For an industry many think is already over-regulated, there is one area where insurance-only agents could use a bit more regulatory guidance and clarity, and that’s when a client wants to liquidate securities to purchase a fixed annuity.
For a registered investment advisor (RIA) or registered rep, it’s not a dilemma. They are permitted, under state law, to dole out investment advice as it pertains to securities sales and purchases. Insurance-only agents do not have the same status. However, in practice, when dealing with interactions between agent and client, the issue becomes less than clear cut and much grayer.
Leading annuity expert John Olsen, president of Olsen Financial Group, says that most states hold that the recommendation to replace a security would constitute the giving of investment advice, and, therefore, requires a securities registration. The question then becomes, what constitutes a recommendation? If the insurance-only agent is aware the funds are in securities and then helps the client fill out the paperwork for the purchase of the fixed product, some states have apparently taken the position that those actions would require securities registration. The difficulty is in finding that ruling in written regulations. “If you look at the various state statues and you ask, where does it say that? It often does not,” Olsen says.
Clarity in Iowa
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One state has taken a step toward clarifying the issue. In 2011, Iowa adopted Bulletin 11-04, which lists permissible and prohibited activities for insurance-only agents and securities-registered professionals. Under permitted activities, an insurance-only agent can discuss a client’s risk tolerance and financial circumstances. Not allowable are providing advice regarding the liquidation of specific securities or the investment performance of a client’s securities portfolio.
In that state, insurance-only agents do have some guidelines. Elsewhere, it’s much murkier. “It is a horrible Catch-22 because states have not been as precise as Iowa has been. So we are left with a remarkable series of bad choices,” Olsen says. Those choices could include simply not selling any fixed product to any client when the money comes from a security, an option Olsen views as not in the best interest of the consumer. Or they can do what they have always done and hope they don’t run afoul of the authorities. “That’s a pretty perilous choice,” Olsen says.
Know the state regs
Kathy Donovan, senior compliance counsel for Insurance Compliance Solutions at Wolters Kluwer Financial Services, advises agents to research what the regulations are in their state. Yet, like Olsen, she concedes there are some gray areas, even in the case of Iowa.
“Bottom line, most of these bulletins are giving you a list as guidance you can refer to, but they are not saying that this is the be-all and end-all in terms of permitted or prohibited activities,” Donovan says.
Olsen advises agents to call their state securities or insurance regulatory body for guidance, but doesn’t hold out much hope the agent will get a definitive answer in writing. More likely, the agent will get “a resounding silence,” he says.
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