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Are You A Fiduciary?

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Discussion is stirring in Congress over whether an Obama administration proposal to have brokers who provide investment advice held to a fiduciary standard, not just the current suitability standard.

Since the proposal is focused on securities brokers, a natural question to ask is, why should insurance practitioners care?

The answer is, this legislation could affect them too; 1) if they also hold securities licenses and provide investment advice; and/or 2) if the standards are applied to brokers but later migrate over to insurance specialists who do planning too.

Besides, the proposal is part of the massive financial overhaul now before Congress, an overall that could affect all financial sectors, including insurance.

A little background. The fiduciary standard is widely viewed as more stringent than the suitability standard. As indicated in the Investment Advisers Act of 1940, advisers who provide investment advice must put the client’s interests first. (This applies to those who advise others, either directly or through publications or writings, regarding investments, as a regular part of their work.)

Registered Investment Advisers and financial planners, among others, are held to the fiduciary standard, according to the Securities and Exchange Commission.

As for the suitability standard, it focuses on sales conduct. It requires securities reps to sell the most appropriate product for the client. Any advice they provide must be “solely incidental” to this work. Investment brokers are currently held to this standard.

(Incidentally, insurance sales agents are also held to suitability standards, but as relates to insurance products–for instance, the Suitability in Annuity Transactions Model Regulation of the National Association of Insurance Commissioners, if adopted by the agents’ state.)

The proposal to apply the fiduciary standard to brokers appears in the Treasury Department’s proposed Investor Protection Act of 2009. (See This legislation would amend the Investment Advisers Act to require all brokers, dealers, and investment advisers who provide investment advice about securities to retail customers or clients “to act solely in the interest of the customer or client without regard to the financial or other interest of the broker, dealer, or investment adviser providing the advice.”

There is no indication in that language that insurance agents and distributors who sell non-security insurance products would be affected. After all, they are not selling or advising on securities.

But what about dual-licensed insurance agents and distributors who sell insurance policies that are securities–e.g., variable annuities and variable life policies–as well as fixed insurance products. They would be likely be affected by the change due to their securities licensure, if they give related (and not incidental) advice. So, on the insurance side, they would be held to their state’s suitability standard, and on the securities side, the federal fiduciary standard.

This is not impossible–the standards are certainly compatible–but shifting hats like this would be new for many.

What about indexed annuity agents and distributors? If SEC Rule 151A ever is adopted, it would require indexed annuities to be treated as securities. That would mean the agents and distributors who sell these products would be handling securities. If the products are sold with securities advice, the agents and distributors will likely then have fiduciary standards to consider.

Here is another challenge. A good many insurance professionals identify themselves as financial advisers. Many do this as they begin to grow their practices into full financial service firms providing products, planning and advice, and some do this even if insurance remains their main business.

If the Investment Advisers Act is amended to apply the fiduciary standard to brokers who provide investment advice, some of these insurance practitioners might find their “financial adviser” tag a bit troublesome. After all, many people believe “financial advisers” are synonymous with “investment advisers.” If the advice and planning provided by the insurance-oriented financial advisors is minimal, or if they refer out advice and planning to specialists, they may not want to be held accountable to investment adviser requirements.

They–as many others–would want to know, “Do the amended Investment Adviser rules apply to me?”

They will not be alone. The Personal Financial Planning Specialty Area of the American Institute of Certified Public Accountants, New York City, recently released The CPA’s Guide to Investment Adviser Registration. Why? To help members determine whether they qualify as investment advisers under SEC and state regulations.

Insurance organizations might consider following suit, especially if the proposal is enacted. A little clarity here wouldn’t hurt.


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