Source of funds still a gray area for insurance-only agents

State regulations are inconsistent.

For an industry many think is already over-regulated, there is one area where insurance-only agents could use a bit more regulatory guidance and clarity, and that’s when a client wants to liquidate securities to purchase a fixed annuity.

For a registered investment advisor (RIA) or registered rep, it’s not a dilemma. They are permitted, under state law, to dole out investment advice as it pertains to securities sales and purchases. Insurance-only agents do not have the same status. However, in practice, when dealing with interactions between agent and client, the issue becomes less than clear cut and much grayer.

Leading annuity expert John Olsen, president of Olsen Financial Group, says that most states hold that the recommendation to replace a security would constitute the giving of investment advice, and, therefore, requires a securities registration. The question then becomes, what constitutes a recommendation? If the insurance-only agent is aware the funds are in securities and then helps the client fill out the paperwork for the purchase of the fixed product, some states have apparently taken the position that those actions would require securities registration. The difficulty is in finding that ruling in written regulations. “If you look at the various state statues and you ask, where does it say that? It often does not,” Olsen says.

Clarity in Iowa

One state has taken a step toward clarifying the issue. In 2011, Iowa adopted Bulletin 11-04, which lists permissible and prohibited activities for insurance-only agents and securities-registered professionals. Under permitted activities, an insurance-only agent can discuss a client’s risk tolerance and financial circumstances. Not allowable are providing advice regarding the liquidation of specific securities or the investment performance of a client’s securities portfolio.

In that state, insurance-only agents do have some guidelines. Elsewhere, it’s much murkier. “It is a horrible Catch-22 because states have not been as precise as Iowa has been. So we are left with a remarkable series of bad choices,” Olsen says. Those choices could include simply not selling any fixed product to any client when the money comes from a security, an option Olsen views as not in the best interest of the consumer. Or they can do what they have always done and hope they don’t run afoul of the authorities. “That’s a pretty perilous choice,” Olsen says.

Know the state regs

Kathy Donovan, senior compliance counsel for Insurance Compliance Solutions at Wolters Kluwer Financial Services, advises agents to research what the regulations are in their state. Yet, like Olsen, she concedes there are some gray areas, even in the case of Iowa.

“Bottom line, most of these bulletins are giving you a list as guidance you can refer to, but they are not saying that this is the be-all and end-all in terms of permitted or prohibited activities,” Donovan says.

Olsen advises agents to call their state securities or insurance regulatory body for guidance, but doesn’t hold out much hope the agent will get a definitive answer in writing. More likely, the agent will get “a resounding silence,” he says.

Where’s the money coming from?

In essence, this is a source of funds question. Where is the money coming from to buy the annuity? In NAIC’s Suitability in Annuity Transactions Model Regulation (expected to be adopted by all states by June), agents are required to obtain information from the consumer as to his or her investments and other insurance products; as well as his or her financial situation and needs, including the consumer’s suitability information so that a decision can be made by the agent as to possible purchase recommendations. The Iowa bulletin also stipulates that insurance-only agents can discuss the client’s financial resources and liquid net worth, but not go into specifics about a client’s securities portfolio.

But what if an insurance-only agent has no insight into what a potential client may sell. “It’s a gray area,” Donovan says. Even though the appropriate questions are asked of the consumer, the decision to recommend a purchase is based on what the individual actually discloses, including the source of funds to be used in the transaction, she notes.

There’s also a paper trail. If the agent submits paperwork to a carrier that shows a security was sold, does that in and of itself indicate the giving of investment advice? What if the agent was merely processing the forms for the client? “Is he not signing onto a specific recommendation?” Olsen says. “Therein lies the rub. I don’t have an answer to that because the regulators have not seen fit to give us an answer.”

What’s an agent to do?

One way to solve the matter is for the insurance-only agent to get his or her securities registration‑a hotly debated issue within the industry. If an insurance-only agent wants to give comprehensive financial advice, then Olsen says he or she should become a RIA or registered rep. However, if the agent does not want to do that, then he or she should not be forced to do so, he says.

States could clear up the question by adopting Iowa’s bulletin, a move both Donovan and Olsen advocate. In the absence of that, insurance-only agents can fall back on the oldest of protections: get it in writing.

An insurance-agent can simply tell a client they cannot and will not give investment or securities advice before any transaction is discussed in full. If the client still wants to proceed with the sale of a security for the purchase of a fixed product (as long as the agent doesn’t recommend which security is sold), then Olsen recommends the agent draft a letter saying precisely what the client agreed to and what the agent did and did not do. Then, send the letter to the client and have him or her sign it. “If the client is uncomfortable signing off on that, you don’t have a client to begin with,” Olsen says.

Though Olsen relates that he has been criticized by some for suggesting drafting such a letter, he is nevertheless firm in that recommendation. “Any litigator or an expert witness in litigation will tell you the number one rule to avoid problems is document, document, document.”

Other than contacting authorities and documenting everything, insurance-agents can still find themselves in regulatory limbo. “This is a terrible, potentially disastrous problem because agents could have their whole lives ruined for transgressing a rule they didn’t even know existed,” Olsen says. “That is fundamentally unfair. And it’s not good for consumers, because if we take a position that we are not going to sell to anybody who has money in a security, what does that do for the poor bloke who says, I’ve got $100,000 in an IRA and I’m scared. I don’t want to lose any money, I want some guarantees and you’ve shown me something that will do that, and you won’t sell it to me? How is that serving the public?”

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