Independent Agents Hung Out to Dry?

By Cyril Tuohy

With some insurance companies balking at assuming fiduciary status under the Department of Labor's new fiduciary rule, some independent agents are wondering if they are being hung out to dry.

As a condition of receiving compensation that would otherwise be prohibited, an exemption under the “Conflict of Interest” rule would require financial institutions to acknowledge their fiduciary status and the fiduciary status of their advisors in writing.

But what if an insurance company declines to acknowledge fiduciary status and instead hands off the responsibility to a distributor such as a broker-dealer? Some carrier execs suggested this route during recent earnings' calls.

In that case, what happens to agents and their fixed indexed annuity (FIA) books of business?

“I’m hearing an awful lot of silence,” said annuity expert John Olsen, president of Olsen Annuity Education in Kirkwood, Mo., in an interview last week, about the reaction among agents to reports that insurers might not sign on as fiduciaries.

Under the rule’s Best Interest Contract Exemption (BICE), the insurance company functions as the financial institution for the sale of FIAs by independent agents to qualified accounts. But agents are confused, Olsen said, and in some ways have only themselves to blame.

Fueled in part by the rumor mill of misinformation, Olsen said many agents are repeating what they’ve heard from third-party sources without even bothering to read the rule published on the DOL website.

“There’s a huge amount of ignorance out there,” Olsen said.

Nuances of the Independent Agent Channel

In the 196 pages that make up the Best Interest Contract Exemption section of the rule, “independent agent” is never mentioned. The noun “agents” is referred to only six times, including in the summary and footnotes of the BICE.

No wonder insurance agents seem to be groping around in the proverbial darkness about how to proceed under a new regulatory regime more than 1,000 pages long.

Regulators appear to have given short shrift to aspects unique to insurance distribution compared with securities sold by broker-dealers, some industry observers say.

Independent insurance agents, of which there were about 74,000 working in insurance agencies and as producers around the country last year, sell products from more than one insurance company to give their clients more choices.

But depending on the business models of individual insurers, some of those agents report directly to the insurance companies’ retail divisions, while other agents report through an independent marketing organization, or IMO.

IMOs and wholesalers in-turn deal with insurers. As a result, it is unknown how agents are affected if they report to an IMO.

“I just got a call from one of the top wholesalers in the country and she's looking for another career,” said annuity agent Stan Haithcock in Ponte Vedra Beach, Fla.

“It's the middleman cuts that they are going to be doing away with,” he said, referring to IMOs and related businesses. “They are going to be the first squeezed out. Then the agents are going to be squeezed out.”

DOL regulators don’t consider IMOs a financial institution for the purpose of the rule, which means that IMOs are unable to acknowledge the fiduciary status of an agent.

Mixed opinions abound about whether an individual agent or advisor retains contractual liability under BICE, said Jamie Hopkins, associate professor of taxation at The American College, and some people are concerned about where the liability begins for the agent.

“You would expect some personal liability for the agent, that's the heart of being a fiduciary,” Hopkins said. “If you are a fiduciary, you have personal liability. How that's enforced is an issue, but the DOL has been very clear: there are going to be areas that need further clarification.”

Concerns Emerge Last Month

Agents expressed concerns following reports last month by some insurance company executives that oversight of independent agents might not be possible under the tougher requirements imposed by the rule and the exemption.

“Numerous obstacles” would hamper American Equity Life Holding’s independent agents from selling FIAs, the best-selling category of fixed annuity last year, CEO John Matovina, said in a conference call with analysts.

“We also have serious questions about whether or not we could exercise the proper oversight of those agents, given that they are independent and could be selling for multiple distributors,” Matovina said.

How can American Equity be expected to oversee an independent agent selling an annuity developed by a competitor such as Allianz, he asked.

Independent insurance agents and advisors not affiliated with a financial institution can expect to be “disenfranchised,” by the new fiduciary rule, added Alain Karaoglan, chief operating officer and CEO of Retirement and Investment Solutions at Voya Financial, in a conference call with analysts.

If insurance companies refuse to acknowledge their fiduciary status and that of their advisors, will agents continue to sell FIAs, leave the business or shift to selling other products?

Already, insurance company executives have talked about changing their product line-up along with the commission and fee structures to make it easier for the independent agents to sell.

Financial services companies sold $133 billion worth of variable annuities last year and $53 billion worth of FIAs, so insurance companies aren’t walking away from those product lines anytime soon, analysts and industry experts said.

Nor have regulators shut the door to further amendments to the rule.

The DOL is open to considering changes, Deputy Assistant Secretary of Labor Tim Hauser said Tuesday, but he held firm on the rule’s deadline. Every agent, advisor, producer and broker will have to be in compliance by Jan. 1, 2018.

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

Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].