The Trump administration has ordered a 60-day review of the U.S. Department of Labor’s conflict-of-interest rule, but insurance intermediaries continue to prepare to comply with the DOL rule.
Many of the independent marketing organizations that distribute indexed annuities are hoping to meet the supervision requirements created by the rule by securing financial institution status under the rule, or by teaming up with other IMOs that are financial institutions.
Other IMOs are pursuing a two-track strategy: They are applying to become DOL-compliant “financial institution marketing organizations,” or “FIMOs,” and they are also setting up registered investment advisors.
Annuity producers with securities licenses who work with a two-track IMO can benefit by getting access to a fee-based platform.
The two-track IMO can benefit by extending its pool of financial professionals, by adding advisors who are already operating under a fiduciary standard.
One business pursuing the two-track strategy is AmeriLife Group LLC, a 46-year-old IMO that offers products tailored to meet the needs of seniors.
The company has expanded its portfolio over the years to a wide array of life and health solutions, including life insurance and annuities, long-term care insurance, final expense policies, Medicare plans, dental insurance, and property/casualty insurance. The company distributes insurance from about 75 carriers through a direct-to-consumer web portal, as well as through a nationwide network of 20 affiliated IMOs and about 100,000 insurance agents and advisors.
By adding an RIA arm, the Clearwater, Florida-based company is moving into the investment business, and taking a step that could significantly expand its footprint.
“As a distributor of more than $2 billion in fixed annuity products, we knew that our thousands of annuity producers needed a solution to continue to sell products under the DOL rule pending approval of our FIMO application,” says AmeriLife Chief Executive Officer Scott Perry. “We didn’t want to wait and put all our eggs in FIMO basket. We set up the RIA so those producers would have another qualified financial institution to do business through.”
Targeting the Gracefully Maturing
Perry says adding an RIA has been easier than becoming a FIMO.
To set up an RIA, AmeriLife had to file ADV, schedules and other financial documents with the Investment Adviser Registration Depository system and with state securities regulators.
AmeriLife also had to acquire $100 million in assets under management within 100 days of registration with the U.S. Securities and Exchange Commission, and it had to set up a business entity for the RIA. The SEC approved the application within 45 days.
To start the process of becoming a FIMO, AmeriLife has had to answer DOL staffers’ questions at a series of meetings. AmeriLife has had to provide detailed documentation describing the business processes and procedures it expects to use to satisfy the DOL fiduciary rule’s “best interest contract exemption,” or BICE.
Under the terms of the DOL’s proposed IMO class exemption, released Jan. 19, an IMO that qualifies for the BICE must have generated an average of $1.5 billion in fixed indexed annuity contract premiums in each of the three last fiscal years.
Sen. Elizabeth Warren (Photo: NLJ)
A DOL-Compliant Tool
Perry says he is confident that the AmeriLife business model will pass muster with the DOL. One key reason is the investments the company made to ensure that both the IMO-affiliated and RIA-affiliated producers will operate based on a best interest standard.
“The bulk of our work involved building systems, compliance checks and business processes needed to serve as a financial institution,” Perry says. “These preparations were needed not only to satisfy the regulators, but also to secure partnering carriers’ stamp of approval.”
AmeriLife had to invest in both technology and staffing. The company used an outside firm to help it develop the AmeriLyzer, a custom online financial needs and risk-assessment tool. The tool can help agents make product recommendations compliant with a best interest standard. The tool also documents the sales process.
AmeriLife also added a DOL Rule Information Center, a web portal aggregating news and sales tools pertaining to the fiduciary rule, and it expanded training for its compliance teams.
Client cases now are administered according to a color-coded scheme: Green cases proceed without human intervention, yellow cases are reviewed, and red cases get kicked back to the producer, the partnering IMO or the carrier for additional work.
For affiliated producers, Perry says, the compliance overhaul will be an adjustment, and not only because of the rigorous fact-finding and documentation needed to satisfy a best interest standard. The transition will also require producers to adapt to new compensation arrangements.
Under the DOL rule, Perry foresees a levelizing of insurance commissions across like products. Producers transitioning to a fee-based or fee-only practice may also struggle in the early going to offset lost commissions, notably on small accounts that may no longer be profitable to serve, he says.
Another challenge may be the heightened litigation risk that could be created by the BICE standard. Because of that concern, some financial professionals have thought about getting out of the investment products market.
“Producers will need to decide whether they’re going to be insurance-only or dually registered advisors licensed to sell products through both our IMO and RIA channels,” Perry says. “Some will avoid the litigation risk and additional compliance work by tailoring their practices to insurance products — disability income, long-term care and life insurance, plus non-indexed, non-variable annuities. A lot of producers are navigating this practice reassessment now.”
Doing Away With Getaways
Producers opting to keep indexed annuities and variable annuities in the toolkit may have to make one other change if the DOL rule takes effect without modification: forgoing the paid trips and other non-financial incentives that IMOs offer to encourage producers to sell more of their annuities. Sen. Elizabeth Warren, D-Mass., criticized use of annuity sales incentives in a report her office released in February. She argued that the DOL fiduciary rule is needed to prevent IMOs from putting “perks like cruises and lavish vacations ahead of the retirement security of middle-class investors.”
Perry says AmeriLife is in a category apart from the IMOs targeted in Warren’s report. AmeriLife, he says, only tells producers of “pass-through offers” from partnering carriers — and only after an internal review to ensure the offers align with company guidelines and principles regarding potential conflicts of interest.
Given the more demanding compliance regime under which AmeriLife’s producers will now be operating, he adds, such sales incentives will, with or without the DOL rule, be even more closely scrutinized to ensure that agents and advisors are offering advice consistent with a fiduciary standard.
“Rewards and performance-based incentives can be delivered in a way that doesn’t influence the advisor to not do what’s in the best interest of the client,” Perry says. “There are ways to structure incentives so they don’t sway advisors one way or another on product recommendations.”
— Read The Warren report on annuity sales incentives: Does it overreach? on ThinkAdvisor.