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Unchartered waters: Why this IMO is seeking FI status under DOL rule

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Since the Department of Labor handed down its fiduciary rule, the industry has been abuzz about the outlook for insurance-only producers who sell fixed indexed annuities through independent marketing organizations. The reason: The rule doesn’t include IMOs in its definition of a “financial institution.”

See also: DOL rule could erase indexed annuity gains next year

The FI categorization has traditionally been reserved for broker-dealers, insurers and registered investment advisors. What’s more, the DOL stipulates that only a FI can approve sales commissions under the fiduciary rule’s best interest contract exemption (BICE).

What are producers of FIAs, which are now subject to the BICE, to do? Well, they can work with an IMO that has secured from the DOL a special exemption to be classified as a financial institution under the BICE. That process is now underway.

Since May, six (out of more than 350) IMOs — Gradient Insurance Brokerage, Clarity 2 Prosperity, InForce Solutions, Legacy Marketing Group, Futurity First Financial Corp., and Financial Independence Group — have applied for FI status with the DOL’s Office of Exemption Determinations. To learn more about the application process, and what the FI designation will mean for approved IMOs and their brokers, LifeHealthPro interviewed the CEO of one of the six: Jason Smith, CEO of Clarity. The following are excerpts.

LHP: When did Clarity 2 Prosperity start the application process? What was involved?

Smith (pictured below): We initially got on a call in May with the Department of Labor’s Office of Exemption to discuss questions I put to the DOL as part of our application. We then initiated [web conferences] to outline our financial planning and product screening processes.

During this time, I learned about what the DOL was looking for and, in particular, their priorities in protecting investors: ensuring that the best interest of the client was being put first. Our financial planning process fit perfectly into what they were asking for — a fiduciary-friendly sales process.

We continued talks with the DOL through May, June and July and decided that we would apply to be a financial institution to be able to sign off on the BICE agreement as an insurance marketing organization.

LHP: Just to clarify, your insurance agents could not have done business through Clarity and be in compliance with the DOL rule without this approval, yes?

Smith: Yes, the fiduciary rule lists banks, broker-dealers, insurance companies and SEC-registered RIAs qualified as financial institutions. Although we do own an SEC-registered RIA firm, we ran into a challenge on the IMO side: For those life-only agents not licensed to sell securities with a broker-dealer or our RIA, there would be no one to sign the BICE agreement, other than an insurance carrier. And, as I discovered, many life insurers don’t want to sign the BICE.

So we needed to come up with a solution for our insurance-only producers who don’t have an investment person in-house to sign off on the BICE. That said, many of our advisors belong to practices where one partner manages investments and the other insurance.

The ability to offer both are, in fact, a requirement to affiliate with Clarity. We believe that to do comprehensive, holistic financial planning, you need as part of your portfolio both protection and investment solutions.

Related: DOL fiduciary rule: Disruption or opportunity?

LHP: Why would Clarity, as an IMO, be more willing to sign off on a BIC exemption than a life insurer?

Smith: As an IMO — a qualified intermediary between carriers and our advisors — we have access to products from multiple insurance and annuity manufacturers. We’re able therefore to screen and recommend products — including fixed-indexed annuities now subject to the DOL rule — in alignment with the client’s best interests.

Related: Options are the future of retirement planning

Individual product manufacturers don’t offer such broad access. If a customer needs a product they don’t have in their own portfolio, they may be hard-pressed to meet the best interest standard.

LHP: Breadth of product aside, what is it about your financial planning model that makes it well-suited to a fiduciary standard of care?

Smith: Our financial planning model — holistic financial planning for the middle class — is the foundation of our company. Most middle income people are served primarily by sales people selling stocks, bonds, mutual funds, annuities, life insurance, trusts, wills and tax services.

Unfortunately, many of these professionals work in silos; and so they’re not coordinating to offer comprehensive planning that’s in a client’s best interest.

The professionals who affiliate with our company want to break out of these transactional silos — to add insurance or investment products so they can do holistic planning. We help them to fill in the planning gaps, including other aspects of planning a client may need, such estate, wealth transfer and tax preparation services.

LHP: How many advisors do you have altogether?

Smith: We have just over 200 affiliated advisors.They’re an exclusive group: We take them through a strict screening process and hold them to very high standards. They have to commit fully to our planning model. We’re not interested in people simply moving sales contracts through Clarity, as is common in a traditional FMO/IMO model.

LHP: So where do you stand now in your application with the DOL?

Smith: We’re providing substantial documentation about policies and procedures with which agents will need to comply to meet the best interest standard. The DOL specifically wants us to address how we’ll avoid conflicts of interest in cases where insurers are paying varying commissions on different products. Overall, the process has moved along as expected.

The DOL told us the application process can take up to a year, but we’re hoping to put the approval on a fast track. I say this because the DOL may now be weighing how the app approval process could positively or negatively impact several lawsuits underway against the department over the fiduciary rule. To the extent the process is viewed favorably, it may buttress the DOL’s arguments in court.

Related: DOL 101: The fiduciary rule’s impact on insurance-only agents

LHP: What do you expect the application process will mean for your advisors? How might they have to adapt their practices?

Smith: At the end of the day, there will likely be cuts in commissions, and more standardized payouts, for agents and advisors, both at the insurer and broker-dealer levels. To help producers prepare, we’re developing a process to assist them in analyzing their practices, including revenue and expenses, to identify gaps to be filled should they opt to transition to a fee-based model.

Related: DOL rule could erase indexed annuity gains next year

LHP: Do you have lessons, tips or best practices to share with other IMOs and FMOs that may also be looking to secure FI status under the BICE?

Smith: Yes — don’t be afraid to get on the phone and talk directly with the DOL. The people I’ve spoken with have been stellar in helping us through the application process.

If [as an IMO] you’re open and honest when work directly with DOL staff people, you’ll get the guidance you need to make a decision on how to move forward.

That may entail partnering with an organization that has the fiduciary rule-compliant processes in place or apply to be a financial institution yourself. Having the conversations directly with DOL staff has put me way ahead on the learning curve.



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