The Securities and Exchange Commission’s proposal to regulate fixed index annuities as securities could result in an estimated loss of $852 million to insurance industry distribution channels.
This is a rough total, based on a conservative estimate of additional expenses to insurance agents with lost revenues plus losses to insurance marketing organizations (IMOs), as follows.
Cost to agents. There may well be 100,000 annuity agents that could be affected by the proposal. A 3-year old Advantage Compendium survey found that 45% of FIA producers did not have securities registration. So, to continue selling FIAs under the proposal, these 45,000 agents would need to train for and pass at least a Series 6 exam, and then hook up with a broker-dealer that would charge fees and or share in the agent income.
In addition, the agents would more likely than not be required to send every scrap of paper they share with the public in their non-securities business to the B-D’s compliance department so the B-D could either approve use of the public marketing letter/script/product, or affirm it is not in any way securities-related.
If fees charged by the B-D and its self-regulatory organization, the Financial Industry Regulatory Authority, averaged $500 a year, the additional cost would be $22.5 million. This does not factor in the agent-hours lost in productive time usually spent with customers but now spent in preparing forms and sending in non-securities sales and public materials because of FINRA’s lack of clear guidelines on what B-Ds should examine.
Total street level agent commissions paid out on FIAs in 2007 amounted to an estimated $2 billion, based on my figures. If agent commission levels remained the same–and I believe they would drop–and if the B-D were to take only 10% of that commission as its share–and my recent look at B-D payout grids shows typical takes of 10% to 40%–the annuity agents would lose $200 million in income.