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April 2, 2009 Thursday 10:37 AM EST
Broker-Dealer's Due Diligence on Life Insurers' Products Gets Tougher
In the fallout of the financial crisis, the due diligence process used by at least one independent broker-dealer to evaluate which life insurance products gain access to its distribution has gotten a lot more rigorous.
National Planning Holdings Inc. is using a lot more third-party research to look into companies, said John Johnson, first vice president of sponsor relations for the firm, which is the independent broker-dealer network of Jackson National Life Insurance Co.
He dubbed due diligence as "the price of admission" for life insurance products to get on a broker-dealer's shelf. Johnson was at the Life Insurance and Retirement Industry conference, sponsored by LIMRA International, LOMA, the Society of Actuaries and the American Council of Life Insurers.
"We've always had extensive conversations around the diligence process with product providers but advisers are getting a lot more questions from the end clients and they need to be prepared to address these questions," said Johnson. After gathering up the research, NPH distributes a weekly commentary for its field force so they can be more responsive to clients, he said.
To stay on NPH's distribution shelf, a company must have "very strong financials" and avoid an A.M. Best rating below A (Excellent), which is the errors & omissions insurance criteria in most cases, Johnson said. Among other factors, a company's risk-based capital also is "looked at pretty strongly," he said.
NPH consists of four broker-dealers: Invest Financial Corp., Investment Centers of America, National Planning Corp and SII Investments, Johnson said. The registered representatives of these firms sell stock market-linked variable life and variable annuity products and are regulated by FINRA, he said. NPH also has a fee-based operation, whose primary regulator is the U.S. Securities and Exchange Commission, Johnson said.
With stock markets down sharply over the past year, variable product sales "are off from traditional trends and there's definitely a movement toward production of fixed products," he acknowledged.
Each of NPH's broker-dealers also are affiliated with insurance agencies in which fixed life insurance products are marketed, Johnson said. Most of NPH's registered representatives are independent contractors, and can sell fixed products through NPH's relationships with the affiliated agencies or general agencies not affiliated with NPH, he said.
There's been "a significant uptick in fixed annuities specifically, largely at the expense of variable annuities, Johnson said, noting there's "emerging competition" in the fixed space.
Turning to a broader industry issue, BestWire reported in 2005 that it's common practice for independent broker dealers to be owned by U.S. life insurers. But some independent broker dealers not affiliated with life insurers questioned whether it was a conflict of interest for life insurer-owned broker dealers to offer representatives more favorable commissions on proprietary products over nonproprietary ones (BestWire, Aug. 15, 2005).
The "potential for a conflict of interest exists" to the extent that there's additional compensation for the sale of proprietary products, "or to use a more casual phrase, if there are 'carrots or sticks' related to the sale of proprietary products," Johnson said.
Jackson National Life, however, "has never had any carrot or stick" approach with respect to proprietary product distribution, he said. With independent contractors, "if you try to tell them what to sell, they will run in the other direction," Johnson said. NPH and its broker dealers have selling agreements with nearly 90 insurance carriers, Johnson said.
Jackson National has "great market share at other independent broker dealers, as well as our own," he said.
[To listen to the entire interview with Johnson in the near future, go to www.bestsdayaudio.com]
(By Fran Matso Lysiak, senior associate editor, BestWeek: [email protected])
April 3, 2009