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.