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Regs Rule: A Closer Look at the Fiduciary Standard

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There is certainly no shortage of regulation in the insurance business. On both the state and federal level, the industry is tightly watched and subject to myriad laws and new ones being proposed. This year brought about an alphabet soup concoction (PPACA, MLR, FIO, to name a few) of regulations either enacted or being contemplated for enactment.

How these laws and proposals will impact advisors on the ground level is the subject of much debate between regulators and industry advocacy groups. And that debate is expected to continue, especially given the slow pace of decision-making in Washington, D.C. and the upcoming presidential election.

With so many regulations being bandied about, it’s difficult to cover all of them. Some deal with capital reserve requirements for carriers. Yet others could alter how Main Street advisors and agents run their business and procure their revenues.

Here are just three that have had or could have the most impact on advisors working in the trenches. It is by no means a definitive list, and debate will surely continue on these issues and many more in the months ahead. Stay tuned (and read LifeHealthPro.com daily for updates).

The fiduciary standard: Will it apply to broker-dealers and insurance agents?

When the Dodd-Frank Act was signed into law in July 2010, it charged that the SEC address the issue of whether the fiduciary standard should be applied across the board to both broker-dealers and their representatives as well as investment advisors and their reps. As it stands now, only investment advisors fall under the fiduciary standard, which requires that they act in “the best interest of their clients,” says Gary Sanders, vice president, securities and state government affairs for the National Association of Insurance and Financial Advisors (NAIFA) in Falls Church, Va.

Broker-dealers, meanwhile, are subject to suitability guidelines, which are intended to ensure that the products they sell are suitable for their clients’ needs.

 “It seems to have become commonplace in the media that the fiduciary standard is the higher standard,” Sanders says. “We’ve never accepted that distinction. We think the suitability standard is a vibrant and vigorous standard for consumer protection and in some ways we think the suitability standard imposes much greater and stricter requirements of the people that are under that standard because of all the rules and compliance requirements that reps and broker-dealers have to go through on a daily basis.”

All NAIFA members are insurance-licensed and about two-thirds have a securities license, meaning they can be registered reps of broker-dealers. A large percentage, Sanders notes, serve clients in the middle income bracket, with household incomes of less than $100,000.

Critics of the move to put broker-dealers and insurance agents under the same fiduciary standard as investment advisors say it fails to take into account the difference between how those camps operate their businesses and, most importantly, are paid.

Investment advisors typically are remunerated under a fee structure for managing assets on an ongoing basis (thus the guideline to act in the best interest of the client). Consequently, they must manage large accounts to support their business model.

Insurance agents, meanwhile, are paid a commission for selling a contract that may stretch for a decade. Although the agent services the contract while it’s in effect and usually has an ongoing relationship with a client, they do not oversee client portfolios on a daily basis the way an investment advisor would.

Having broker-dealers and insurance agents work under the fiduciary standard would result in higher fees, thereby making their services out of reach for the middle market they currently serve, Sanders contends.

“It’s going to leave a lot of the people they are currently serving out in the cold without any access to advice or service. That’s our big concern,” Sanders says.

Kim O’Brien, president and CEO of the National Association for Fixed Annuities (NAFA) in Milwaukee, agrees that imposing the fiduciary standard on insurance agents who sell fixed annuities is a “square-peg, round-hole situation. It’s not a standard that really works in the selling of fixed annuities.”

Forcing a change from the current transaction- and commission-based model for selling fixed annuities to the fiduciary standard could cause agents to abandon the product, O’Brien warns.

Further, she notes that broker-dealers are already subject to the suitability requirements of FINRA, which provides more than adequate consumer protection.

“The beauty of the suitability standard is that it looks at each sale twice before it’s completed,” O’Brien says. “The producer or the broker-dealer has to do it and then the insurance company.”

If a sale is deemed unsuitable, the insurance company is held accountable. “The insurance company is dealing with thousands of consumers so if they are being audited for a single sale they are going to have to make sure every sale is suitable,” O’Brien says. “That is a huge benefit to consumers and I think that is an appropriate standard for that annuity sale.”

Securities and Exchange Commission chairman Mary Schapiro has stated that any change in the rule will likely not be complete until sometime in 2012. According to Sanders, Schapiro has also indicated in her comments that any new rule will differentiate between broker-dealers and investment advisors, a stance that leaves him somewhat hopeful.

“I am guardedly optimistic that what they propose is going to take into account that there are different business models out there and I’m hoping but I’m not entirely confident that it’s going to be a proposal that we think will enable our members to continue to serve their clients in the way they are serving them now,” Sanders says.

O’Brien declines to venture a prediction on the outcome, but says industry groups like NAFA and NAIFA must continue to lobby lawmakers on the issue. “Our job is to educate, inform and make sure they understand that the consumer is better protected with the suitability model and making sure that is the model that stays in place.”

Check back next week for part 2 of our regulatory review, when we’ll ask “Is the Federal Insurance Office necessary?” and investigate the Medical Loss Ratio.

Additional reporting for this article was done by Michael K. Stanley, Elizabeth Festa and Arthur D. Postal.