Leveraging Your Business Through Your Broker-Dealer

Looking back, most long time veteran agents came into the business representing one company with only four products: term, whole life, disability, and immediate annuities.

Someone who was recently joining our broker-dealer asked how many products we had. I counted several different kinds of life insurance products, several different kinds of annuity products, 5 kinds of mutual funds, dozens of types of fee-based asset management programs, stocks, bonds, unit investment trusts, partnerships, and index-traded funds.

I counted over 6,700 products! And, all but 152 of these are offered through our broker-dealer.

Why is the broker-dealer so important? Because it not only controls the products we traditionally thought of as securitiesstocks, bonds, and mutual fundsbut it controls access to and compensation of the most important insurance products:

• Variable Life;
• Variable Annuities; and
• Under NASD 97-27, Group Annuities.

But the broker-dealer is also vital because it needs to approve any Registered Investment Advisor (RIA) business done as well.

Under NASD 94-44, and Notice 96-33, the broker-dealer is required to supervise the activities of a RIA. This means that all fee-based planning and asset management activities must be coordinated with your broker-dealer.

With that said, now lets turn to what I think is the critical capability for many producers, the ability to charge fees.

The primary difference between what a broker-dealer does and what a RIA does is how the client pays for the services. Broker-dealer products have the commission built in. The prospectus discloses to the client what he will pay in total charges, and then the product vendor pays the broker-dealer. This is all done through the 1933 and 1934 Securities Acts.

The 1940 Act covers advice given to the client. There are two primary activities covered by this legislation:

• Asset management–where the client pays an on-going fee vs. a commission for you to manage assets (often called a wrap program or fee-based investment advice).
• Financial planning or investment advice–this is where you charge a fee for these services.

For years, many of our member offices tried to avoid classifying what they did as investment advice. However, the more they looked at it, and as additional rulings were made, it was very hard to avoid this classification. Lets look at each part of the 3-part test:

For compensation, is engaged in the business of providing advice, making recommendations, issuing reports or furnishing analyses regarding securities.

Some people say "I do not charge any fees for my advice so I am exempt." However, there is a very clear precedent showing that if you did a "free financial plan" and earned a commission from a securities product (i.e., a variable annuity) you would have met this element.

Now, there is an exception called the broker-dealer exception, but to rely on this exemption, one must clearly be acting in the capacity of a registered representative.

For example, if you did a "free estate plan" and the recommendation was to purchase variable survivorship life. The estate plan must clearly be identified as having come from the broker-dealer.

This part pretty much speaks for itself. Any time there is a separate fee, you can no longer rely on the broker-dealer exemption.

Many of our offices have worked hard to avoid characterizing their work as falling under the 1940 Act. They thought that perhaps by doing a generic plan, and only recommending life insurance in the plan, they would be safe by separating the recommendation in a separate phase. However, it is now clear that this is not the case.

It is clear that any time you are charging a fee and making a recommendation, even about a type of product, it will fall under the 1940 Investment Advisors Act. So some of you are thinking, "so what"

I know when I used to hear this kind of stuff, I would think that the compliance busybodies had nothing better to do but look up arcane securities rules to mess up my ability to earn a livelihood. However, on this issue, as I began to research it myself, my attitude quickly changed. There are 2 substantial risks that producers take if they choose to ignore this issue.

One is no errors and omissions (E&O) for the advice, and the second puts my license at risk. With an adjusted attitude it became abundantly clear that if our offices were going to charge fees, we had to make it easy for them to do so through a RIA. So we created special procedures to allow fees through the RIA for:

• estate planning;
• financial planning;
• analysis of life insurance contracts for a fee; and,
• the more traditional asset management.

The other thing that caught my attention was that there were criminal penalties for failing to provide this investment advice under the 1940 Act.

Now do I think anyone is going to go to jail for this? No, but a charge brought under the act would almost certainly result in the loss of a securities license or require disclosure to all clients. I dont think anyone would want to be put in a position where they had to explain this violation to each of their clients and prospects.

Many broker-dealers have invested considerable effort to help their offices be able to charge fees. Many subsidized financial planning programs have created prototype fee management contracts for you to charge fees. Given the downside, there is no reason not to use these. In fact, I think a good fee-based plan is the key that allows you to uncover many of the other needs that your client has.

Now, some may argue that most of these sales could be made without a financial plan, but it is a whole lot easier to make the case for them in a coordinated way with a financial plan. It is also the plan that allows you to position yourself as the clients primary advisor. Many of our member offices have positioned themselves as wealth transfer experts and use the broker-dealer and RIA primarily for planning and selling variable life products. However, many of our practices that identify themselves as planners or who are in partnerships with local CPA firms use a broader range of products.

I think a series 7 license is vital for those who want to position their firm as a true financial planning office. Many of you may be thinking, "All the products I am interested in selling do not require the series 7, why go through the trouble?"

The answer is that if you have a series 7 license, you will generate more revenue, on average.

I acknowledge that it may not be from the commissions generated directly from selling securities products, but it is from the ability to access pools of money.

A series 7 license is important because without it, your clients need to convert their accounts to cash in order for you to invest their money.

Lets think about an example where your client has $400,000 in a brokerage account with a wirehouse firm. After making a cogent argument about why mutual funds are better than stocks, carefully creating an asset allocation that matches the clients goals and researching which funds fit the objectives, you are instructing your client to call the wirehouse broker and enter a sell order for the whole portfolio. Contrast that with an order that moves the whole account to your clearing firm where you can do this on a discounted basis.

Is it surprising that those agents with only a series 6 license average significantly less commissions?

Lawrence J. Rybka, J.D., CFP, with Valmark Securities, Beachwood, Ohio, specializes in supporting wealth transfer and corporate insurance. He may be reached at larryj.rybka@

This article is an abridged version of a presentation he gave at the MDRT meeting in Nashville.

Reproduced from National Underwriter Life & Health/Financial Services Edition, July 1, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.