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Retirement Planning > Spending in Retirement > Income Planning

An Income Planning Challenge

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Recent developments are again raising the issue of harmonization of the duties of broker-dealers that sell insurance products and the duties of investment advisers who consult on income planning.

As often is the case in the world of insurance products, no single concept stands totally alone; each implicates other concepts and developments that are the focus. Income planning is a prime example of this convergence of issues.

In all sales of insurance products and securities, the product itself is a key element, but product selection is grounded in the process of assessing the suitability of the product to the needs, purposes and capacity of the purchaser.

Product and process give rise to differing considerations, and, at least under current law, different regulation.

Federal securities regulation and state insurance regulation have not come to grips with this duality and differing emphasis. This is evidenced by several developments, the most significant being the reemergence of the issue of harmonization of the standards for B-D producers and investment advisers following the Goldman Sachs inquiry.

To recap the meaning of harmonization: Its core, as relevant here, is imposing, on B-Ds selling insurance products, a fiduciary duty equivalent to that currently imposed on investment advisers in the process of income planning. Fiduciary duty involves the prohibition of conflicts of interest, one of which is how compensation is paid.

One of the key concerns related to insurance product sales, as voiced by senior executives of the Financial Industry Regulatory Authority, Washington, D.C., is failure to disclose the conflicts of interest arising from receipt of marketing fees.

But FINRA’s doesn’t prohibit the receipt of compensation that could sway the B-D’s efforts and recommendations.

FINRA’s remedy conveys that a sale is okay as long as the prospect has been told: “Don’t think I have only your interests at heart when I sell you this.” The prospect can then presumably evaluate the product with that disclosed warning in mind.

The state of Iowa recently took a different approach. In May, the state insurance division submitted two proposed rules that would amend existing regulations under the Iowa Administrative Code relating to compensation for the sale of insurance products, especially annuities (Chapter 50, “Regulation of Securities Offerings and Those Who Engage in the Securities Business,” and Chapter 15, “Unfair Trade Practices”). The comment periods extend to early July with hearings scheduled a few days thereafter. (See box for key sections.)

It is interesting to note, and arguably to be expected, that Iowa, albeit not referring to any fiduciary duty, has placed a prohibition on so-called “double-dipping.”

FINRA on the other hand, appears to be telegraphing that disclosure is an adequate remedy, even if disclosure discourages investors’ accessing needed services.

Thus, neither FINRA nor Iowa has recognized the unique quality of income planning. As opposed to asset accumulation under products, income planning is an intensive on-going process of reevaluation, in view of ever-changing needs and circumstances.

Neither entity has proffered a regulatory framework that contemplates the provision of those critical on-going services. Their proposals only zero in on the product purchase as though it were a self-contained action.

Recognition of the unique demands of income planning would dictate revisions to the fiduciary duty and compensation structure of regulation. Such revision would accommodate the interaction and integration of insurance product sales and the process of income planning.

Joan E. Boros, Esq., is of counsel with Jorden Burt LLP, Washington, D.C. Her e-mail address is [email protected].


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