In advance of the Million Dollar Round Table's annual meeting taking place in Anaheim June 10-13, ValMark Securities President and CEO Lawrence J. Rybka gave an exclusive interview to National Underwriter Senior Editor Warren S. Hersch. The interview spanned a broad range of topics, including Rybka's presentation in Anaheim, his work as chair of AALU's Regulatory Reform Committee, the recent Glenn Neasham verdict and issues that are top of mind for producers.
Hersch: I’ve noted that you recently completed terms on the boards of both the AALU and the MDRT Foundation. What were your key objectives during your tenure on the boards and have you achieved them? What more remains to be accomplished?
Rybka: Both of these organizations are great organizations and the work with them was highly rewarding and beneficial. They have very different missions. The AALU board was more involved and the more challenging of the two and really gave me great insight into the importance of agents being involved in the political process.
Plato said, ”The punishment that the wise suffer who refuse to take part in the governmentis to live under the government of worse men.” I am absolutely sold on the idea that financial services entrepreneurs must be politically involved if we wish to protect the benefits of the products clients buy and the ability to have successful business. We did accomplish some goals but the work of both is never done.
Hersch: In regards to your current work as chair of the AALU’s Regulatory Reform Committee, what are the key issues before the committee this year? What industry or regulatory developments are of greatest concern? How does the committee intend to address them?
Rybka: The current leadership on the AALU board wisely recognized that the risks from overregulation may be every bit as high as destroying the tax advantages of the products we sell. Nat Perlmutter gets all the credit in his year as AALU President for this. He went with me for some of our initial meetings at the SEC.
The overarching mission that the board charged our committee with was to protect against the kind of bureaucratic over-regulation that exists in the United Kingdom and that destroyed the spirit and opportunities for financial service entrepreneurs in that country.
A few years ago when I was Program Chair for the AALU Annual Meeting, I asked former MDRT President Tony Gordon to share his experience with what happened to the insurance business in the UK. He related a chilling tale about how regulators gradually destroyed the insurance business--in part by prohibiting commissions on product sales.
The threat he warned us about today may come in many forms including states that force commission disclosure; politically motivated states’ attorneys general; The SEC in elements of Dodd-Frank, especially the Section 913 Best Interests Standard; and The California Elder Abuse Statute.
Hersch: How will the industry address this threat?
Rybka: We recognized a need for regulatory lobbying, which required getting the broker-dealers of our members involved in calling on the SEC, FINRA and weighing in on proposed rules. We assembled key people from 9 of the 10 largest broker-dealers in AALU and mobilized these resources to act collectively.
But what has been often overlooked is that the producer group--The Independent Insurance Agents & Brokers of New York--that took legal action to try to stop the regulation from taking effect, lost their case. The fact that they lost on the grounds that the New York insurance commissioner does indeed have authority to promulgate commission disclosure recommendations without impetus from the legislature sets a bad precedent.
Hersch: Might a harmonized fiduciary standard for registered investment advisors and broker-dealers also be bad for the industry?
Rybka: We at ValMark run both an RIA and a B-D. On the RIA side, we manage $2.5 billion of assets, for which investors a fee. Unless, say, I were to lie about the fee or otherwise hide the fact that I'm getting paid a second way, it's hard to see how this simple business model would engender significant conflicts of interest. But a fiduciary standard of care doesn't fit when applied to a broker-dealer that offers a more complex set of products with varying levels of compensation.
A vague fiduciary standard, with no specifics, will be subject to second-guessing--particularly by the trial bar. And anything with a higher commission may create a presumption that the advisor made the wrong recommendation.
One outcome that I fear: If we as a broker-dealer have to say that a certain product is in the client's best interests, then the data we collected previously is no longer adequate to determining what is best. Now we have to explore more alternatives based on the client's financial objectives and risk profile. This can be very intrusive into the recommendations that producers make.
In sum, a law passed by Congress that asks the SEC to develop rules that requires' broker-dealers' registered reps to “To act in the best interest of the client without regard to compensation” is troubling. As Edmund Burke said, “Bad laws are the worst sort of tyranny.”
Hersch: Turning to Glenn Neasham, who is featured in National Underwriter’s May cover story, I understand that you offered AALU’s leadership insight into his case. How significant is his conviction?
Rybka: I think this case is very significant and illustrative of what happens when there are laws with ambiguous and subjective standards. In this case, specifically, I bet no one was thinking that California's Elder Abuse statue would be applied in this way when it was passed. To have 3,000 bank tellers trained and with an obligation to report transactions under threat of penalty is a very scary thing.
Neasham's case also serves as a reminder that the onus is on agents who sell fixed indexed annuities to meet product suitability requirements. With variable annuities, somebody else--the broker-dealer--is reviewing and signing off on the transaction. The sale becomes the broker-dealer's problem, instead of that of the registered rep.
Rybka: They must collectively be involved politically. We also cannot confine our concerns to our own narrow type of business and think:
- The limitation on commissions in health insurance from Obama care don’t impact me because I don’t sell life insurance.
- That crazy result with an Elder Abuse law in California doesn’t impact me because I live in Texas.
- That proposal to tax the death benefit on COLI in Oregon doesn’t matter because I don’t sell COLI.
- That New York disclosure requirement isn’t a risk to my practice because I don’t live there.
- The convoluted functional fiduciary rules proposed by the Department of Labor isn’t something I care about because I don’t work with qualified plans.
- The Uniform Fiduciary Standard only applies to securities and I sell whole life.
The very thing that Tony Gordon warned us about five years ago is starting to happen. I think about the warning of a much more famous Britton who said, “The appeaser is the one who hopes the crocodile will eat him last.” It is not yet too late--but it will be if we are not involved.
Hersch: Respecting the focus that you’ll be presenting at this year’s MDRT conference, “Beyond the Ratings: Determining a Carrier’s Financial Strength,” what expertise and experience do you bring to this topic?
Rybka: Through ValMark’s member firms we have been distributing life products for various companies for 49 years with almost $40 billion of insurance in force. We have seen a lot during those years and have never heard a carrier say, “We are headed for the rocks."
Unfortunately we had a number of policyholders with Confederation Life and Executive Life; both of these companies had AAA ratings less than three years before going into receivership. We've found the rating agencies to be very poor predictors of future problems. AIG and Sun Life are recent examples; both had the highest ratings before the financial crisis and both had sudden reversals. If someone is buying a product because it has a 30- or 40-year guarantee, this is unacceptable.
We also own a broker-dealer and an investment advisor: ValMark Securities and Valmark Advisers. So we really thought about using some of the research capabilities of the investment business and applying the principals to looking at life companies.
If a company is losing money or is highly leveraged, it is risky for both investors and ultimately policyholders. Most of the ideas I will present use the public information that sell-side equity analysts use to look at the life companies. We've found a number of these indicators to be very helpful.
Consider, for example, book value. Why are some companies selling policies at 25% of their book value when others are at 90% of their book value. To me, a high percentage suggests that assets are overstated in value or that liabilities are understated. These ratios can leave clues as to which carriers are stronger and which ones are experiencing trouble.
Rybka: The short answer is no, but they should. Generally, since the end of the financial crisis, carrier financial strength has not been high on agents' list of concerns. But I think the situation for several carriers is now worse than it was in 2009.
A graph I have showing the stock performance of two U.S. insurers and two European insurers reveals a striking difference among the companies. The carriers' stock prices move in tandem until the financial crisis, at which point they all experience a precipitous decline in value, thought the U.S. companies suffer a bigger decline.
But after the financial crisis, the European carriers' share prices don't recover nearly as much as do their U.S. counterparts. They briefly recover, but nowhere relative to the recovery of the U.S. stock companies.
Hersch: Looking to 2013 and beyond, what changes do you foresee that will be top of mind for insurance and financial service professionals, both here in the U.S. and internationally?
Rybka: First, I expect that insurance companies will have to increase their reserves and change their products because they are being pressured by low interest rates. This is the biggest story in the life insurance industry. Every risk product--annuities, life insurance, long-term care--is impacted by interest rates. Not only are products being pulled from the market because the companies can no longer offer them.
Low interest rates also impact dividends and products' non-guaranteed elements. Agents who want to build a long-term practice need to ask themselves, "If interest rates stay where they are, what does that mean for the various products I sell?" They need to make sure that they're not over-promising a benefit that's not likely to materialize.
Secondly, agents need to guard against the threat of overregulation coming from a 7-headed regulatory hydra. These regulators--the Department of Labor, state insurance commissioners, state attorneys-general, FINRA, the SEC--significantly impact how we do business. We need to work together to insure these bodies don't overreach with rules that could harm the industry--and ultimately consumers.
Hersch: And how will producers have to adapt their practices to ensure their continuing success?
Rybka: Besides being politically active, insurance professionals will have to give greater thought before endorsing a concept or product. They'll also have to be more thoughtful about which carriers they do business with and really ask hard questions about the ability of the carrier to give the client what is promised.
They'll have to ask hard questions, too, about their commitment to the products we recommend. You don’t want to get locked into the idea that a single product will be the solution to most of the clients’ problems.