IMOs take on enhanced sales role under the new DOL rule

The new fiduciary standard has the insurance and financial services industries scrambling

Under the final Department of Labor fiduciary rule, fixed indexed annuity products and variable annuity products will be subject to the best interest contract exemption. (Photo: iStock) Under the final Department of Labor fiduciary rule, fixed indexed annuity products and variable annuity products will be subject to the best interest contract exemption. (Photo: iStock)

WASHINGTON — An historic reluctance to deal with federal regulators is apparently slowing the ability of the insurance industry to properly comply with the Department of Labor’s new fiduciary standard as of the April 2017 deadline.

At stake is the ability of independent agents to maintain the current momentum of hot-selling fixed index annuities (FIAs) into retirement accounts.

According to Jason L. Smith, CEO and founder of Clarity 2 Prosperity, the DOL goal is to establish independent marketing organizations (IMO)s with the appropriate vehicle for distribution of such retirement products as FIAs into investment accounts. Clarity 2 Prosperity is based in Cleveland.

Investment accounts include 401 (k)s, 403 (b)s, pension plans, 457s and “every IRA that is out there,” as stated by Bob Phillips, president & managing director of Alternative Brokerage, an independent marketing organization based in Des Moines, Ia.

According to Phillips, there are approximately 350 IMOs distributing insurance products. LIMRA forecasts they distribute roughly two-thirds of the FIAs sold in the U.S.

See also: DOL rule could erase indexed annuity gains next year

But, Smith said, so far only six IMOs have applied to the DOL to be defined as “financial institutions,” and therefore comply with the Best Interest Contract Exemption (BICE) that is the core of the fiduciary standard regulation that will go into effect next April.

Between 50 and 60 percent of the FIAs sold are into investment accounts that will be covered by the BICE, Phillips said.

At stake are strong sales of FIAs, which “have been increasing quarter over quarter, year over year,” according to Phillips.

LIMRA Secure Retirement Institute forecasts a 15-20 percent increase in retail indexed annuity sales in 2016, compared with 2015 results.

Under the new DOL rule, IMOs are not recognized as financial institutions. As such, these organizations cannot execute the best interest contract with the policyholder on behalf of the agent. While industry analysts expect many IMOs will eventually change their status and become broker-bealers, which are recognized as financial institutions by the DOL, there will likely be others who leave the market or consolidate with another organization, shrinking the overall channel’s reach, LIMRA projects.

See also: What Does it Mean to be SIFI?

“Carriers are telling us they were not looking to sign the BICE agreement on behalf of agents," Smith said, which echoes similear reports from across the financial services industry.

But, Smith said, there are some carriers that are thinking of signing the BICE for at least a short period until they can pass the torch to IMOs that they are satisifed can comply with the policies and procedures to meet the impartial conduct standard mandated by the fiduciary standard rule.

See also:

What does it mean to be a fiduciary?

10 compliance challenges annuity providers will face in 2016

The only IMOs that have applied to be a financial institution under the DOL regulation are Gradient Insurance Brokerage, Inc., St. Paul; Clarity 2 Prosperity; Legacy Marketing Group, Inc., Petaluma, Calif.; InForce Solutions LLC, Woodstock, Ga.; Financial Independence Group, Bloomfields, Mich.; and Futurity First Financial Corp., Rocky Hill, Conn.

InForce Solutions is a subsidiary of Allianz Life Insurance Co., based in Minneapolis. Allianz is the largest underwriter of FIAs in the U.S.

Smith said IMOs will ultimately be the distribution systems for insurance agents selling investment products covered by the BICE, while Registered Investment Advisers will sign on for the investment adviser representatives (IAR)s and the broker dealers on the registered representatives.

But, Smith said, Clarity 2 Prosperity is “getting ahead of the curve.”

It is “shocking to me that we are one of only six to have signed on,” Smith said.

He added that he believes the reason for that is, as a field marketing organization (FMO) or an IMO, “you are not used to dealing with regulatory bodies," such as the Securities and Exchange Commission, the Financial Institution Regulatory Agency, and the DOL.

“FMOs and IMOs are just not looking to, either, though I can’t make any sense of it,” Smith said. “I think they are putting their head in the sand and hoping that through the lawsuits the whole DOL thing goes away."

Several lawsuits challenging the legality of the fiduciary standard itself as well as the DOL decision to have the rule apply to FIAs are pending.

The suit filed by the National Association of Fixed Annuities seeking an injunction against the rule will be heard Aug. 24 in District Court in Washington, and another suit filed by the Synergy Marketing Group will be heard in Kansas City Sept. 21.

See also: NAFA plots course in DOL rule fight

He explained that Clarity 2 Prosperity is a financial planning organization that has “presented our whole process as to how we do financial planning.”

The difference between his firm and FMOs and IMOs “is that they are not financial planning organizations; they are just distributing products.”

The DOL, by contrast, wants IMOs to do financial planning.

“Other IMOs are not doing this,” he said, and the fiduciary standard rule “is forcing them to change their business model.”

“The DOL has told us that their goal is to approve IMOs as financial institutions," Smith said. They just want to make sure that we can put the policy and procedures in place necessary to comply with the impartial conduct standard.”

See also:

The DOL fiduciary rule: heralding the end of commissions

3 exciting unintended consequences of the DOL rule

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