Few threats are scarier to the average independent life insurance producer than the potential banning of commission-based compensation for insurance product sales. And the prospect of adapting from a suitability standard of care to a fiduciary standard opens up another can of worms.

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

Soon, the suitability standard may well be eliminated in favor of a universal fiduciary standard that would apply to both groups. Proponents of a universal fiduciary standard—including many financial planner and consumer groups—claim consumers who rely on the financial advice of experts are confused by the different standards of care. These consumers are at an information disadvantage, they say, and vulnerable to exploitation by advisors who are not required to make recommendations in the best interest of the customer. Opponents of a fiduciary standard—including many life insurance industry trade associations—say a universal fiduciary standard is unnecessary because the current suitability standard is effective. Opponents also say the imposition of a universal fiduciary standard would result in higher costs and reduced choices and service for consumers.

How we got here

Section 913 of the Dodd-Frank Act of 2010 required the Securities and Exchange Commission to conduct a study on the scope of the standard of care used by brokers, dealers and investment advisors. The law also gave the SEC the authority to develop a final rule on whether or not a uniform standard should be applied to all financial professionals and to determine how the standards would apply. The study was released in January 2011 and concluded that a harmonized standard of care “at least as stringent” as the fiduciary standard currently applied to investment advisors should extend 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 imposing a universal standard. SEC Commissioners Kathleen Casey and Troy Paredes came out against the study's recommendations, saying the SEC staff “does not adequately recognize the risk that its recommendations could adversely impact investors.” They urged the staff to go back and perform a detailed cost/benefit analysis on the proposed rule change.

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

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

Valmark Securities President and CEO Lawrence Rybka, who is also chair of the AALU's Regulatory Reform Committee, told National Underwriter in June that a “vague” fiduciary standard would be subject to second-guessing. And anything with a higher commission could create the presumption that the advisor made the wrong recommendation, he said.

“One outcome that I fear: If we, as a broker-dealer, have to say that a certain product is in the client's best interests, then the data we collected previously is no longer adequate to determining what is best,” Rybka said. “Now we have to explore more alternatives based on the client's financial objectives and risk profile. This can be very intrusive into the recommendations that producers make.”

Meanwhile, seven consumer and financial planning industry organizations supporting a uniform fiduciary duty—Consumer Federation of America, Fund Democracy, AARP, Certified Financial Planner Board of Standards Inc., Financial Planning Association, Investment Adviser Association, and National Association of Personal Financial Advisors—submitted a “roadmap” in March to SEC Chairman Mary Schapiro for resolving the debate about how to create a rule outlined in the study. The compromise framework uses a July 2011 letter from the Securities Industry and Financial Markets Association as a starting point. Here is an excerpt from the 14-page letter detailing the consortium's position:

“We support the general approach to accomplishing this goal outlined in the Section 913 Study issued by the Commission staff in January 2011… Properly implemented, this approach would provide badly needed and long overdue protections for individuals who receive investment advice from broker-dealers without imposing undue regulatory burdens on brokers and without disrupting transaction-based aspects of the broker-dealer business model.

“Some members of the broker-dealer community have expressed the concern that imposition of a fiduciary duty on brokers' personalized investment advice could have catastrophic consequences— forcing brokers to abandon commission-based compensation, proprietary sales, or transaction-based recommendations. These concerns are clearly unfounded. They ignore both the clear direction from Congress with regard to how the fiduciary duty would be applied and extensive evidence that the Advisers Act fiduciary duty is sufficiently flexible to apply to a variety of business models. One need only look at longstanding practices under the Advisers Act as applied to dual registrants and to financial planners who are registered as investment advisers for evidence that the fiduciary duty is fully consistent with sales-related business practices, including receipt of transaction-based compensation, sale of proprietary products, and sale from a limited menu of products.

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

SIFMA, for its part, is in favor of a uniform fiduciary standard, but is calling upon the SEC to create a new fiduciary duty rule based on a “fiduciary framework,” which would protect broker activities, such as charging commissions and selling proprietary products.

SEC has next move

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

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

“Getting it right,” as far as insurance producers are concerned, would mean any uniform fiduciary standard that is enacted will not put 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 CEO of Treasure Coast Financial Services in Stuart, Fla., and a Top of the Table Million Dollar Round Table member. White told Life Insurance Selling at the June MDRT annual meeting in Anaheim, Calif., that he prays regulators don't ban commission-based compensation for insurance agents. He would vastly prefer enhanced commission disclosure.

“I don't mind commission disclosure. I don't really think disclosure is as big of an issue as some people think it is. But I don't like the idea that we could essentially force everybody to fees, because if you force everybody to fees, what will happen is guys 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, famously warned AALU annual meeting attendees in 2007—and again in 2010—to beware of regulators massing and abusing power, as he witnessed with the creation of the Financial Services Authority, the U.K. equivalent of the SEC. Gordon said regulators there gradually destroyed the insurance business—in part by prohibiting commissions on product sales. The FSA's Retail Distribution Review, which comes into force in 2013, prohibits commissions on life insurance products.

The ranks of insurance advisors, Gordon said, have fallen from more than 150,000 before the FSA was created to less than 50,000 by 2010. White says he is fearful such a decline could indeed occur here.

“If we totally blow up the system of distribution, we run the risk of falling into the Great Britain scenario,” White says. “Great Britain is going to have a huge problem. Not only do they not insure their masses, they don't even insure the affluent there anymore. 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 government relations, says he expects the SEC to solicit public comment to further help inform the content of any proposed rule. He said he would be surprised to see any proposal from the SEC before the end of the year.

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

Jill Hoffman, NAIFA assistant vice president of federal government relations, had this to add: “The language of Dodd-Frank specifically says that a fiduciary standard can be met, and a person can still receive commissions, and a person can still sell proprietary products. In other words, the language says you cannot violate a fiduciary standard just because you sell proprietary products and get paid commission.”

So while a fiduciary standard seems likely, independent producers can be hopeful it won't necessitate it blowing up their business model.

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

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