I am deeply concerned about the lack of clear rules regarding what “insurance only” agents can do when recommending fixed products to consumers who may fund those products with funds taken from securities. Even those holding securities registrations aren’t safe, as some state securities regulators assert that the recommendation by an advisor to a consumer to liquidate securities to purchase a product requires that advisor to be registered as an investment advisor (or investment advisory representative). There are few, if any, truly “safe harbors.” Two Iowa Bulletins 11-4 (issued by both the Iowa Department of Insurance and the Iowa Department of Securities) provide commendably clear rules and, for those who follow those rules, identifiable safe harbors, but most state securities regulators have yet to follow suit
Some commentators have declared that Bulletin 14-2009 from the Arkansas Department of Insurance asserts that the sale of a fixed annuity to a consumer who funds that annuity with dollars taken from a securities account requires that the agent be a registered investment advisor in Arkansas. The bulletin does not say that. It says, “The recommendation to replace securities such as mutual funds, stocks, bonds, and various other investment vehicles defined as securities under the Arkansas Securities Act is the offering of investment advice.”
The difference is in the word “recommendation.” Is an agent recommending the purchase of a fixed product to a consumer who, the agent knows, can fund that fixed product only with dollars currently invested in securities giving securities advice? Does the mere knowledge that the funding will come from the liquidation of some securities (perhaps not identified specifically) amount to giving investment advice to make such liquidation?
Do you know the answer to that question? Probably not, because insurance regulators in most states have not provided clear guidance on that question. The Iowa Bulletins 11-4 are a very welcome exception — one that other states should follow.
It’s fairly clear that the specific recommendation to a consumer that he or she liquidate (fully or partially) a specific security is dangerous for an insurance-only agent. Some marketing organizations have addressed this risk by including language in required suitability questionnaires, to be completed by any applicant for an annuity, similar to this:
“I declare that the agent has not provided any personalized advice about securities to me or made any recommendation regarding securities I own.”
Will that suffice? Perhaps. But, to my mind, it may not satisfy a state securities regulator, and it’s the sort of thing that a plaintiff’s attorney could have a field day with on cross-examination. That said, until state regulators provide clear rules — and, one hopes, clear safe harbors — what is an agent or insurance company to do?
In my opinion, this issue is serious and truly scary. Agents are subject to sanctions under rules that are unclear, if they’ve even been formulated. Agents cannot know what they may or may not lawfully do because regulators with the power to impose fines or worse aren’t telling them. This needs fixing. I strongly urge every agent to contact the insurance and securities regulators in the states where they do business and demand a clear explanation of the rules as those regulators intend to enforce them.
John L. Olsen, CLU, ChFC, AEP, is a financial and estate planner practicing in St. Louis County, Missouri. In addition to providing insurance, financial and estate planning services to his own clients, he works with other advisors on advanced cases and product selection and offers expert witness services in litigation involving annuities, insurance, and securities.
John is a past president of the St. Louis chapter of the National Association of Insurance and Financial Advisors, past president of and the Estate Planning Council of St. Louis a former Board member of the St. Louis chapter of the Society of Financial Services Professionals,, and a member of the Editorial Advisory Board of Tax Facts. He can be reached at firstname.lastname@example.org.
For more from John L. Olsen, see:
- Problems with jointly owned deferred annuities
- Whose death triggers which death benefit in that annuity?
- Suitability: The rules are changing