Not ready to become a DOL-compliant FI? Go partner with one

The handful of independent marketing organizations that, since July, have applied to become a financial institution under the Department of Labor’s fiduciary rule has a lot of market-watchers wondering how other IMOs on the sidelines intend to do business once the rule is phased in next year. Indeed, there are more than 350 of these insurance distribution intermediaries — many of them big sellers of fixed indexed annuities — that stand to lose a ton of business in the retirement space if they fail to take action.

For those not prepared to become an FI — and make the substantial investment in DOL-compliant business processes, technology and people — there’s one potentially attractive alternative: partner with an IMO that is a financial institution. One organization that’s availing IMOs of this option is Legacy Marketing Group, a Petaluma, California-based firm that, now its 23^rd year, has relationships with more than 200 IMOs and 27,000 producers nationwide.

To learn more about the company’s go-to-market strategy under the rule, LifeHealthPro interviewed three Legacy executives: President Preston Pitts; Chief Marketing Officer Niju Vaswani; and Vice President of Compliance Chris Eaken. The following are excerpts from this 4^th installment in a series of Q&As with IMO executives and stakeholders on the DOL application process. 

Related: DOL fiduciary rule: Disruption or opportunity?

LHP: What did your FI application with the DOL entail? What remains to be done?

Eaken: We worked with outside counsel — the law firm Drinker & Biddle — in developing the application to comply with the DOL requirements. We’re now awaiting feedback on business processes and procedures we’ve outlined for complying with fiduciary rule requirements: how we intend to levelize sales commissions for like products; mitigate potential conflicts of interest; and ensure that advisor-recommended products are appropriate for the client.

LHP: How would you describe the financial process at Legacy Marketing Group? Do you subscribe to, say, a holistic financial planning model that some IMOs believe most closely aligns with the new fiduciary rule?

Vaswani: We’re different in that we work with many IMOs to help their advisors become successful selling insurance and financial services. We’ll continue to occupy this niche under the fiduciary regime: As a financial institution, we’ll avail their agents and advisors of training, education and guidance needed to be compliant with the DOL rule.

Pitts: We’re now affiliated with about 200 independent marketing organizations, of which about 50 to 60 actively do business with us. We’ll sign off on BIC [best interest contract] agreements for these IMOs and supervise their advisors throughout the sales process.

Compliance aside, these IMOs will remain actively involved in other aspects of their business: recruiting producers; providing sales training; assisting with product recommendations and, at a certain level, ensuring regulatory compliance.

Related: IMOs take on enhanced sales role under the new DOL rule

LHP: Might the fact that Legacy-affiliated IMOs are operating under separate business models — some subscribing to holistic planning, others not — present a challenge for your organization in complying with the DOL rule?

Vaswani: There are indeed differences among marketing organizations. And, as you point out, some might have a more holistic approach than others.

What we plan to do is to share with our IMO partners the holistic method, including accompany training and education, which Legacy Marketing is developing to operate under a fiduciary regime. The goal is to have every IMO follow this DOL-compliant process.

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

LHP: How does the current process at your organization vary from what you’ll be implementing to comply with the DOL rule?

Pitts: In today’s world, producers do a fact-finding and needs analysis to ascertain the client’s goals and objectives and then formulate a product recommendation that’s suitable. In the new fiduciary world, the producer will have to ensure the recommendation is in the client’s best interest — a higher standard of care than product suitability. There will also have to be more disclosures — including compensation to be paid to the producer — to mitigate potential conflicts of interest.

Eaken: Under the DOL rule, agents and advisors will have to compare clients’ existing products with proposed products. Producers will also have to document their recommendations, explaining why a solution is in the client’s best interest.

LHP: Do you envision that the transition from the old model to the new will be more or less seamless? Or do you expect there will be challenges along the way? Will your firm, partnering IMOs or their advisors have to revamp their businesses to such an extent that operating under the rule may prove problematic?

Pitts: There will be a transition period where the client conversations, disclosures of compensation and more general disclosures will be different. That may entail pain in the short-term for some; long-term, our DOL-compliant processes and disclosure will simply become a normal part of doing business.

LHP: How involved will the training be? And how will it be facilitated?

Eaken: LIMRA is now developing in-depth training for complying with the rule’s BIC exemption requirements. Our goal will be to expand on their training by incorporating our sales process and technologies.

The education — covering documentation of the sales process, gathering info through fact-finders and a needs analysis, gauging the client’s risk tolerance, then comparing and recommending products — could be delivered through a series of webinars and in-classroom instruction. We also have regional sales VPs who train across the country.

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

LHP: How many advisors are now affiliated with your partner IMOs? What’s the extent of their current training and expertise?

Vaswani: About 27,000 producers are affiliated with us through the various IMOs. Between 25 to 30 percent, or about 5,000, actively do business with us. Based on our research, roughly 50 percent of the advisors have a Series 65 license and/or registration with a broker-dealer, allowing them to sell securities and/or provide other investment advice. The other half are insurance-only producers.

LHP: How else might these producers have to adapt their practices going forward? Should they expect a reduction and/or compression of sales commissions?