A U.S. proposal for stricter rules on retirement-product sales helped spur American International Group Inc.’s decision to sell its broker-dealer operation, according to Chief Executive Officer Peter Hancock.
“It’s a business we are not the best owner of, particularly in the light of potential Department of Labor rules,” Hancock said Tuesday in a conference call updating investors on AIG’s strategy. “With the new DOL rules, that was a big factor in thinking whether this was better owned by somebody independent of us.”
President Barack Obama’s administration has said that new rules are required so advisors put their clients’ best interests first for retirement accounts. The proposal could increase compliance costs for the industry. Hancock announced a deal Tuesday to sell AIG Advisor Group to investment funds affiliated with Donald Marron’s Lightyear Capital LLC and PSP Investments, a Canadian pension investment manager.
The insurer’s comments show that the industry believes the rule is going to move forward, according to Barbara Roper, director of investor protection for the Consumer Federation of America.
“There will be a lot of hyperbole from the firms on the effects of the rule and blaming the rule for things that they would have done otherwise,” Roper said. “That doesn’t mean they will stop fighting it. It just means those efforts move into a new phase.”
Hancock said the broker-dealer network earned about $40 million in 2014, yet consumed a “disproportionate amount” of AIG’s compliance cost. The sale was part of a larger plan the insurer announced Tuesday to simplify operations and improve results, as the New York-based company faces pressure to break up from activist investor Carl Icahn.
The rule is “basically going to increase the risk and cost of distributing a number of retirement products, and so therefore it could have a chilling effect on sales and commissions,” Randy Binner, an analyst at FBR Capital Markets, said in a phone interview. “Relative to everything else that’s going on at AIG — which is a lot — this is just a distraction they don’t need.”
Called a “fiduciary” rule, the Labor Department proposal would require brokers handling retirement accounts to put their clients’ best interests first. Currently, brokers are required to offer investments that fit a client’s needs and risk tolerance at the time of sale but are able to push their own company’s products.
Under the Labor Department’s proposed rule, brokers could earn sales commissions and other income if they sign a “best-interest” contract with investors to disclose fees and incentives that might influence recommendations.
“Being a standalone firm allows us to avoid the potential conflicts of interest of being owned by a product manufacturer,” Valerie Brown, who was previously CEO of Cetera Financial Group and will become executive chairman of Advisor Group after the sale, said in an emailed statement. “Independence is key.” AIG hasn’t spurned all regulation, even after a U.S. panel deemed the insurer a systemically important financial institution, which could come with higher capital requirements. Hancock has said that he welcomes the high standards that come with the oversight and that it’s probable that the insurer will continue to be highly regulated even if it’s not a SIFI.
AIG Advisor Group had more than 5,200 independent advisors and more than 800 full-time employees, according to AIG’s statement about the sale. It comprises four broker- dealers, FSC Securities Corp., Royal Alliance Associates, SagePoint Financial and Woodbury Financial Services Inc.
Marron ran Paine Webber Group Inc. for more than two decades through 2000, when he struck a deal to sell the retail brokerage to UBS AG for more than $10 billion. At Lightyear, he built Cetera through acquisitions, including a deal in 2013 to buy two of insurer MetLife Inc.’s broker-dealer affiliates to add about $25 billion under management. Marron announced an agreement in 2014 to sell Cetera to RCS Capital Corp.
–With assistance from Sonali Basak.
— Check out What Will Lightyear Do With AIG Advisor Group? on ThinkAdvisor.