Few threats are scarier to the average independent lifeinsurance producer than the potential banning of commission-basedcompensation for insurance product sales. And the prospect ofadapting from a suitability standard of care to a fiduciarystandard opens up another can of worms.

Insurance producers traditionally have been subject to asuitability standard under the Securities Exchange Act of 1934,which requires sellers to verify that their products appear to suitcustomers' needs. Investment advisors are regulated as fiduciariesunder the Investment Advisors Act of 1940, which requires sellersto put clients' needs and interests ahead of their own.

Soon, the suitability standard may well be eliminated in favorof a universal fiduciary standard that would apply to both groups.Proponents of a universal fiduciary standard—including manyfinancial planner and consumer groups—claim consumers who rely onthe financial advice of experts are confused by the differentstandards of care. These consumers are at an informationdisadvantage, they say, and vulnerable to exploitation by advisorswho are not required to make recommendations in the best interestof the customer. Opponents of a fiduciary standard—including manylife insurance industry trade associations—say a universalfiduciary standard is unnecessary because the current suitabilitystandard is effective. Opponents also say the imposition of auniversal fiduciary standard would result in higher costs andreduced choices and service for consumers.

How we got here

Section 913 of the Dodd-Frank Act of 2010 required theSecurities and Exchange Commission to conduct a study on the scopeof the standard of care used by brokers, dealers and investmentadvisors. The law also gave the SEC the authority to develop afinal rule on whether or not a uniform standard should be appliedto all financial professionals and to determine how the standardswould apply. The study was released in January 2011 and concludedthat a harmonized standard of care “at least as stringent” as thefiduciary standard currently applied to investment advisors shouldextend to all brokers, dealers and investment advisors.

Critics of that study said it lacked proper analysis,particularly in the area of a cost/benefit analysis around imposinga universal standard. SEC Commissioners Kathleen Casey and TroyParedes came out against the study's recommendations, saying theSEC staff “does not adequately recognize the risk that itsrecommendations could adversely impact investors.” They urged thestaff to go back and perform a detailed cost/benefit analysis onthe proposed rule change.

The Association for Advanced Life Underwriting, the NationalAssociation of Insurance and Financial Advisors and the NationalAssociation of Independent Life Brokerage Agencies were among theindustry organizations that criticized the study as inadequate.

A LIMRA study released by NAIFA in December 2011 claimed afiduciary standard would increase compliance costs by at least 15percent for its 50,000 members, and as a result, 65 percent of itsmembers would reduce their services to less-wealthy customers.

Valmark Securities President and CEO Lawrence Rybka, who is alsochair of the AALU's Regulatory Reform Committee, told NationalUnderwriter in June that a “vague” fiduciary standard would besubject to second-guessing. And anything with a higher commissioncould create the presumption that the advisor made the wrongrecommendation, he said.

“One outcome that I fear: If we, as a broker-dealer, have to saythat a certain product is in the client's best interests, then thedata we collected previously is no longer adequate to determiningwhat is best,” Rybka said. “Now we have to explore morealternatives based on the client's financial objectives and riskprofile. This can be very intrusive into the recommendations thatproducers make.”

Meanwhile, seven consumer and financial planning industryorganizations supporting a uniform fiduciary duty—ConsumerFederation of America, Fund Democracy, AARP, Certified FinancialPlanner Board of Standards Inc., Financial Planning Association,Investment Adviser Association, and National Association ofPersonal Financial Advisors—submitted a “roadmap” in March to SECChairman Mary Schapiro for resolving the debate about how to createa rule outlined in the study. The compromise framework uses a July2011 letter from the Securities Industry and Financial MarketsAssociation as a starting point. Here is an excerpt from the14-page letter detailing the consortium's position:

“We support the general approach to accomplishing this goaloutlined in the Section 913 Study issued by the Commission staff inJanuary 2011… Properly implemented, this approach would providebadly needed and long overdue protections for individuals whoreceive investment advice from broker-dealers without imposingundue regulatory burdens on brokers and without disruptingtransaction-based aspects of the broker-dealer business model.

“Some members of the broker-dealer community have expressed theconcern that imposition of a fiduciary duty on brokers'personalized investment advice could have catastrophicconsequences— forcing brokers to abandon commission-basedcompensation, proprietary sales, or transaction-basedrecommendations. These concerns are clearly unfounded. They ignoreboth the clear direction from Congress with regard to how thefiduciary duty would be applied and extensive evidence that theAdvisers Act fiduciary duty is sufficiently flexible to apply to avariety of business models. One need only look at longstandingpractices under the Advisers Act as applied to dual registrants andto financial planners who are registered as investment advisers forevidence that the fiduciary duty is fully consistent withsales-related business practices, including receipt oftransaction-based compensation, sale of proprietary products, andsale from a limited menu of products.

“While the Commission must be mindful of the impact upon theindustry as it implements the fiduciary standard for brokers, itmust also avoid an over response to expressions of broker-dealerconcerns that reflect either a misunderstanding of the standard oran unwarranted effort to limit its scope … As long as theCommission stays true to the vision outlined in the Section 913Study, however, it can implement the standard in a way that retainsaspects of the broker-dealer business model investors value whilefulfilling the Congressional mandate to improve protections forinvestors.”

SIFMA, for its part, is in favor of a uniform fiduciarystandard, but is calling upon the SEC to create a new fiduciaryduty rule based on a “fiduciary framework,” which would protectbroker activities, such as charging commissions and sellingproprietary products.

SEC has next move

The SEC has been mum on the subject of late, which current NAIFAPresident Robert Miller says is a good thing.

“We think that the SEC is working hard on bringing all theirdata together,” Miller told Life Insurance Selling. “Ireally thought by now we'd have something down, but I don't see itas a negative that there's nothing written yet. In fact, I see itas the SEC wanting to get it right, or at least doing the best theycan to get it right. Whether they will or not is up in the air, butobviously, when they finally do promulgate, we're going to belooking at it very carefully.”

“Getting it right,” as far as insurance producers are concerned,would mean any uniform fiduciary standard that is enacted will notput an outright ban on commission-based sales but might, instead,call for enhanced commission disclosure.

That would be OK with Don White Jr., CLU, ChFC, AEP, who is CEOof Treasure Coast Financial Services in Stuart, Fla., and a Top ofthe Table Million Dollar Round Table member. White told LifeInsurance Selling at the June MDRT annual meeting in Anaheim,Calif., that he prays regulators don't ban commission-basedcompensation for insurance agents. He would vastly prefer enhancedcommission disclosure.

“I don't mind commission disclosure. I don't really thinkdisclosure is as big of an issue as some people think it is. But Idon't like the idea that we could essentially force everybody tofees, because if you force everybody to fees, what will happen isguys will just no longer just sell life insurance,” White says.“All you've got to do is look at Great Britain.”

Former MDRT President Tony Gordon, who is British, famouslywarned AALU annual meeting attendees in 2007—and again in 2010—tobeware of regulators massing and abusing power, as he witnessedwith the creation of the Financial Services Authority, the U.K.equivalent of the SEC. Gordon said regulators there graduallydestroyed the insurance business—in part by prohibiting commissionson product sales. The FSA's Retail Distribution Review, which comesinto force in 2013, prohibits commissions on life insuranceproducts.

The ranks of insurance advisors, Gordon said, have fallen frommore than 150,000 before the FSA was created to less than 50,000 by2010. White says he is fearful such a decline could indeed occurhere.

“If we totally blow up the system of distribution, we run therisk of falling into the Great Britain scenario,” White says.“Great Britain is going to have a huge problem. Not only do theynot insure their masses, they don't even insure the affluent thereanymore. It's a tragedy.”

The road ahead

Before the SEC comes out with a proposed rule, Gary Sanders,NAIFA's vice president of securities and state governmentrelations, says he expects the SEC to solicit public comment tofurther help inform the content of any proposed rule. He said hewould be surprised to see any proposal from the SEC before the endof the year.

NAIFA's Miller says ultimately a good outcome would be afiduciary standard “that's going to be able to encompass all thesemodels of doing business with disclosures. And I think that wouldbe a good compromise that we'd be looking for. I do think they'llget this figured out.”

Jill Hoffman, NAIFA assistant vice president of federalgovernment relations, had this to add: “The language of Dodd-Frankspecifically says that a fiduciary standard can be met, and aperson can still receive commissions, and a person can still sellproprietary products. In other words, the language says you cannotviolate a fiduciary standard just because you sell proprietaryproducts and get paid commission.”

So while a fiduciary standard seems likely, independentproducers can be hopeful it won't necessitate it blowing up theirbusiness model. 

Brian Anderson is the editor-in-chief of Life InsuranceSelling magazine, and is a former editor of Senior MarketAdvisor. He can be reached at 720-895-1529. This articleoriginally appeared in Life Insurance Selling.