6 IMOs Apply for ‘Financial Institution’ Status Under DOL Rule

By Cyril Tuohy

Six independent marketing organizations, or IMOs, have applied to the Department of Labor’s Office of Exemption Determinations to become a “financial institution."

Earning the designation would clear the path for independent insurance agents to sell commission-based insurance and financial products under the Labor Department’s Best Interest Contract Exemption, or BICE.

A financial institution seal-of-approval from the DOL “puts us in a stronger position to attract a specific type of independent agent,” said Jason L. Smith, CEO and founder of Clarity 2 Prosperity, an IMO based outside Cleveland, which has applied.

Other IMOs applying to become financial institutions include Gradient Insurance Brokerage, Legacy Marketing Group, InForce Solutions, Financial Independence Group and Futurity First Financial, a DOL spokesman said.

InForce Solutions is a wholly-owned subsidiary of Allianz Individual Insurance Group, a subsidiary of Allianz Life Insurance of North America, the top seller of fixed indexed annuities in the U.S. last year. It would also be called a field marketing organization because of the relationship with the insurance company.

The six companies represent the first wave of IMOs to apply to regulators for financial institution status. The DOL spokesman declined comment beyond confirming the six applications.

BICE allows agents to accept "reasonable" commissions on recommendations for investment or insurance products to retirement plans or individual retirement accounts, and IRAs. It requires a contract signed by a financial institution.

Under the final version of the fiduciary rule published in April, only banks, insurance companies, broker-dealers and registered investment advisors were considered by the DOL as financial institutions.

IMOs, who have contracts with independent agents, were left out as they are not regulated in the same way.

Many Regulatory Regimes

Independent agents signing contracts with IMOs designated as financial institutions should benefit now and in the future, said Charles Lucius, CEO at Gradient Financial Group outside Minneapolis.

Regulatory agencies beyond the DOL are reviewing how to regulate financial advice as well. The more broker-dealers, registered advisors and IMOs are prepared to meet the new requirements, the stronger position they and agents will be in years to come, he said.

“There’s light at the end of the tunnel and the tunnel has a train behind it and that train is the Department of Labor,” Lucius said.

The DOL’s fiduciary rule is the subject of three court challenges, but Lucius said that is irrelevant. “If this (regulatory) train gets derailed there will be another one behind,” he said.

Gradient, which already owns a broker-dealer and a registered investment advisor, was the first IMO to apply for financial institution status. It applied about six weeks after the DOL issued the financial version of its fiduciary rule in early April, Lucius said.

Insurance companies expressed concerns earlier this year about accepting the liability that comes with supervising agents who have relationships through IMOs, or wholesalers. Many insurance company executives said they were unwilling to do that.

Independent agents were responsible for more than 60 percent of all fixed-indexed annuity sales last year, according to industry analysts.

With the sale of fixed indexed annuities expected to reach $60 billion this year, independent agents have a lot at stake in making sure they can continue to sell fixed indexed annuities.

Applications Ask for Compensation Strategy

The DOL’s financial institution application documents, each said to be more than 20 pages long, require IMOs to spell out how they plan to compensate independent agents, one of the major reasons for DOL’s adoption of the fiduciary rule.

“The department wanted clarity about who’s getting paid, how they are getting paid and how much,” Smith said. “They wanted transparency and they wanted us to address how we are going to make sure agents are not incentivized over another.”

One of the goals in requiring a fiduciary standard is to eliminate big differences in commission structures so that agents earn nearly identical compensation for similar products they sell, free of any incentive to favor one product over another.

The DOL claims that past compensation incentives steered agents toward selling a product that was not necessarily in the best interest of the investor — a strategy that was acceptable under a suitability standard of care.

Under a fiduciary standard, the compensation levels will change to eliminate those incentives, but DOL regulators are still struggling with where and how to set compensation levels for independent agents.

If the compensation leveling doesn’t take place at the insurance company level, it will have to take place at the IMO, or wholesaler, level, Smith said. “There’s no doubt that compensation at the agent level is going down.”

Clarity 2 Prosperity explained to the DOL how it screens the annuities it sells and under what conditions those products are made available to its 200 advisors and financial planners.

One of the sticking points is whether DOL regulators would grant wholesalers financial institution status on an individual basis or on a class basis. The department seemed to be favoring a single individual exemption “that would work for a majority of applicants,” Smith said.

A draft of the exemption document could be in the hands of Clarity 2 Prosperity for review by the end of the month, Smith added.

"I would expect DOL to answer by year end, if not sooner," Smith said. "Right now we're full steam ahead with technology and head hunting firms and consultants helping put policies and procedures in place.”

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