2015-06-09-奥纬咨询-Distribution_Disruption_8页_171kb

Distribution Disruption: Impact of the DOL Fiduciary Standard on US Life Insurers

Core Content

The Department of Labor (DOL) has proposed expanding the definition of a fiduciary under ERISA and the Internal Revenue Code, which will significantly alter the advice landscape for 401(k) rollovers and IRAs. This change is expected to have wide-ranging implications for life insurers and the broader retail insurance distribution ecosystem.

Main Points

1. Impact on Distribution and Product Sales

• Significant disruption is anticipated in the advice landscape, particularly for products like Variable Annuities (VAs) and Fixed Index Annuities (FIAs), which are heavily reliant on commission structures.
• Over 50% of new money in the VA and FIA market, and 25% of Fixed Annuity sales, come from qualified retirement assets.
• The DOL estimates $2.5 trillion in 5-year flows from IRA rollovers, which is a major asset flow for insurers and wealth managers.

2. Changes in Advisor Compensation and Disclosure

• Advisors providing advice on ERISA plans or IRAs will be required to operate under the Best Interest Contract Exemption, which mandates:
  • Advice in the best interest of the investor.
  • Full disclosure of compensation structures.
  • Reasonable compensation limits.
• This will lead to:
  • Greater transparency in fee structures.
  • Downward pressure on fees as investors scrutinize options more closely.
  • Increased use of low-cost, passive investment strategies such as ETFs and index funds.

3. Strategic Impacts on Life Insurers

• Retention strategies for Defined Contribution (DC) assets will be affected.
• Mutual fund complexes and distribution economics will be impacted, especially with the use of broker/dealer platforms and tied agents.
• New business models are likely to emerge as the market adapts to the fiduciary standard.

Key Lessons from International Markets

1. UK Retail Distribution Review (RDR)

• 2006 FSA initiated RDR to address issues in the retail investment market.
• 2013 saw the implementation of a ban on commissions for new products, with grandfathering for prior sales.
• Advisors have shifted toward three distinct models:
  • Outsourcers focusing on financial planning.
  • In-house investment strategy firms.
  • Vertically integrated firms with incentives to use in-house funds.
• Self-investment and platform-based distribution have grown significantly.

2. Australian FOFA Reforms

• 2009 inquiry led to FOFA reforms, including a ban on conflicted remuneration and a Best Interests Duty.
• July 2013 saw the first implementation, with grandfathering for trail commissions.
• Self-Managed Superannuation Funds (SMSFs) have grown to over 30% of the superannuation market.
• Platform providers have become central to the distribution model, with consolidation and increased scale.

Strategic Recommendations for Insurers

1. Portfolio Strategy

   • Assess the impact of the fiduciary standard across all business lines.
   • Develop alternative future scenarios (Benign, Expected, Adverse, Severely Adverse) to anticipate market changes.
   • Plan for risk triage and opportunity capture.

2. Distribution Strategy

   • Understand how distribution partners will react to the new standard.
   • Analyze distribution economics by product and channel to identify disruption and opportunity zones.

3. Product Strategy

   • Consider radical product simplification to reduce reliance on high-commission structures.
   • Focus on simpler, lower-cost products that align with the fiduciary standard.

4. Legal and Compliance Strategy

   • Document and review current processes to align with fiduciary requirements.
   • Develop a compliance plan for the Best Interest Contract Exemption.

Conclusion

The DOL's fiduciary standard will materially impact the US insurance and wealth management industry, leading to disruption and a period of adjustment. While the exact trajectory is uncertain, similar trends have been observed in the UK and Australia, where commission-based models were replaced by more transparent, fee-based structures. Insurers should prepare by building scenarios, assessing impacts, and refining strategies to adapt to the new regulatory environment.

Authors:
Mick Moloney, Ramy Tadros, David Clarkson, Anthony Bice

Contact:
Oliver Wyman – info-FS@oliverwyman.com
Phone: +1 212 541 8100 (Americas), +44 20 7333 8333 (EMEA), +65 6510 9700 (Asia Pacific)
Website: www.oliverwyman.com

Disclaimer:
This report is not investment advice. It is intended for informational purposes only.