Editor's Note: This is the second part of a six-part series on threats to the independent life insurance distribution channel, running in each issue of Life Insurance Selling through the remainder of 2012.
Part V: Combatting consumer apathy
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 (SEC) 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 (AALU), the National Association of Insurance and Financial Advisors (NAIFA) and the National Association of Independent Life Brokerage Agencies (NAILBA) 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% for its 50,000 members, and as a result, 65% 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 (SIFMA) 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.
