Insurance Marketing Organizations Feel The DOL’s Freezer Burn

U.S. Department of Labor regulators earlier this spring hit life and annuity wholesalers with a double whammy.

First, regulators made it harder for retail agents to sell fixed indexed annuity products, the shining star of the fixed annuity world.

Then regulators froze out the wholesalers, sometimes known as insurance or independent marketing organizations (IMOs), or field marketing organizations (FMOs), by excluding them from a list of regulated financial institutions authorized to certify the sale of a financial product under a new fiduciary contract.

The marketing organizations were none too pleased.

Karlan Tucker, president of Tucker Advisors, an FMO in Littleton, Colo., said he feels as if the feds barely recognized the existence of marketing organizations when DOL regulators issued the final draft of their Conflict of Interest rule on April 6.

“They don’t even address the fact that IMOs exist,” said Tucker, who serves the needs of about 800 independent agents, half of whom are securities licensed and the other half are insurance licensed.

Marketing organizations manage thousands of independent insurance agents, which are the primary channel for fixed indexed annuities. FIAs have outsold all other categories of fixed annuities for many years.

More than $53 billion in fixed annuities were sold last year. How can regulators barely address the primary sales channel for a product line that generated $53 billion in sales last year, FMO managers wonder?

It’s a good question — an answer to which the annuity industry seemed genuinely flummoxed at first.

As the weeks went by, the life and annuity industry grew more irritated and hard feelings culminated in the filing of several lawsuits against the DOL over the past 10 days. The treatment of fixed indexed and fixed annuities figure prominently in those complaints.

IMOs, FMOs Headed for Consolidation

Life and annuity wholesalers come in all shapes and sizes, but one thing’s for sure: small wholesalers, two- or three-person shops selling one product line without an affiliated broker-dealer or registered investment advisor, those shops are gone.

The fiduciary rule is going to make it too cumbersome, too expensive and too risky for the smallest wholesalers — if you can even call them that — to continue selling FIAs profitably, one IMO executive said.

Small wholesalers will either close or merge with larger wholesalers as bigger distributors retool their models to comply with the DOL.

No one knows how many life insurance wholesalers operate in the U.S., but everyone is certain that IMOs/FMOs and the hordes of independent advisors they manage generate billions of dollars every year in insurance and annuity premiums.

The best estimates place the number of IMOs/FMOs in the hundreds. The top 20 FMOs conduct the lion’s share of the business thanks to the hundreds or even thousands of independent agents who report to them, FMO executives said.

Big organizations like M&O Marketing, InsurMark and Advisors Excel have the scale and the product inventory to survive, and those with a broker-dealer or a registered investment advisor, or RIA, should be able to work through the regulatory challenges, executives said.

IMOs/FMOs with services geared toward helping advisors grow their books of business through advanced technology platforms, educational tools, long-term growth strategies and back office support should also prevail.

But those laden with agent incentive programs — trips, meals, marketing dollars and other cash equivalents — had better retool their approaches, analysts say. The expectation is that there will be at least some merger activity among the larger wholesalers.

The independent agent channel is still viable and IMOs/FMOs will still provide as much or more guidance to agents five years from now as they were five years ago, said John Aiken, president of LTA Marketing Group, an FMO in Fargo, N.D., that does business with 2,500 agents.

“Agents will need guidance and now perhaps more than ever,” Aiken said. “We've always been in middle between the manufacturer and the distributor and we will play a more informed role in that process.”

IMOs/FMOs to DOL: No Thanks

Even if the Great IMO/FMO shakeout leaves the strongest organizations intact and rids the marketplace of weaklings, a major sticking point remains.

IMOs/FMOs cannot certify a fiduciary transaction unless they apply to become a financial institution in the same league as banks, broker-dealers, registered investment advisors and insurance companies, all of which are supervised by state or federal regulators.

The prospect of applying to the DOL for financial institution status holds little appeal because it’s too complex and the last thing on the mind of an IMO/FMO executive is to deal with still more DOL regulation, executives said.

“We’re looking for other remedies,” Aiken said.

Since IMOs/FMOs were not defined as financial institutions and therefore lost the opportunity to certify transactions as required under the DOL rule, and since insurers may also decline to certify a fiduciary transaction, as some indicate they will, how will independent agents continue to sell fixed indexed annuities?

“What we’ve heard from the insurance companies is they’re not sure if they can distribute fixed indexed annuity product via the FMO channel any longer,” said Ray Kathawa, vice president of Practice Development with M&O Marketing, a large FMO based in Southfield, Mich.

“Carriers may decide to shift products to the broker-dealer and bank distribution channels and out of the FMO distribution channel,” he said. “If you read between the lines and you are an FMO without a broker-dealer, you may be in trouble.”

Clearly, it’s an issue and IMOs/FMOs report that some insurance companies are working aggressively to find other products with different commission structures while other insurers are taking more of a wait-and-see approach.

In this era of low interest rates and paltry returns, sales growth of fixed indexed annuities, which are tied to a market index and deliver higher returns, outperformed every other category of fixed and variable annuity last year, LIMRA sales data show.

Adding income riders to fixed annuities will help but even that won’t come close to the sales volumes of fixed indexed annuities.

People want fixed indexed products for a returns they generate and the living benefits they provide without the risk of losing money.

That’s why fixed indexed product sales soared 13 percent last year, nearly double the sales growth of the overall fixed annuity market.

“We're in low-rate environment and you sell fixed annuities without a link to the stock market, it’s not so sexy,” Tucker said.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

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