Why Some Annuity IMOs Own Their Own Broker-Dealer

At least three big fixed indexed annuity marketers now own their own broker-dealers.

The IMOs are Covenant Reliance Producers LLC, Nashville, Tenn.; Brokers International Ltd., Panora, Iowa; and Asset Marketing Systems Insurance Services LLC, San Diego, Calif., says Jack Marrion, president of Advantage Compendium Ltd., St. Louis.

The new structures have come in the wake of regulatory moves to redirect regulation of fixed indexed annuities from the state to the federal level (via Notice to Members 05-50 of the Financial Industry Regulatory Authority and not-yet-implemented Rule 151A of the Securities and Exchange Commission.)

Traditionally, insurance marketing organizations (IMOs) and similar firms have provided insurance agents and advisors with access to products, marketing, training and other sale services in accord with state insurance laws. But the Notice 05-50 changed that. Issued in August 2005, the notice directed B-Ds to supervise sales of indexed annuities as securities, thus upending parts of the IMO sales process.

IMOs have responded in different ways. Several have set themselves up as an office of supervisory jurisdiction (OSJ), meaning they are effectively a B-D branch office, says Marrion. Others have become registered investment advisory (RIA) firms.

But a few have gone a step further, creating or buying their own B-D, he says.

Asset Marketing formed Madison Avenue Securities, Inc. in May 2005. Brokers International formed Brokers International Financial Services LLC in November 2005. Covenant Reliance bought Center Street Securities, Inc. in spring 2009.

"We saw the writing on the wall, when Notice 05-50 came out," says Matthew Rettick, Covenant Reliance president of its move to B-D.

"We realized it was not enough anymore to educate agents, help with insurance licensing, provide products and otherwise support them as insurance advisors." To sell FIAs, he says, insurance agents would now need to get Series 65 licensed, he continues, "so they could be investment company representatives and talk about securities with clients as well as insurance."

That realization led to a restructuring of the IMO that stretched over three years.

In August 2006, Rettick joined with partner Dean Zayed to create Brookstone Capital Management, LLC, a fee-based registered investment advisor that provides Series 65 licensing assistance, compliance and various money management services.

In spring 2009 came the purchase of the Center Street B-D, from J.R. Thacker, who remains with the firm.

Later in 2009, he set up a holding company, Producers Equity Group, Inc., for all three businesses--Covenant, Brookstone and Center Street. The IMO, RIA and holding company are based in Nashville and Center Street in Chicago.

Why buy the B-D? It was either build one or buy one, Rettick says. Agents were "bugging" him to do this, he explains.

"They were telling us that most B-Ds they used, in compliance with Notice 5-50, were just a source of products and offered no other assistance with sales or strategies." They were securities firms and had no insurance expertise, which made things difficult when working with FIAs.

In addition, Rettick says, advisors complained that many of the B-Ds were "hassling" them--about their seminars or presentations, their product choices, and their annuity carriers.

"Agents also didn't like having to run indexed annuity sales through the grid," he adds, noting the term refers to putting the sale through a review process for which the B-D takes a percent of each commission. (Before Notice 05-50, he recalls, reps who sold FIAs did so as outside business activity "with no haircut on the commission.")

By owning a B-D and RIA, he says his reinvented business can control the whole FIA sales process--from indexed products and carrier selection to sales strategies, presentations, compliance and compensation--as well as help reps set up and build their businesses.

"We want that control," he says, noting "you can't manage what you can't control."

Agents who place FIAs through the firm are paid full street commission, Rettick points out. "No haircuts." (His firm is compensated by annuity company overrides, as in other insurance sales.)

Rettick says his firm has been adding new advisors and reps monthly ever since. Many are transferring entire blocks of FIA clients over to his B-D, he adds.

The uncertain status of SEC Rule 151A, which would make the FIA a security, is not a concern for him. "We're concerned about aggressive state securities departments going after agents for giving investment advice without a securities license," he says.

But with its new structure, he says, his firm is in a position to manage, "whichever way the regulatory pendulum swings."

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