Uniform Fiduciary Standard May Threaten Sales Model of Life-Insurer Owned Broker-Dealers

If a strict definition of a fiduciary standard of conduct becomes the fate for broker-dealers owned by U.S. life insurance companies, they could be forced to completely revamp their sales and distribution business model.

The U.S. Securities and Exchange Commission in January recommended the standard to Congress. It would apply to broker-dealers and investment advisers when they provide investment advice about securities to individual investors. The ball is now with the SEC on finalizing the rulemaking -- it may be picking up again after the one-year anniversary of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (BestWire, July 1, 2011).

The American Council of Life Insurers said its members work through affiliated and independent distributors, including broker-dealers and investment advisers. "We believe that registered representatives ... of BDs directly affiliated with the life insurance industry represent a majority of the associated persons associated with the BD industry," the group wrote in a letter to the SEC last summer.

In terms of how this would impact insurance distribution, "there could be somewhat more impact on companies with captive distribution channels that sell through a company-owned broker-dealer," said Thomas Rosendale, assistant vice president at A.M. Best Co.

"Whatever training/oversight/compliance requirements come from a change to a uniform fiduciary standard would presumably be the responsibility of the broker-dealer, which could add to expenses and could even have an impact on variable product sales volume depending on how much disruption is caused by the implementation process," he said. "If suitability requirements become more stringent, this could impact sales as well."

Rosendale said insurers selling through captive channels using their own broker-dealer "would likely have more liability than those selling their products through unaffiliated BDs."

Investment advisers have been held to a fiduciary standard, which means they must put the interest of their clients before their own.

The Financial Industry Regulatory Authority, the independent regulator of U.S. securities firms, oversees nearly 4,535 brokerages and 631,640 registered securities representatives, who are licensed to sell securities with the legal power of an agent. They usually work for a broker licensed by the SEC and FINRA.

Broker-dealers, whether independent or owned by a larger parent company, are concerned about a uniform fiduciary standard, said Kevin Vozar, chief operating officer for Producers Equity Group, an independent firm that offers broker-dealer and investment advisory services.

Broker-dealers owned by life insurers that offer their own proprietary products are "in a very difficult situation because many times the products they make available for sale to the public are not always the best products for the consumer," Vozar said.

These registered representatives are in the "crosshairs" because they often are pressured from the company they're affiliated with to sell that company's products, which might not always be in a client's best interest, Vozar said. Career agents with some large mutual life insurers are required to do a minimum amount of sales for their own company's products to keep their contract, he said. Registered representative life insurance agents sell products including variable annuities and variable life insurance.

Vozar said if a uniform fiduciary standard goes through, registered representatives working for a broker-dealer offering propriety products may find themselves in a dilemma: "Do I offer my clients the best product or do I offer them my firm's product even if it's not as suitable?"

Terry Headley, president of the National Association of Insurance and Financial Advisors, said to impose such a standard across the entire market "would do great harm." The SEC will move forward with a fiduciary standard and implied it would follow the Investment Advisors Act of 1940 as guidance, he said.

All of NAIFA's 50,000 members have an insurance license, and about 63% are registered representatives. It's estimated that up to 256,000 insurance agents also are registered representatives. About 27% of NAIFA's members are dually registered as investment adviser representatives under the corporate RIA of their broker-dealer.

The SEC hasn't yet made a final ruling on the scope of the standard. A pure "legalastic" and rigid definition that mirrors the 1940 law would be a big problem for his members and their customers, Headley said. NAIFA members will be forced to drop the middle and lower-income markets because of higher liability exposure and regulatory compliance costs, he said.

RIAs serve the wealthy and generally receive fees, not commissions, for managing their clients' assets. About 11,500 RIAs want to "dictate the rules of engagement" against the broker-dealer community of hundreds of thousands, Headley said.

A NAIFA survey showed about 31% of them indicated that they probably would transition their business model "in a different direction" if a uniform fiduciary standard goes through, Headley said. His group's members are small businesses and are Main Street, not Wall Street, Headley said.

Jeremy Alexander, chief executive officer of Beacon Research, said although much depends on how a fiduciary standard is defined, it will accelerate the trend toward a fee-based business model for advisers, and RIA operations of B-Ds and others, such as banks. Annuity sales by registered representatives "probably will decline during a period of adjustment to the new standard."

Vozar said a uniform fiduciary standard would force proprietary product sponsors to make their products much more competitive, such as reducing early withdrawal benefits and reducing charges.

(By Fran Matso Lysiak, senior associate editor, BestWeek: [email protected])