PHOENIX — If Congress goes ahead with extending a fiduciary standard of care to all broker-dealers, that could lead to huge changes in the everyday lives of financial professionals who act as trustees.
Two speakers — Thomas Commito and Lawrence Brody — talked about that possibility here during the kick-off general session at the Society of Financial Service Professionals’ FSP Forum.
The broker-dealer fiduciary standard provision is part of the Investor Protection Act of 2009 bill.
Commito and Brody addressed the implications of the fiduciary standard in connection with a 2009 court case involving Key Bank, Cleveland.
The case centered on the financial institution’s role as trustee of an individual retirement account that owned a variable life policy on the insured, a 53-year-old man. Because of a steep decline in equity values, the policy collapsed and the bank hired two consultants to explore alternatives.
Their recommendation was to do a 1035 exchange of the VUL policy for a fixed universal life contract carrying a reduced death benefit ($3 million versus $8 million for the VUL policy). The trust’s beneficiaries–all family members of the insured–sued the bank, arguing that the bank did not fulfill its fiduciary duty because of the $5 million reduction in death benefits.
Key Bank “barely” won the case, for the speakers noted, the presiding judge ruled the bank could have done more (though he did not specify what) to fulfill its fiduciary obligations.
“This could be a brave new world,” said Commito, a director of sales concepts at Lincoln Financial Distributors, Hartford. “If we’re all held to be fiduciaries, then when proposing a 1035 exchange, we as advisors will have to do a lot more than most of us currently are in terms of deconstructing policies.”
Brody agreed, adding that advisors held to a fiduciary standard would likely also have to be more forthcoming in disclosing commissions and potential conflicts of interest. And, echoing Commito, he cautioned attendees to think hard before agreeing to become a trustee.
“If you’re a trustee, this is an instructive case,” said Brody, a partner at Bryan Cave L.L.P., St. Louis. “Do you really want to be a trustee of a client’s insurance trust? Unless you’re overseeing a whole life policy that has no moving parts, it may be wise not to take on this responsibility–or to resign if you already have.”
The speakers questioned, however, whether holding agents to a fiduciary duty would withstand legal scrutiny. They noted, as the Association for Advanced Life Underwriting, Falls Church, Va., recently argued in testimony before the House Financial Services Committee, that the standard could impose a conflict of interest.
“You can’t serve two masters,” said Brody. “If you’re an agent, then you’re a fiduciary of the insurer. If you’re also a fiduciary of the client, how can you serve both interests without having a conflict?”
Two Internal Revenue Service revenue rulings–2009-13 and 2009-14–also featured prominently during the Forum’s kick-off general session.