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July 01, 2012 at 08:00 PM
During the 2012 annual meeting of the Million Dollar Round Table, held in Anaheim, Calif., June 9-13, editors of Summit Business Media’s LifeHealthPro group—Warren Hersch of National Underwriter Life & Health, Brian Anderson of Life Insurance Selling and Daniel Williams of Senior Market Advisor—met with MDRT members from New Zealand, Canada, the U.S. and the U.K. to explore regulatory, practice management and product issues and trends in the four countries.
The roundtable participants included Brian Ashe, president of Brian Ashe and Associates Ltd., Lisle, Ill.; Adrian Baker, a senior partner at St. James Places, Bristol, England; Herb Braley, Jr., president and CEO of Braley Winton Financial, Toronto, Ont.; and Scott Morrison, principal of Summit Financial Group Ltd., Auckland, New Zealand.
Hersch: MDRT President Jennifer Borislow and AALU Regulatory Reform Committee Chair Larry Rybka warn that advisors’ practices are increasingly threatened by government restrictions on agent compensation, most notably in respect to commissions. What government regulations are you facing in your respective countries and how well are you dealing with them?
Ashe: In the U.S., one area of concern in the health insurance market is the imposition of the medical loss ratio [of the 2010 Dodd-Frank Act which has effectively imposed price controls on life insurance companies as well as limits on what agents can get paid. The result is that agents who sell insurance have experienced a 20% to 80% reduction in commissions.
The second big area of concern is the proposed fiduciary standard for broker-dealers. Underpinning the proposal is a belief that only advisors who operate under a fiduciary standard can act in the client’s best interest and that commissions are unethical.
Baker: In the U.K., we’re just six months away from implementing one of the largest shake-ups in financial services in the last 30 years: the Retail Distribution Review. The legislation affects not just commissions, but also renewal commissions.
On January 1, 2013, every advisor will have to satisfy new educational requirements of the U.K.’s Financial Services Authority. There has been a massive loss of agents from the industry because of the time and cost of retraining. If you’re an independent advisor after January 1, then you can only accept fee-based compensation.
One of the most significant issues stemming from the new law is renewal commissions on policies. Clients must have the opportunity to discontinue renewal commissions if they believe they’re not receiving adequate advice or service.
For agents who have been in the business a long time, this change could have a massive effect on their income. We expect that many clients will cash out policies and buy new ones so they can turn off renewal commissions, which advisors can only receive for sales concluded before 2013.
Braley: Not much has happened in Canada bearing on compensation. But I imagine that Canada will abolish commissions at some point.
Many of the major insurers in Canada are now auditing our files on a “friendly basis.” This auditing used to be limited to mutual funds and other investment products for compliance; now it’s happening with life insurance products.
Morrison: We in New Zealand are half-way between the regulatory regimes of Canada and the U.K. Since enactment of the Financial Services Act of 2008, which was fully implemented 18 months ago, all investment advisors must meet educational requirements of a revised version of the National Certificate in Financial Services—unless they satisfy recognized alternative qualifications or designations—to become an Authorised Financial Adviser.
Most advisors have taken six months away from their practices to do this. As of 18 months ago, if you weren’t an AFA, then you couldn’t sell investment-based products.
Originally, the new educational requirements were supposed to cover both insurance and investments, but the government didn’t have the systems to cope with getting everyone through the AFA program. So they scaled back the requirement to Category 1 investment products.
Insurance products fall into Category 2. We expect that within 18 months Category 2 insurance advisors will be subject to the same requirements as Category 1 investment advisors. So we’re putting all of our insurance advisors through the AFA curriculum to stay ahead of the regulations.
After the new law went into effect, about one-third of advisors in New Zealand left the business. Also, valuations of existing practices declined because prospective buyers understood they could acquire sellers’ businesses at lower prices.
This has been an issue for many older advisors who had built up commissions-based practices over many years and had hoped to sell the businesses at retirement. When they could no longer get the prices they expected without the AFA designation, many were forced to do the exams.
Ashe: The new laws in the U.K. and New Zealand impact not only up-front commissions of advisors in these countries. If your renewal commissions drop between 20% and 80%, the resale value of your practice is much reduced. For many advisors, the renewal commissions represent a significant portion of the personal wealth they’ve accumulated over 30 or 40 years. The resale value of their practices has been totally compromised with a stroke of pen.
Hersch: Producers are also expressing growing alarm over government controls on the sale of certain products. Here in the U.S., we have the recent example of FINRA’s efforts to extend its regulatory supervision to fixed indexed annuities. In India, we’ve noted the recent ban on indexed universal life products, which Ms. Borislow says has resulted in a 50% decline in the Indian contingent of MDRT’s membership within the past year. How are you adapting to increased government regulation, restrictions or bans on the sale of certain life insurance products in your countries?
Baker: Five years ago, the British government started taxing dividends inside pension schemes, which used to be tax-free. This significantly affected fund values, just at a time when pension funds were diminishing dramatically because of the financial crisis.
Braley: We’re always concerned about the Canadian government’s attempts to raise revenue by taxing certain products. Most recently, the government has been looking at taxing critical illness policies, specifically those with a return of premium provision. I think Canada is one of only a few countries that still offer return of premium on critical illness policies, which is a fabulous product.