In advance of the Million Dollar Round Table’s annual meeting taking place in Anaheim June 10-13, ValMark Securities President and CEO Lawrence J. Rybka gave an exclusive interview to National Underwriter Senior Editor Warren S. Hersch. The interview spanned a broad range of topics, including Rybka’s presentation in Anaheim, his work as chair of AALU’s Regulatory Reform Committee, the recent Glenn Neasham verdict and issues that are top of mind for producers.
Hersch: I’ve noted that you recently completed terms on the boards of both the AALU and the MDRT Foundation. What were your key objectives during your tenure on the boards and have you achieved them? What more remains to be accomplished?
Rybka: Both of these organizations are great organizations and the work with them was highly rewarding and beneficial. They have very different missions. The AALU board was more involved and the more challenging of the two and really gave me great insight into the importance of agents being involved in the political process.
Plato said, ”The punishment that the wise suffer who refuse to take part in the governmentis to live under the government of worse men.” I am absolutely sold on the idea that financial services entrepreneurs must be politically involved if we wish to protect the benefits of the products clients buy and the ability to have successful business. We did accomplish some goals but the work of both is never done.
Hersch: In regards to your current work as chair of the AALU’s Regulatory Reform Committee, what are the key issues before the committee this year? What industry or regulatory developments are of greatest concern? How does the committee intend to address them?
Rybka: The current leadership on the AALU board wisely recognized that the risks from overregulation may be every bit as high as destroying the tax advantages of the products we sell. Nat Perlmutter gets all the credit in his year as AALU President for this. He went with me for some of our initial meetings at the SEC.
The overarching mission that the board charged our committee with was to protect against the kind of bureaucratic over-regulation that exists in the United Kingdom and that destroyed the spirit and opportunities for financial service entrepreneurs in that country.
A few years ago when I was Program Chair for the AALU Annual Meeting, I asked former MDRT President Tony Gordon to share his experience with what happened to the insurance business in the UK. He related a chilling tale about how regulators gradually destroyed the insurance business–in part by prohibiting commissions on product sales.
The threat he warned us about today may come in many forms including states that force commission disclosure; politically motivated states’ attorneys general; The SEC in elements of Dodd-Frank, especially the Section 913 Best Interests Standard; and The California Elder Abuse Statute.
Hersch: How will the industry address this threat?
Rybka: We recognized a need for regulatory lobbying, which required getting the broker-dealers of our members involved in calling on the SEC, FINRA and weighing in on proposed rules. We assembled key people from 9 of the 10 largest broker-dealers in AALU and mobilized these resources to act collectively. One example of success in rolling back onerous regulatory proposals is the AALU’s lobbying efforts to help revise New York’s commission disclosure [Producer Compensation Transparency] rule. We ended up, after 18 months of negotiation, with something that agents can live with.
But what has been often overlooked is that the producer group–The Independent Insurance Agents & Brokers of New York–that took legal action to try to stop the regulation from taking effect, lost their case. The fact that they lost on the grounds that the New York insurance commissioner does indeed have authority to promulgate commission disclosure recommendations without impetus from the legislature sets a bad precedent.
Hersch: Might a harmonized fiduciary standard for registered investment advisors and broker-dealers also be bad for the industry?
Rybka: We at ValMark run both an RIA and a B-D. On the RIA side, we manage $2.5 billion of assets, for which investors a fee. Unless, say, I were to lie about the fee or otherwise hide the fact that I’m getting paid a second way, it’s hard to see how this simple business model would engender significant conflicts of interest. But a fiduciary standard of care doesn’t fit when applied to a broker-dealer that offers a more complex set of products with varying levels of compensation.
A vague fiduciary standard, with no specifics, will be subject to second-guessing–particularly by the trial bar. And anything with a higher commission may create a presumption that the advisor made the wrong recommendation.
One outcome that I fear: If we as a broker-dealer have to say that a certain product is in the client’s best interests, then the data we collected previously is no longer adequate to determining what is best. Now we have to explore more alternatives based on the client’s financial objectives and risk profile. This can be very intrusive into the recommendations that producers make.
In sum, a law passed by Congress that asks the SEC to develop rules that requires’ broker-dealers’ registered reps to “To act in the best interest of the client without regard to compensation” is troubling. As Edmund Burke said, “Bad laws are the worst sort of tyranny.”
Hersch: Turning to Glenn Neasham, who is featured in National Underwriter’s May cover story, I understand that you offered AALU’s leadership insight into his case. How significant is his conviction?
Rybka: I think this case is very significant and illustrative of what happens when there are laws with ambiguous and subjective standards. In this case, specifically, I bet no one was thinking that California’s Elder Abuse statue would be applied in this way when it was passed. To have 3,000 bank tellers trained and with an obligation to report transactions under threat of penalty is a very scary thing.