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

This is the overwhelming consensus of industry associations thathave submitted last-minute letters in advance of a comment deadlineset by the DOL. Among the organizations voicing concerns: theAssociation for Advanced Life Underwriting (AALU), the AmericanCouncil of Life Insurers (ACLI), the National Association of Insurance and FinancialAdvisors (NAIFA) and National Association of Independent LifeBrokerage Agencies (NAILBA).

Read: Opponents say DOL fiduciary ruleunworkable

“In its current form, the proposed rule presents major—and insome cases, insurmountable—obstacles for NAIFA members servingmiddle-market retail investors,” NAIFA states in its commentletter. “The proposal portends a dramatic shift in the way ourmembers will interact with their clients and conduct theirbusinesses, and a significant increase in the cost of conductingtheir business.”

That view is echoed in the joint comment letter submitted byAALU and NAILBA, which label the complex rule “unworkable” and notcompatible with the industry’s business models.

“The proposal imposes unreasonable limitations, requirements andadditional costs on life insurance companies and agents, making itdifficult to provide advice and financial products to retirementsavers that need them the most,” the letter says.

Among other provisions, the proposal requires that advisors puttheir client’s best interest first by providing impartialretirement plan advice. To receive commissions on product sales,they must qualify for a best interest contract exemption orBICE. 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 proceduresdesigned to mitigate potential conflicts of interest when providingadvice.

Read: Fitch warns of potential disruptions from DOLrule

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

One consequence for advisors who don’t comply with the ruleswill be an excise tax on transactions produced by conflictedadvice.

Read: What DOL fiduciary rule means for plancommunications

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

The two associations also view as unrealistic (1) the DOL’sestimate (60 hours) of the time required by a provider’s in-houseattorney to draft and review BICE-related disclosures; and (2) thenumber of brokers who would rely on the BICE exemption to maintaincommissions (the DOL surmises half of all brokers; the industrybelieves the percentage will be “much larger.”)

“The Department failed to conduct a thorough, objectivecost-benefit analysis in this rulemaking by overstating benefits,understating costs, and disregarding harm to small retirementplans,” states the ACLI. “The analysis fails to examine theproposal's impact on the annuity market and the availability oflifetime income.”

The industry associations further contend that the rule's“substantial costs” and “administrative burdens” would prompt manybrokers to exit the business — leaving many middle market consumersin the lurch. Other advisors may refocus their practices and nolonger offer services to small plans or individuals with smallaccounts.

Those who do will find their latitude for advising retirementsavers circumscribed. The proposal would limit education activitiesdesigned to assist savers with asset allocation and retirementplanning. It treats educational materials as “recommendations” ifthey include references to specific investment products, investmentalternatives, or distribution options — including annuitiesavailable under a plan or IRA.

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

“The proposal could result in some advisors exiting the marketentirely, which for some rural communities, could result in acomplete void of professional financial services,” NAIFA said inits comments.

Receiving investment advice would become more expensive underthe proposal as brokers seeking to comply with proposed transactionexemptions or PTEs (of which the BICE is one) would shift theircompensation structure from commissions to fees. And these feeswould have to factor in the high cost of complying with PTEs,making advice less affordable for small businesses and accountholders.

Another bone of contention: the absence under the BICE of acommission exemption when advising on retirement account rolloversand distributions.

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

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

“The idea that investors would sign a contract shows a seriousmisunderstanding about how financial markets work — in fact, itshows confusion about how consumer markets work in general,” AALUand NAILBA assert. “In [our members’] experience very few peoplewill ever sign such a contract unless an advisor can specificallytalk about how they can help their client beforehand.”

Yet another objection to the BICE: a contract may not includedisclaimers limiting the liability of an advisor or the insurer forviolating the contract’s terms. This provision will likely resultin increased customer litigation, arbitration and, ultimately, moreexpensive products.

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

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

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

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

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

The AALU and NAILBA agree.

“Average Americans will bear the burden by having significantlyless access to professional financial advice and few options tosave for retirement, particularly through lifetime income productssuch as annuities,” their letter says.

The proposal might have met with less resistance if the DOL haddemonstrated that financial markets and the current broker-dealermodel are harming retirement savers. On this score, the AALU andNAIBA insist, the DOL failed: The department cites as justificationfor the proposal statistics “not supported” in academicliterature.

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 asto fend off liability for violations of the new rules. Theiradvisors will follow suit. Upshot: fewer services and lessadvice.

“As it stands, nearly all of our members who become fiduciarieswill have to alter their current compensation arrangements — for atleast some clients and some products — or satisfy a PTE,” NAIFAstates. “Both options carry significant risk of harm to retailinvestors.”

See also:

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

Taking stock of the DOL’s fiduciary ruleproposal

AARP storms Capitol Hill over fiduciarystandard

BlackRock says DOL rule against broker bias favorsindex funds