The Association for Advanced Life Underwriting wants the House Financial Services Committee to mandate “differentiation” of financial professionals’ roles in the marketplace, rather than “harmonization.”
The AALU, Falls Church, Va., has sent the committee a letter recommending that lawmakers replace “one-size-fits-all” fiduciary standard language in the Investor Protection Act of 2009 draft.
“As life insurance producers, our members strive to decrease the proportion of American who lack life insurance coverage, currently at 40%,” AALU officers write. “It is critical that regulatory reform does not create artificial barriers which interfere with the ability of life insurance producers to help consumer.”
The IPA draft bill was released earlier this month by Rep. Paul Kanjorski, D-Pa., chairman of the committee’s capital markets subcommittee.
The bill draft calls for all sellers of securities to consumers to meet a fiduciary standard of care, meaning that they would have to act in the “best interests of the consumer.”
Today, a fee-based registered investment advisor must meet a fiduciary standard of care.
A broker-dealer that earns commissions and does not take a fee must meet a looser “suitability standard,” and attempt to ensure that any product sold to a consumer is suitable for that consumer.
Currently, consumers have the choice of paying a fee to retain a registered investment advisor on a fiduciary basis to help them with their needs, or utilizing the services of a broker-dealer, who does not charge a fee, but is compensated by securities commissions upon sale of a suitable product to the consumer, the so-called “suitability standard.”
The IPA bill draft also would impose limits on some sales practices, compensation schemes and other arrangements, and it would give the U.S. Securities and Exchange Commission authority to prohibit or restrict use of mandatory pre-dispute arbitration in sales contracts.
In its comments, the AALU says broker-dealers typically provide lower-cost access to the investment marketplace for middle-income customers, as they get much of their compensation in the form of commissions from securities manufacturers, rather than through fees paid directly by customers. “With appropriate disclosure, customers can benefit from the cost dynamics of this model,” AALU officials write in the AALU letter.
“Not everyone wants to pay higher costs simply to execute a stock trade or be forced into a ‘fee-only’ advisory arrangement with an RIA, but such circumstances are likely to result from imposition of a fiduciary standard across the board and heightened litigation and compliance risks associated with providing ‘best’ advice or recommendations,” the AALU officials write.
Lawmakers should consider changing the IPA to create a clear separation between the roles of those who sell securities — broker-dealers — and those who provide investment advice — registered investment advisors.
The AALU says the bill should:
- Increase disclosures to investors by both RIAs and BDs to ensure that investors understand the respective roles and duties of each.
- Impose strict fiduciary standards on RIAs — those who are retained exclusively by customers to provide investment advice.
-Increase the statutory duties of BDs, to ensure that the securities products offered are suited to the overall objectives, financial status, risk-tolerance, and other needs of the customer.
- Require annual examinations of BDs and RIAs.