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.
Stockbrokers have long been held to have a fiduciary duty to their customers. However, the case law seems to make this a limited fiduciary duty. Arbitration proceedings at the Financial Industry Regulatory Authority do not seem to have set forth a clear picture of how much duty a stockbroker owes to customers, but at the very least, securities laws have always imposed a duty of disclosure, which is usually satisfied by the use of prospectuses and confirmations in the sales process.
Investment advisors are at the center of the current debate over fiduciary duties. Investment advisors for regulated mutual funds have always had a fiduciary duty with respect to the mutual funds they advise. This requirement is imposed by the Investment Company Act of 1940.
Many proposals currently under consideration would impose similar fiduciary duties on all investment advisors for all activities, not just for regulated mutual funds.
A major impetus for imposing fiduciary duties on people in the financial services industry is concern over the potential for sales people to “dial a commission” by selecting a higher commission product that costs their customers higher fees.
This concept has been expressed as a concern for certain members of the Securities and Exchange Commission and of senior FINRA staff. These regulators would prefer that the recommendations to customers be commission blind, where only the best interests of the customer are taken into consideration by the people selling investments or insurance or providing investment advice.
A number of insurance agents have already taken a route to avoid the problems with respect to fiduciary duties.
One of these routes is to sell only products with front-end sales loads that are totally disclosed to the customer and where there can be no temptation for the sales person to “dial a commission.” Another route is to sell only products that carry no sales loads or commissions with a “wrap-fee” charged to the customer to compensate the advisor for services rendered. Unfortunately, few insurance products are designed for this type of transaction.
It is doubtful that many people get up in the morning with the idea that “today we need to buy some life insurance or an annuity.” Instead, the need for insurance products must be brought to the attention of a prospect.
The hardest part of any insurance sale is to find the prospect. The amount of time and expense is significant and insurance commissions have been designed to provide adequate compensation for the amount of work and expense involved.
It is hard to imagine that critical insurance products will be as widely available to the consuming public if there is a change in the methods by which insurance agents are compensated. However, as much as the industry may hate to see such change, it certainly appears that it is inevitable.
Norse N. Blazzard, JD, CLU, and Judith A. Hasenauer, JD, CLU, are attorneys in the Pompano Beach, Fla. firm of Blazzard & Hasenauer, P.C. Their email addresses are [email protected] and [email protected]