It’s going to be a busy month of July for managers with field marketing organizations (FMOs), as they seek to chart a future direction for their companies following new federal regulations designed to protect investors in the retirement market.
Under the new Department of Labor fiduciary rules issued in April, FMOs were denied the authority to certify whether an insurance sale was in the best interest of a policyholder. That has led many industry experts to wonder how agents will continue selling life and annuity products.
Unlike insurance companies, banks, broker-dealers and registered investments advisors (RIA), which are overseen by state insurance departments or the U.S. Securities and Exchange Commission, FMOs are not regulated.
Because they are unregulated, the DOL didn’t included them as financial institutions for the sake of an insurance or annuity sale under the fiduciary rule.
FMOs, however, have several options at their disposal.
Option One: Sell Through the B/D, RIA
The first, which many industry experts see as the path of least resistance to complying with the fiduciary rule, is to sell life and annuity contracts through a broker-dealer or a registered investment advisor (RIA), since these classes of distributors are authorized to certify transactions.
Many FMOs, the larger ones in particular, own broker-dealers or RIAs.
It would, therefore, fall to the broker-dealer to supervise nonsecurities licensed insurance agents under the fiduciary rule’s Best Interest Contract Exemption.
The broker-dealer or RIA would act as the financial institution on behalf of the FMO with which a broker-dealer or RIA is affiliated.
While selling through the broker-dealer may be more convenient for the FMO, independent agents have traditionally shied away from the broker-dealer channel because it cuts into agents’ commission revenue, a stream whose margins are already under pressure.
Under the FMO-broker dealer/RIA model, “Many policies and procedures have to be added but it’s not as burdensome as starting from scratch,” said David Rauch, chief operating officer and general counsel of Annexus, an insurance product design and distribution company in Scottsdale, Ariz.
FMOs without a broker-dealer or RIA could simply buy one.
Option Two: Applying for 'FI' Status
The second option is for FMOs to apply to the DOL for financial institution status, which would put FMOs on the same regulatory footing as insurance companies, banks, broker-dealers and RIAs for the purposes of the DOL rule.
While some FMO managers see applying to the DOL as burdensome, expensive and unnecessary, FMOs that are granted the higher status of financial institution may suddenly find themselves with a lot more clout.
FMOs offer training, education, compliance and incentive programs to help agents sell more annuities and recruit insurance agents to work for them.
FMOs that add financial institution status to their calling cards will only make themselves more attractive in the eyes of agents — and may even be in a position to require that agent to move all of his or her insurance company appointments to that FMO, Rauch said.
“If there’s only a handful of FMOs that become financial institutions, it’s more powerful for them,” he said.
The downside of “FI” status is that it comes with a lot more liability, cost and responsibility, according to FMO managers.
Option Three: Wait (and hope) For DOL to Expand FI Class
A third option said to be under discussion with the DOL is that regulators could create a new “entity class” for those intermediaries that meet standards similar to those required of financial institutions.
Adding a class for FMOs would rely on establishing standards and could get tricky. The DOL approved the original four entity classes (RIA, banks, insurance companies, and B/Ds) in part because they are already subject to heightened regulation.
Standards for an FMO class might include capital requirements, premium volume, years in business, state regulatory approvals and technology/compliance platforms.
While on-the-record details are scant, sources say creating a new class is appealing because the path for FMOs, agencies or other third-party distribution companies in the insurance world would be clearer than it is now.
Managers with FMOs or “superagencies,” would be able to render a decision about a future course of action, one that will involve significant investment as companies alter their compliance and distribution infrastructures to meet the new requirements.
The first clauses of the rule, which is more than 1,000 pages long, take effect April 10, 2017, and the rest of the regulation goes into effect Jan. 1, 2018.
FMOs, also called insurance or independent marketing organizations (IMOs), act as wholesalers in the insurance distribution chain.
Hundreds of insurance wholesalers around the country recruit thousands of independent insurance agents and advisors to channel insurance company products. Wholesalers sell tens of billions of dollars’ worth of premium annually for which they receive fees from the insurance companies.
The role of FMOs and wholesalers came under close scrutiny shortly after the fiduciary rule was issued. Some insurance company executives cast doubt about an insurance company’s willingness to stand behind the sale of an annuity executed by an independent agent.
“Many carriers haven’t figured in what direction they are going,” said Jeremy Alexander, president of Beacon Research, an annuity research company in Northfield, Illinois.
InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at firstname.lastname@example.org.
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