions (the DOL surmises half of all brokers; the industry believes the percentage will be “much larger.”)

“The Department failed to conduct a thorough, objective cost-benefit analysis in this rulemaking by overstating benefits, understating costs, and disregarding harm to small retirement plans,” states the ACLI. “The analysis fails to examine the proposal's impact on the annuity market and the availability of lifetime income.”

The industry associations further contend that the rule's “substantial costs” and “administrative burdens” would prompt many brokers to exit the business — leaving many middle market consumers in the lurch. Other advisors may refocus their practices and no longer offer services to small plans or individuals with small accounts.

Those who do will find their latitude for advising retirement savers circumscribed. The proposal would limit education activities designed to assist savers with asset allocation and retirement planning. It treats educational materials as “recommendations” if they include references to specific investment products, investment alternatives, or distribution options — including annuities available under a plan or IRA.

NAIFA argues that rule’s restrictive definition of investment “education” would prevent advisors from providing “meaningful education” to their clients. Investors unwilling to sign the BICE and unprepared to pay upfront or out-of-pocket fees may also forgo advisory services.

“The proposal could result in some advisors exiting the market entirely, which for some rural communities, could result in a complete void of professional financial services,” NAIFA said in its comments.

Receiving investment advice would become more expensive under the proposal as brokers seeking to comply with proposed transaction exemptions or PTEs (of which the BICE is one) would shift their compensation structure from commissions to fees. And these fees would have to factor in the high cost of complying with PTEs, making advice less affordable for small businesses and account holders.

Another bone of contention: the absence under the BICE of a commission exemption when advising on retirement account rollovers and distributions.

“When investors nearing retirement age contract insurance professionals with questions about options for their qualified plan, they will no longer be able to provide important information, but will simply have to refuse to answer questions or serve those needing guidance,” the AALU and NAILBA assert in their letter.

The BICE also comes under fire in the letter for mandating the signing of a pre-advice, pre-sale contract.

“The idea that investors would sign a contract shows a serious misunderstanding about how financial markets work — in fact, it shows confusion about how consumer markets work in general,” AALU and NAILBA assert. “In [our members’] experience very few people will ever sign such a contract unless an advisor can specifically talk about how they can help their client beforehand.”

Yet another objection to the BICE: a contract may not include disclaimers limiting the liability of an advisor or the insurer for violating the contract’s terms. This provision will likely result in increased customer litigation, arbitration and, ultimately, more expensive products.

“Unfortunately, the [BICE] exemption provides no clear path to compliance and would increase legal exposure, the potential for class action lawsuits, and excise taxes, the ACLI states in its letter. “This risk will add to the cost or, more likely, limit the availability of transactional commission-based services.”

The AALU/NAILBA letter also flags as “not compatible” with industry business models the proposal’s warranty provision. Bonuses, differentiated compensation and incentives the proposal labels “conflicted interest compensation” are in fact “common and necessary” to ensure that retirement savers can secure affordable life insurance products, the AALU and NAILBA contend.

Product-wise, the proposals’ opponents foresee a decline in annuity sales, a dip that would be felt most by those who need guaranteed income products: low- and middle-income consumers.

Also objectionable: the DOL’s position (as indicated in a provision of BICE) that offering a limited range of proprietary products cannot serve the best interests of the client. The requirement that the advisor provide notice to this effect will, the AALU and NAILBA argue, discourage investors from buying retirement savings products, most especially lifetime income products like annuities.

“The Department’s proposal foists a heightened burden on advisors who offer annuity products to non-fee-paying clients,” NAIFA states in its letter. “In addition, the proposal’s structure for annuities is particularly complex and confusing, which will make offering these products more difficult and costly." 

The AALU and NAILBA agree.

“Average Americans will bear the burden by having significantly less access to professional financial advice and few options to save for retirement, particularly through lifetime income products such as annuities,” their letter says.

The proposal might have met with less resistance if the DOL had demonstrated that financial markets and the current broker-dealer model are harming retirement savers. On this score, the AALU and NAIBA insist, the DOL failed: The department cites as justification for the proposal statistics “not supported” in academic literature.

Compliance with the proposal, which NAIFA describes as “dense, complicated, and confusing,” will prompt product providers to adopt “overly conservative and restrictive policies and practices” so as to fend off liability for violations of the new rules. Their advisors will follow suit. Upshot: fewer services and less advice. 

“As it stands, nearly all of our members who become fiduciaries will have to alter their current compensation arrangements — for at least some clients and some products — or satisfy a PTE,” NAIFA states. “Both options carry significant risk of harm to retail investors.”

See also:

AALU: Life industry facing a 'bloody battle' over DOL's fiduciary rule

Taking stock of the DOL’s fiduciary rule proposal

AARP storms Capitol Hill over fiduciary standard

BlackRock says DOL rule against broker bias favors index funds