New Regulations For A Changing Industry

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Those of you who came into the business 25 or 30 years ago might feel like you need to be a superhero to keep up with the changes. Others new to the business may not appreciate how much the business has changed.

U.S. broker-dealers (including our organization) have redirected their focus from selling simple products to supporting producers as they offer advice. The insurance industry is also witnessingand benefiting fromthe final demolition of artificial walls that separated manufacturers of financial products for the last 75 years.

The regulatory environment has not, however, kept pace with this evolution, as separate federal and state rules still govern the insurance, securities and financial advisory businesses. That should change in the coming years with the development of uniform, securities-type regulations for all financial services.

Back in the 30s

After the Great Depression, the U.S. Congress created a peculiar set of regulatory barriers that kept all financial services businesses separate. Those barriers required clients to go to a bevy of specialists who often gave them conflicting advice about how to construct a financial house.

Insurance people sold life insurance. Property and casualty agents sold property insurance. CPAs gave tax advice. Stockbrokers sold equity products. Banks offered fixed savings vehicles.

In this fragmented market, each professional operated in a rigid structure, acting like a human product kiosk for a specific product or single manufacturer. Separate regulations and regulatory bodies governed different advisors.

Brick salesman could sell bricks. Lumber salesmen could sell lumber. But no one professional was permitted to serve as the chief architect in designing the client?s financial house.

Clients have never wanted products. They want what those products provide: a comfortable, safe financial structure to provide for and protect their families. But regulatory barriers dictated that we serve as brick salesmen.

When my father entered the life insurance business in 1964, he had 3 simple products: annual renewable term insurance, whole life insurance and immediate annuities.

He could sell red, yellow and white bricks, all at a fixed price, based on a client?s given age. He looked up a number from the rate book, multiplied it by 10, 25 or 50, and filled out an application.

The whole MDRT era of the Ben Feldmans was based on finding creative ways of selling these simple, commodity-like products.

The best people in the business learned they could sell more bricks if they drew a picture of a house with windows, doors and shingles. However, in the old system, they could only get paid for selling bricks.

In 2004, you can sell thousands of financial products, including insurance, securities pensions and group benefits. Most importantly, you can charge your clients fees for your advice.

Today, I estimate that broker-dealers like ValMark Securities offer 4,000 products, not counting individual stocks and bonds. In variable life and annuities alone, there are more than 450 products.

The biggest challenge is not the number of products but their complexity. Now, more than ever, clients need your advice.

They need you to help them design and construct their financial homes. They need advice on which products to choose. And they need your advice on tailoring products to their needs.

In fact, the advice component of today’s products may be more important than the products themselves.

Even for those of you who think you are only in the insurance business, the world has changed. We no longer are limited to selling just insurance bricks; the lumber man is no longer limited to selling just lumber.

Some of our firm’s most successful insurance professionals are housed in banks, CPA firms and even law firms.

In this new environment, financial professionals who attempt to design a sound financial blueprint without securities products will find themselves at an extreme disadvantage. Consider the following:

o First, follow the money. In 2003, of every hundred dollars coming into U.S. life insurance companies, between 32% and 35% was from equity-based products.

o In your own practices, look at the products that now come under the jurisdiction of a broker-dealer. These are all variable products, pension products, mutual funds and fee-based advice. Even in Texas, that wide jurisdiction would be considered a major piece of real estate.

o The importance of these equity-based products is evidenced by the fact that every one of the top 25 U.S. life insurance companies owns at least one broker-dealer.

Now that everyone can sell everything and securities products are integrated into the insurance products we sell, I predict we will see one regulator for the distribution of all financial products.

Today, each of the existing regulators acts as if you are exclusively in their business. The reality is that if you sell securities, insurance, and give advice, you may have to comply with 5 sets of licensing and regulations. And that is if you only serve clients in your home state.

What will this one system look like? I believe it will more closely resemble the regulatory framework governing the securities industry than that of the current insurance business. I say this for 3 reasons:

1. Litigation. As trial lawyers target the financial services industry, the predictability of NASD arbitration becomes more attractive than the prospect of jackpot justice in state courts. It is also much less expensive and time consuming.

2. Suitability. Unlike the current patchwork of state regulations for insurance-based products, the securities industry relies on a single national standard of suitability. This process requires that we collect basic information about the client to determine if the product recommended is suitable for the individual circumstances.

3. Accountability. In the insurance industry, licenses are held by the state. What is lacking is a strong system for dealing with complaints or disciplining the few rogue agents who have harmed our industry’s reputation.

By contrast, in the securities industry, the broker-dealer holds the license. The principals of that broker-dealer must put their signatures on every transaction, approving or disapproving it, based on suitability.

The broker-dealer must act on customer complaints or the firm’s officers risk losing their licenses for failure to supervise. In light of all the current scandals in financial services, the public will demand this degree of accountability.

Outpacing the Regulators

In many ways, the securities industry already has become the de facto regulator of the insurance industry. In the presence of 2 sets of standardsone for insurance, the other for securitiesmany insurance companies are imposing the higher NASD-type standards, even on their general account business.

For producers, these more rigorous rules translate into a higher standard of conduct to abide by. And, once formalized under the new system, I expect the industry will demand a more rigorous education for all people in financial services.

This new program might require a 4-year college degree plus some years of the on-the-job experience.

In sum, the new regulatory environment will work to the benefit of those who are dedicated to serving their clients in a professional manner.

Lawrence J. Rybka, J.D., CFP, is president and chief executive officer of ValMark Securities Inc., an Akron, Ohio-based independent broker-dealer. You can reach him via his assistant Vicki Reed, at vicki.reed@valmarksecurities.com.

This is an abridged version of a presentation he gave at the MDRT annual meeting in Anaheim.

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The biggest challenge is not the number of products but their complexity. Now, more than ever, clients need your advice.


Reproduced from National Underwriter Edition, June 18, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.