Since the Department of Labor handed down its fiduciary rule, the industry has been abuzz about the outlook for insurance-only producers who sell fixed indexed annuities through independent marketing organizations. The reason: The rule doesn't include IMOs in its definition of a "financial institution."
The FI categorization has traditionally been reserved for broker-dealers, insurers and registered investment advisors. What's more, the DOL stipulates that only a FI can approve sales commissions under the fiduciary rule's best interest contract exemption (BICE).
What are producers of FIAs, which are now subject to the BICE, to do? Well, they can work with an IMO that has secured from the DOL a special exemption to be classified as a financial institution under the BICE. That process is now underway.
Since May, six (out of more than 350) IMOs — Gradient Insurance Brokerage, Clarity 2 Prosperity, InForce Solutions, Legacy Marketing Group, Futurity First Financial Corp., and Financial Independence Group — have applied for FI status with the DOL's Office of Exemption Determinations. To learn more about the application process, and what the FI designation will mean for approved IMOs and their brokers, LifeHealthPro interviewed the CEO of one of the six: Jason Smith, CEO of Clarity. The following are excerpts.
LHP: When did Clarity 2 Prosperity start the application process? What was involved?
Smith (pictured below): We initially got on a call in May with the Department of Labor's Office of Exemption to discuss questions I put to the DOL as part of our application. We then initiated [web conferences] to outline our financial planning and product screening processes.
During this time, I learned about what the DOL was looking for and, in particular, their priorities in protecting investors: ensuring that the best interest of the client was being put first. Our financial planning process fit perfectly into what they were asking for — a fiduciary-friendly sales process.
We continued talks with the DOL through May, June and July and decided that we would apply to be a financial institution to be able to sign off on the BICE agreement as an insurance marketing organization.
LHP: Just to clarify, your insurance agents could not have done business through Clarity and be in compliance with the DOL rule without this approval, yes?
Smith: Yes, the fiduciary rule lists banks, broker-dealers, insurance companies and SEC-registered RIAs qualified as financial institutions. Although we do own an SEC-registered RIA firm, we ran into a challenge on the IMO side: For those life-only agents not licensed to sell securities with a broker-dealer or our RIA, there would be no one to sign the BICE agreement, other than an insurance carrier. And, as I discovered, many life insurers don't want to sign the BICE.
So we needed to come up with a solution for our insurance-only producers who don't have an investment person in-house to sign off on the BICE. That said, many of our advisors belong to practices where one partner manages investments and the other insurance.
The ability to offer both are, in fact, a requirement to affiliate with Clarity. We believe that to do comprehensive, holistic financial planning, you need as part of your portfolio both protection and investment solutions.
LHP: Why would Clarity, as an IMO, be more willing to sign off on a BIC exemption than a life insurer?
Smith: As an IMO — a qualified intermediary between carriers and our advisors — we have access to products from multiple insurance and annuity manufacturers. We're able therefore to screen and recommend products — including fixed-indexed annuities now subject to the DOL rule — in alignment with the client's best interests.
Individual product manufacturers don't offer such broad access. If a customer needs a product they don't have in their own portfolio, they may be hard-pressed to meet the best interest standard.
LHP: Breadth of product aside, what is it about your financial planning model that makes it well-suited to a fiduciary standard of care?
Smith: Our financial planning model — holistic financial planning for the middle class — is the foundation of our company. Most middle income people are served primarily by sales people selling stocks, bonds, mutual funds, annuities, life insurance, trusts, wills and tax services.
Unfortunately, many of these professionals work in silos; and so they're not coordinating to offer comprehensive planning that's in a client's best interest.
