Tag Archives: robo adviser

DOL Fiduciary Rule: What It Means

In April 2016, the U.S. Department of Labor (DOL) released a regulatory package that established a new standard for fiduciary investment advice. Under the Fiduciary Rule, investment recommendation given to an employee benefit plan or an individual retirement account (IRA) is considered fiduciary investment advice and therefore must be in the “best interest” of the investor.

As a result, financial advisers who provide investment advice under the new standard now face limits on receiving commission-based compensation. Considering that 50% of U.S. financial assets is held in retirement accounts, the impact of the rule is significantly affecting insurers, broker dealers and investment managers.

The DOL has long been concerned that people rolling over assets from an employer-sponsored pension plan to an IRA are not being well-advised and, as a result, are investing in products that are not most suitable for their needs or are unnecessarily expensive. Central to the DOL concern is what it perceives to be a lack of transparency around the standard under which an adviser is providing advice and how he/she is compensated. This is not surprising because advisers operate under multiple standards, with a majority of asset flows falling under a “suitability” rather than fiduciary standard.

To address these concerns, the DOL expanded the definition of the term “investment advice” under ERISA, thereby imposing fiduciary status under both ERISA and the Internal Revenue Code on firms and advisers who provide investment advice under this expanded standard. A fiduciary is subject to the duties of prudence and loyalty and is prohibited from acting for his/her own interests or in a manner adverse to those of the ERISA plan or IRA. Accordingly, fiduciary status will have a fundamental impact on adviser compensation, as advisers who are fiduciaries may not use their authority to affect or increase their own compensation in connection with transactions involving an ERISA plan or IRA.

See also: Does DOL Ruling Require a Plan C?  

A catalyst of widespread organizational change

The DOL Rule is causing significant changes to the insurance industry that go well beyond compliance. While the industry needs to be prepared for the June 2017 applicability date, delayed from the original April date, the rule (even if delayed again) is also a catalyst for more meaningful change for both insurance manufacturers and distributors. In many cases, these changes have been contemplated for some time.

Compensation For starters, to mitigate any conflicts of interest resulting from distribution compensation, insurers should inventory current compensation and understand the impact of changing models to various distribution channels. The industry has been focusing on the issue of compensation for some time, anyway (e.g., moving to commissions for annuities), and the DOL rule provides further impetus for change. This change will not be easy, not least because the industry has a variety of products and uses different distribution models. To facilitate the transition to the new environment, carriers and distributors will need to understand the current hierarchy and how it might change.

  1. What is the distribution channel? Is the distributor a fiduciary? If so, what exception or exemption is the distributor using?
  2. How will changing the hierarchy affect agents’ livelihood?
  3. Do you risk losing agents to a carrier that will pay “conflicted” compensation?
  4. How do you factor in outside compensation (e.g., marketing fees and allowances, 12-B1 fees)?
  5. Depending on the product shelf, there will be different types of conflicts.
  6. Determine which transactions are prohibited. Determining “red” and “green” transactions should be relatively easy, but determining “yellow” ones will be much more difficult, especially because the rule is fairly ambiguous in this regard.
  7. Understand each other’s point of view. Distributors will create rules for types of compensation they will allow in their systems. Although they are currently uncertain about how they will have to adapt, carriers will have to change their compensation structures and communicate them to distributors.

Carriers and distributors will also need to safeguard against personal and organizational conflicts of interest.

  1. How do we pay our workforce and others?
  2. What is non-cash compensation?
  3. How do we provide incentives to agents to sell products and sell certain product classes over others?
  4. What is the difference between suitability and fiduciary?
  5. Inventory products and create a tool to identify potential conflicts. This will be a complex undertaking, but it will enable carriers to determine who and how much carriers pay and why, as well as if conflicts are permissible or need to be disclosed.
  6. Perform a compensation impact analysis; assess the performance of distribution compensation as it currently exists and what seems likely in the future. This should include an assessment of the future model’s effect on revenue, profitability, market position, channel attractiveness and overall company performance.
  7. As part of a change management strategy, ensure that there is regular, clear and informative communication – both internally and externally – on impending change.

Changes in agent training

Once the fiduciary rule is in effect, agents will need to be advisers first and sellers second. Even though many insurers, especially ones with captive sales forces, have already tightened sales practices in recent years, this does represent a genuine cultural shift and a novel convergence between compliance and sales and distribution. As a result, agents will need more training on their fiduciary role – all the way down to call center scripts – and, with rationalized product lines, most likely less product training than in the past.

Some carriers are experiencing impacts they didn’t foresee. Because of their increasing need to respond to fiduciaries’ requests, they’re having to adopt their distributors’ policies and procedures (including access data requests) and change their product portfolios, share classes and fee structures. If they don’t do this, they risk losing shelf space to insurers that do.

Product rationalization – The DOL rule is intensifying carriers’ and distributors’ focus on product rationalization. Smaller product portfolios and resulting streamlined distribution models will facilitate carrier understanding of its product suite and compliance risks when providing “best interest” advice to consumers, reduce training required for agents and help the industry reduce costs and increase scale. For example, with annuities:

  • There are many providers offering many similar products, and oftentimes riders emulate characteristics of other carriers’ products that companies can’t build themselves. The rule provides the industry further incentives to address the inherent inefficiency in this state of affairs.
  • When determining which products to sell, financial strength is going to be a key product rationalization consideration for distributors because compensation will be more normalized with fewer products. When product portfolios shrink, lower-rated carriers’ products aren’t going to receive shelf space, especially if distributors can’t clearly demonstrate their benefits to customers. As a result of portfolio rationalization and likely decreases in commissions, both carrier and distributor consolidation is likely to increase.
  • Moreover, this isn’t just a business decision but also a compliance one; distributors will have monitoring policy procedures to confirm adherence to this policy. Accordingly, distributors will have to establish a product selection methodology for each segment that accounts for appropriateness and applicability.

However, regardless of product, the challenges of rationalization also represent an opportunity for insurers to have more profitable product portfolios because they can focus on what they’re best at. They also should be able to create products that are less capital-intensive and, with a level fee/different fee structure, potentially profitable in earlier years. In addition, rationalization can help solve the challenge of a shrinking captive and independent agent workforce; fewer and more transparent products should reduce the need to replace many of the agents who are at or near retirement age. Because of the ability to inexpensively manage small accounts and automatically comply with fiduciary standards, as well as the potential to increase scale as needed, robo-advisers should become an even more popular way for insurers to sell products.

Data and technologyMoreover, the DOL rule makes capturing and maintaining new types of data a high priority for carriers and distributors. Agents will need to track, from the time contact is made with a client, how they acted in his/her best interest, and this record – which should be readily available to customers – will demonstrate that agents are being compliant (i.e., defensibility), as well as facilitate monitoring. Automating data capture, which should be especially effective via the robo-adviser channel, is the easiest way to ensure data is repeatable and transparent (again, defensible). This requires automating certain process to maintain compliance and be competitive in the future. Most of the industry has been aware of the need for technological changes, namely process automation, for some time – and many have been making them – but the DOL rule serves as yet another catalyst, especially for those companies that have been slow to act.

See also: Stepping Over Dollars to Pick Up Pennies  

Facilitating effective compliance

Distribution traditionally has had little to no involvement in regulatory compliance, and the DOL rule represents a new challenge for most organizations. We recommend that compliance should:

  1. Oversee distribution;
  2. Provide quarterly “health checks” to the board of directors in to review compliance on a quarterly basis;
  3. Maintain a traceability matrix that outlines key strategic and operational decisions related to rule requirements and thereby provides the company defensible documentation to minimize and mitigate losses.

Implications: Far beyond compliance

As a result:

  • The industry is likely to increase its already growing investments in and use of digital and online channels, including robo-advice.
  • Some insurers are divesting their broker-dealers; as a result, we expect to see consolidation among smaller insurance broker-dealers, independent broker-dealers and regional brokerages over the next three years.
  • The DOL’s move to increase transparency and eliminate conflicts of interest is helping drive convergence of regulation toward a broad fiduciary standard. Whether or not the SEC proposes to cover non-retirement accounts given the mandate for a federal uniform fiduciary standard under the Dodd-Frank Act, some fiduciary agents have already started to consider extending the DOL standard to an increased scope of accounts to avoid potentially awkward double standards for investors who hold both retirement and non-retirement accounts.

Regardless of political developments, we believe the rule’s core framework will remain intact. The industry has already made significant progress toward complying with it, and there is general recognition of the importance of removing conflicts of interest between financial advisers and retirement investors. As a result, financial advisers and firms should continue their work to meet the rule’s requirements.

7 Symbiotic Ties With Insurtechs

Our previous blogpost introduced the Top 10 insurtech trends for 2017. We received a lot of requests to share more of our view with regard to the last trend we mentioned: symbiotic relationships with insurtechs. Banks and insurers are looking for ways to learn much more from the fintechs and insurtechs they are investing in and partnering with. This is indeed a critical issue to accelerate innovation in banking and insurance.

In our new book “Reinventing Customer Engagement: The next level of digital transformation for banks and insurers,” we actually included seven best practices — seven examples of banks and insurers that created very different ways of working with fintechs and insurtechs. (The book will be available Feb. 23, but you can already pre-order at Amazon).

Corporate Venturing

Virtually every bank and insurer is organizing competitions and hackathons or supports one or more accelerator programs. Some have started their own corporate venture arm. Obviously, corporate venturing should not be the main way for financial institutions to reinvent themselves. It is a means but not an end in itself. The challenge of the digital transformation is essentially a cultural one that involves the whole company, not just the technology. Working with fintechs and insurtechs offers the opportunity to rethink and accelerate innovation. Innovation is not about asking customers in focus groups what they want. It is about understanding new technologies and how they will interact with consumer behavior. And that is one of the things fintechs and insurtechs are much better at than incumbents. Therefore, financial institutions need to really immerse in the fintech community to stay on pace or maybe even a step ahead in a rapidly changing technology environment, or, better still, to shake up the status quo and accelerate change in the stagnant financial industry.

Minh Q. Tran (AXA Strategic Ventures). Key note address at DIA Barcelona in 2016

Banks and insurers are looking for ways to learn much more from the fintechs and insurtechs they are investing in and partnering with — whether it is about specific capabilities or concrete instruments they can use in the incumbent organization, or whether it is about the culture and the way of working. (At last year’s edition of our Digital Insurance Agenda, Minh Q. Tran, general partner at AXA Strategic Partners, and Moshe Tamir, global head of digital transformation at Generali, shared their view. Check here for the interview with Tamir. Obviously, expect more such keynotes addressing this critical issue at DIA Amsterdam, which will take place May 10-11, 2017.)

We have come across quite a few different models in which relationships between financial institutions and fintechs/insurtechs seem to flourish. In this blogpost, we included seven examples. This is not meant to be exhaustive. New kinds of symbiotic relationships evolve every day, and of course they can be combined.

1. DBS Bank: Fintech Injections

Neal Cross, chief innovation officer at DBS Bank, involves fintechs in his own distinctive way: “I don’t do innovation, I do sales. I sell programs that solve business problems inside the bank. We always start with their problems, around business model innovation or around KPIs. The start-up community plays a key role in our programs. I often tell our business units: ‘Give us 20 of your staff, we will split them into teams and pair them with startups.’ By embedding our staff in this agile, lean mean way of working, everyone benefits. We make sure our teams work within structured processes that include research, experimentation and prototyping, followed by implementation. Everything we do is focused, and we get senior sponsorship before embarking on a project, so we don’t have problems with innovations that end up not being implemented.”

Neal Cross

2. Aviva: Icons

This is the best practice that we included in our previous blogpost. Andrew Brem, chief digital officer at Aviva: ‘In our view, ‘icons’ are needed to spearhead the digital transformation process. Our digital garages in London and Singapore are such icons. They are a very concrete and visual manifestation of our digital journey – for everyone across Aviva. The garages are not just idea labs to house ‘skunk works’ teams. They are real places, where we make and break things. We run digital businesses from the Garages, and we design and build our digital ecosystems such as MyAviva. Anyone from Aviva is welcome to come and hold workshops and meetings there, to see and feel our digital capabilities at first hand. The garages also help us engage with insurtechs and inject their culture into our organization; by launching startups ourselves, but also by partnering, mentoring and investing. Aviva Ventures, with a fund of £100 million, is also housed in the garage, and so are some of the startups they invest in, such as the IoT home security startup Cocoon.”

Aviva Garage, Shoreditch, London

3. Deutsche Bank: Digital Factory

In the summer of 2016, Deutsche Bank started its “digital factory.” More than 400 IT specialists and banking experts from the private, wealth and commercial clients division are working on a specific site in Frankfurt to develop new digital products and services for the bank’s customers. In addition, there are 50 places for external partners from the fintech community. The digital factory is obviously also connected with the Deutsche Bank’s innovation labs in Berlin, London and Palo Alto CA.

4. Munich Re: Interfaces

Andrew Rear, CEO of Munich Re Digital Partners: “To avoid a culture clash, we have set up a separate Digital Partners unit in 2016. To make the interface between the two worlds work, two things are vital: The first is speed. Startups move fast and don’t accept the limitations of a corporate diary: ‘Time is money’ is literally true for them. We therefore need to move with the same sense of pace. The second is decision-making: Start-ups make decisions; they don’t arrange committees. Therefore, we don’t do that, either. All the key decisions from Munich Re’s side are in our hands. In our model we do the things startups don’t need to control, to make their proposition live. That can include policy administration, compliance, reporting and product pricing; the ‘boring insurance’ stuff. We have stakes in our start-up partners but we don’t interfere in the way they engage their customers. The positive effects on our ‘regular’ organization are noticeable. For example, people in compliance and risk management were not used to these new speeds but are already adapting and finding new ways to fulfill their responsibilities in a way that is manageable for the start-up.”

Example of an interface between Munich Re and startups at regional level is Mundi Lab. Mundi Lab is an accelerator partnership between Munich Re Iberia & Latin America and Alma Mundi Ventures. Augusto Diaz-Leante, senior vice president of Munich Re Life, Spain, Portugal and Latin America, explains how the cross-fertilization with startups works: “We select startups from all over the world, such as RiskApp from Italy and Netbee from Brazil. Twenty Munich Re executives mentor these startups one-on-one. The best-performing companies with the highest potential to disrupt the insurance industry have the opportunity to work on a pilot program in one of the Munich Re Iberia or Latin America markets. In this way, the sharing of knowledge, experience and expertise is made very concrete.”

The Munich Re Mundi Lab team

5. Zurich: Open Innovation

Zurich created a platform to bring together the innovation initiatives and projects in the group. Xavier Tuduri, CEO of ServiZurich Technology Delivery Center: “In the Zurich Innovation Lab, we generate disruptive ideas and strategic R&D projects for the global Zurich group. We believe in open innovation, a collaborative model that means combining the internal knowledge, for example regarding markets with external talent and disruptive technologies. In this way we are always at the forefront of the latest disruptive fintech and insurtech developments, while being able to quickly develop tangible prototypes that fit and inspire our businesses. These are prototypes, without risky high investments, for example regarding using drones for risk assessment. Each prototype project is led by an employee of ServiZurich who works together in a team with several start-ups, universities and institutions. In this way, our people and organization get injected with new ways of working and thinking.”

6. Chebanica!: Co-Opetition

If a financial institution wants to behave like a fintech, it needs to open up, think of what the ecosystem could look like, be at the forefront to see what is happening and partner with fintechs to accelerate innovation, to learn or to advance the sector as a whole. Roberto Ferrari (CheBanca!) is a protagonist of this mindset: “We believe in a ‘co-opetition’ model. There will be things in which we will be competing with fintechs and other banks, and areas where we will be cooperating with the same parties. Therefore, we try to make the Italian fintech community grow. Building a larger cake will be for the good of the whole financial ecosystem, innovation is key and startups will always be the lifeblood of any sector. We among others launched the Italian fintech awards and the Smartmoney blog, which is now the most important vertical innovation in banking blogs in Italy. We now have a very strong presence in the Italian fintech community, and we are close to all developments and connections. I and other C-level executives at our bank speak to at least five to six fintechs each week, and we have already launched two new services – award-winning Mobile Wallet and Robo Adviser — thanks to our partnership with some specialized Italian fintech startups. We help them by partnering, but also we want to help them to go abroad as scale is key to succeed.”

Roberto Ferrari (right) with Matteo Rizzi (left, one of the most influential fintech experts)

7. Metlife: Capability Building

Lee Ng, vice president and COO of LumenLab, MetLife’s innovation center in Singapore: “LumenLab and our new businesses are distinct from MetLife’s core business. Our mission is to create a growth engine that launches disruptive new revenue-generating businesses for MetLife, targeting the needs of Asian consumers across health, aging and wealth. But we do work with in-country experts to develop plans for testing the new business ideas and assess market potential. In our first year we, for instance, launched BerryQ, a quiz app that rewards users for their health knowledge; Rememory Stories, a platform to capture intergenerational stories; and developed CONVRSE, virtual reality experiences around service and sales for financial services. We notice a real mindset shift within MetLife because of this cooperation. The people we work with develop skills about new ways of testing new ideas, new toolkits and new ways of thinking. Our core insurance business thus improves their performance, through adopting new behaviors like curiosity, velocity, experimentalism and bravery. In others words, we are lighting a path for innovation at MetLife.”

MetLife’s LumenLab, Singapore

We believe that it will be increasingly important to adopt a culture of constant innovation, to stay in sync with all that is going on out there. Rather than trying to change their DNA, which is quite impossible, banks and insurers should think that constant innovation is the only way to adapt the DNA to the change that is taking place. You can, for example, buy great algorithms, but if you are not able to transform your culture, the implementation of these algorithms will fail. A banker shared with us: “I see working with fintechs like vaccinations in biology: these injections in our cytoplasm help us prepare ourselves for new attacks and adapt to changing environments. If you acquire new fintech companies, you could destroy them if you don’t adapt to them as an organization. You have to adapt the mindset of your own people. It is like playing a piano. Some people sit down on their piano chair and move their chair to the piano. Other people don’t want to change their position and try to pull the piano to their chair. We should therefore teach people to move their chair after sitting down. How to move the chair will depend upon the situation, but should always deliver value to our customers.”

Working With Fintechs and Insurtechs at DIA Amsterdam

Maximizing the results from working with insurtechs is an essential subject on the Digital Insurance Agenda. So definitely expect us to pay ample attention to this at DIA Amsterdam: our two-day conference connecting insurance executives with insurtech leaders. Check out www.digitalinsuranceagenda.com for more information.