Come 2012, be prepared for more product disclosure requirements. Be ready also to chuck big commissions on sales. These were key take-aways from discussions I had with advisors while researching my 2012 forecast feature, which begins on page 54.
Leon Rousso, a financial planner and principal of Leon Rousso & Associates Inc., Ventura Calif., says the disclosures required of agents—as to policy features and disclaimers, conflicts of interest and compensation resulting from a product sale or advisory services—have grown in recent years. And they're likely to become still more onerous next year.
A key reason for this is implementation of a single fiduciary standard for registered investment advisors and broker-dealers. The Securities and Exchange Commission is expected to issue a proposed rule in 2012 that will "harmonize" the standard of care governing RIAs and broker-dealers.
Yes, as SEC Chairman Mary Shapiro suggested in December, there may be accommodations in the proposed rule for captive or career agents who, beholden to the contractual obligations or sales quotas of their carriers, have less leeway to recommend third-party products than do independent advisors. Nonetheless, change is afoot, and agents would do well to revisit a chief concern of regulators: financial incentives to recommend certain products.
Whatever the final language of the rule, the new standard will, I expect, prompt many producers to jettison front-loaded or "heaped" first-year commissions in favor of "levelized" or "trailing" commissions that pay out over the life of a policy. This change will more closely align compensation with a key goal of a harmonized standard: to put the client's interests first.
Shifting to trailing commissions, as Russo suggests, may also allow agents access to more competitive products. Consider, for example, the contingent deferred sales charge periods (surrender charge periods) on annuity contracts, which typically last between three and nine years after the sale. The surrender charge is assessed to reimburse the insurer for costs connected with marketing an annuity, including the commission paid.
If less commission is paid up-front, then the annuity provider may have greater flexibility to reduce the surrender charge period or, alternatively, the penalty amount. Indeed, many carriers now offer no-load products that come without a surrender charge. The companies can forgo the penalty because the products, targeted to fee-based advisors, pay no commission.
This was a point that producers brought to my attention in 2009 as I was researching an article for Annuity Sales Buzz, an e-newsletter then published by National Underwriter. As I noted in the feature, the type and amount of annuity commissions can impact features in multiple ways.
In addition to lengthening a surrender charge period, a higher than average payout to the producer may result in a market value adjustment should the client fail to annuitize the contract. A high payout may also reduce the interest credited to the client's account.
A Better Business Model
The bottom line: By accepting reduced commissions on individual sales, producers can avail clients of more attractive products. Better products, in turn, translate to increased sales and, over time, greater commissions in the aggregate.
Levelized commissions also make for a more sustainable business model, for each product sales adds one more incremental income stream to cash flow. At a certain point, the producer can live comfortably on the accumulated payouts. That beats having to depend on the next policy sale with all the psychological pressures this may entail for the agent—not least among them the urge to embellish or omit information that might present products in a more favorable light than is justified—to meet monthly expenses.
Of course, transitioning to trailing commissions can be a long-term proposition, and likely not feasible for the new agent. But the sooner that veteran producers make this transition, if necessary by combined levelized commissions with fees for advisory services, the better positioned they'll be to surmount obstacles—the fragile economy and the SEC's impending fiduciary standard come to mind—that might otherwise negatively impact their practices.
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