Various legislative bodies and not a few regulators are moving at warp speed to impose “fiduciary duties” on salespeople in all segments of the financial services industry.
It appears that something is inevitable in this regard; the only question is when.
When insurance agents, financial advisors and stockbrokers become subject to these new fiduciary duty standards, whatever they turn out to be, it will have a profound effect on how business is done within the financial services field.
The current applicability of fiduciary duties to the financial services industry is a hodgepodge of differing rules and interpretations. Moreover, the definition of a “fiduciary duty” seems to be a shifting target. This means that whatever the laws are that will be imposed in the future, the industry may have a clearer picture of how it is to operate, even if professionals do not particularly like the new rules.
A fiduciary relationship is one founded on trust or confidence reposed by one person in the integrity and fidelity of another, according to several resources, including court decisions.
A basic requirement is that the person with the duty–the “fiduciary”–is always supposed to put the interests of his principal (i.e., the person to whom the fiduciary duty is owed) ahead of his own interests. This includes the requirement that the fiduciary should not unfairly profit from the relationship.
There are a number of cases that have also imposed a requirement for disclosure by the fiduciary of any possible conflict of interest with the principal.
Traditionally, insurance agents have not been held to a fiduciary standard with their customers. Thus, the term “agent,” within the insurance context, meant that the agent was the agent of the insurer, not of the customer.
If the proposed legislation imposes a fiduciary duty on an insurance agent with respect to purchasers of insurance products, it will totally change the relationships between the parties. Indeed, the concept of an insurance commission is almost inconsistent with the concept of a fiduciary relationship between the insurance agent and the purchaser of insurance.
Certainly, any such legislation (or regulations, if that is the route that will be taken) can limit the concept of fiduciary duty to permit continuation of insurance commissions in the traditional manner. However, it will be necessary for such legislation or regulations to specifically define the rules applicable to commissionable insurance sales if insurance agents are to be required to be fiduciaries to their customers.
Many agents deplore the concept of disclosing commissions to their customers because they think that such disclosure will adversely affect sales.