Most brokerage general agencies, along with their agents, have built successful careers by finding the best destinations for their clients' assets. Whether it's a fixed index annuity or a life insurance product, the emphasis is on choosing the right investment for the consumer.
But in today's regulatory environment of scrutiny, skepticism, and litigation, attention is increasingly directed at the very beginning of a financial transaction. Instead of simply focusing on where the money is going, agents are now being encouraged to disclose where exactly it came from.
If a client's money comes from an investment, some are calling for the insurance agent -- who may have had nothing to do with the original security purchase -- to be properly licensed to dispense investment advice. The rationale is that if the client is selling an investment in order to purchase a life insurance product, someone must have advised them on the transaction. Without proper licensing, the sales agent could then be accused of providing unlicensed investment advice.
Increased scrutiny
The above scenario is more than just a theory. In Massachusetts, it was recently put into practice when two life in-surance agents were charged with providing unlicensed investment advice by allegedly con-vincing elderly clients to liquidate their securities in order to fund a fixed annuity purchase.
That particular incident illustrates only one factor in the constantly evolving regulatory climate that affects both insurance agents and BGAs. In 2005, the National Association of Securities Dealers' (NASD) Notice to Members 05-50 dealt with index annuities, stating that the NASD was "concerned about the manner in which associated persons are marketing and selling unregistered equity index annuities [now known as fixed index annuities] and the absence of adequate supervision of these sales practices." The notice suggested that member firms take a closer look at how these products were being sold.
Then, in 2007, the Financial Industry Regulatory Authority (FINRA, formerly known as the NASD) announced a new investigation into allegedly deceptive sales tactics used at "free lunch" seminars targeting senior consumers, where the lure of a meal is sometimes nothing more than a precursor to the sponsoring agent dispensing financial advice and conducting sales presentations. The Securities and Exchange Commission (SEC) and state securities regulators also participated in the examination.
These examples have bearing on the life insurance industry, since products and sales methods are now being called into question by various agencies. Patricia Struck, Wisconsin securities administrator and chair of the North American Securities Administrators Association's (NASAA) Investment Advisor section, believes that regulators are becoming increasingly interested in the source of an agent's annuity sales commissions.
"It's our perception that the annuity products are being sold to take advantage of the very high commissions that the professionals are able to earn by selling those products," Struck said. "So where does the money come from to buy those products that earn the insurance agent that very high commission? Very often, they come from the sale of mutual funds or other kinds of investments."
Struck said she believes that agents must become knowledgeable in the "entire universe" of the sales transaction -- where the money came from, where it's going, and how suitable the recommendation is for the client.
NASAA is the membership organization of state and provincial securities regulators, which includes every state in the Union, the District of Columbia, and the U.S. Virgin Islands, as well as Mexico and all Canadian provinces. The NASAA participated with FINRA and the SEC on the "free lunch" examination, and Struck said that more investigations are on the horizon, including a focus on the "best practices" of several firms.
Struck said she believes that the industry's constantly evolving products and services necessitate increased awareness among agents.
"I think the one thing we can all agree on is that the products are becoming more complicated, and the hazards that the investor encounters are greater because the products are more complicated," she said. "So it becomes more and more important for the professional giving the advice and making the sale to understand and be able to explain to the investor what the investment recommendations really mean."
What constitutes investment advice?
While fixed index annuities are a frequent destination for funds, security assets that are moved into any annuity product can be cause for concern. According to Jeremy Rettick, vice president of marketing at Covenant Reliance Producers, the risk is becoming clear throughout the industry.
"The truth is that if you don't have a securities license and you're moving money from an equity position, you could be accused of giving investment advice," Rettick said. As a result, some BGAs are advising agents to proactively deal with the increased scrutiny and obtain the licenses that will allow them to offer investment advice.
For agents, a compliance strategy that involves a Series 65 license also requires the agent to become either a registered investment advisor (RIA) or an investment advisor representative (IAR), two designations that carry different responsibilities. The RIA path is more of a "do it yourself" approach and includes setting up a corporation and registering with the SEC and appropriate regulatory bodies, such as a state's division of securities. The RIA must also calculate fees, build portfolios, prepare reports, and create an ADV form that provides pertinent firm information and a detailed explanation of services and fees. Becoming an IAR involves affiliating with, and, for a fee, transferring many of those responsibilities to, a separate RIA.
Both options allow the agent to provide investment advice, make recommendations, and charge a fee for their services, normally by retaining assets under management.
Brookstone Capital Management is an RIA firm that provides a turnkey money management platform for IARs. They have about 75 agents in 32 states working under their RIA umbrella, and each producer pays $1,500 per year, which includes the extra errors and omissions insurance and filing costs associated with the registration. According to Dean Zayed, the firm's CEO, the regulatory environment is causing more and more agents to consider becoming either an RIA or an IAR.
"For about 10 years, insurance agents have really had a 'bye.' They've been able to move securities into fixed products with nobody looking at that at all," Zayed said. "Now (regulators) are starting to look at that and say you need to have a securities or investment advisor license to talk about that."
Although all of Brookstone's agents have chosen the IAR route, Zayed said that becoming an RIA can also be appropriate for the right people. But for those who want to make fewer changes to their current business while still expanding into investment-related opportunities, he said he believes that becoming an IAR is simpler and less time-consuming than the RIA option.
"If somebody has the time and capability to really bring the money management in-house, I say (becoming an RIA) is a pretty fair option," Zayed said. "But for most insurance agents, they're looking for something more turnkey where they can leverage another company's infrastructure and go on and do what they're best at -- and that is to cultivate relationships and gather assets to manage."
Along with assisting clients, a heightened regulatory environment is what influenced Jim Jones of New Covenant Financial to become an IAR.
"I think these two things were converging at the same time: the ability to help clients on a wider scale and, at the same time, the compliance and scrutiny from state departments of insurance," Jones said. He does business in both Indiana and Kentucky and is aware that agents need to offer suitable solutions in all cases.
Rather than taking on the added responsibilities of an RIA, Jones instead chose to become an IAR. He said this decision allowed him to remain focused on his clients and continue working as a producer without making too many changes to the way he does business.
Jones said he feels the move has brought him great success. In the nearly two years since he became an IAR, he said, his overall production has doubled and his insurance production has grown.
"I've had a certain level of success, but with today's environment, I don't even feel like I could maintain that success without adding the IAR designation and at least being licensed on the securities side, because of the scrutiny," he said.
Rettick said he believes that agents should consider obtaining an investment license without being concerned that their insurance production will drop off.
Zayed agrees, noting that nearly all of his agents have seen a rise in their insurance business since becoming an IAR. "It's not a competition between putting money with the RIA platform and selling a fixed product," he said. "In fact, with the RIA platform, they're able to be more successful in closing deals, gather more of those assets and, just the way the numbers fall, they will sell more product."
Michael Murillo is a freelance writer and frequent contributor to the Agent's Sales Journal. He can be reached at vivamurillo@hotmail.com.
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