Investment Advisors Recommend Insurance Agents End the Drama, Face Reality

 

Thursday, Sep 03,2009, 9:15:56 AM   Click:

Long before the Securities and Exchange Commission (SEC) proposed Rule 151A, federal regulators have sought to transfer control of the indexed annuity industry, state departments of insurance regulatory capital base of the Commission . The series of events since the adoption of the rule was held more as a fiction TV day that concerted efforts to reach an agreement between the financial and insurance professionals, many of whom are lobbying to increase the level control for the titles licensed counselors are familiar.

The latest twist in this melodrama involves the Kansas City, Missouri National Association of Insurance Commissioner's (NAIC) has continued to tinker with its convenience in Annuity Transactions Model Regulation. And some of the changes they have proposed - particularly as regards the standards of competency of indexed annuities - have given insurers, insurance groups and agents of another reason to oppose (or, the largest number of counselors might say, another reason to lament).

The amendments to the NAIC’s model regulation aim to hold insurance agents to a higher degree of responsibility, specifically when it comes to indexed annuity sales, by adopting uniform suitability standards that place agents under the same level of scrutiny to which investment advisors are subject. To accomplish this, the proposed revisions would mandate that insurers monitor their distributors of indexed annuities (i.e., broker/dealers and insurance agencies) to ensure that all annuity transactions meet stringent suitability standards.

But their securities-licensed brethren, registered — and long rigorously regulated — advisors say that it’s time for insurance agents to share in the regulatory burden of doing business. For investment advisors, suitability, disclosure, compliance and regulations are just everyday nuisances one learns to accept as just another part of the job, and many feel that it couldn’t hurt for insurance agents to get to know what it’s like to work beneath an omnipresent regulatory microscope.

Suffice it to say, many investment advisors are less than sympathetic toward their anxious insurance counterparts. Generally pleased with the revised NAIC-proposed model rule, the majority either could not care less or they urge the insurance industry just to suck it up, accept the change, and begin taking the requisite steps to continue selling indexed annuities. If one of those steps requires becoming securities licensed, so be it. After all, it would grant these advisors the ability to offer their clientele a far broader menu of product options or the authority to discuss investments in any context when working with clients — including the authority to point out opportunities for clients to shift funds from certain securities to fund indexed annuities. 

As everyone in the industry knows, the past few years have yielded a dramatic spike in demand for indexed annuities as well as an explosion in sales, and the data support the fact that Americans like the benefit of a guaranteed income, which was underscored in AnnuitySpecs.com’s recently released “Second Quarter, 2009 Indexed Sales Results” report.  

The data gleaned from the report show that total second-quarter sales were up 21.2 percent from the same period in 2008, and up 18.3 percent from the last quarter of this year, marking a record-breaking quarter with $8.3 billion in indexed annuity sales.

“Never has there been a more challenging period for those selling indexed annuities,” said Sheryl J. Moore, president and CEO of AnnuitySpecs.com. “Scarce capital has resulted in most carriers making changes to their annuities including commission reductions, premium bonus reductions, increasing minimum premiums, and dropping issue ages. We’ve even seen folks terminating distribution and halting new agent appointments. Despite these challenges, Americans have spoken, and indexed annuities are the product of choice.”

Clearly, the popularity of indexed annuities demands rigorous regulation, and though they’re already supervised by state insurance departments, the categorically ambiguous nature of indexed annuities will most likely result in some sort of securities oversight, just as the NAIC, the SEC and many investment advisors expect.

Given the myriad challenges, changes and responsibilities insurance-only agents will face as they work toward the licensing required to sell indexed annuities, perhaps investment and fee-only advisors could give their insurance cohorts a break, especially when they consider everything an insurance agent must wrestle with in order to sell this popular product by 2011:

• First things first: “A life insurance producer will be subject to a few more levels of regulation and scrutiny of his business practices,” says David R. Millar, owner of Grand Rapids, Mi.-based  Integrity Compliance Consulting. “If he isn’t used to being regulated, it could be a bit of a shock.”
• Due to higher compliance costs, commissions on indexed annuities will likely plummet.
• Business could be slowed severely, as securities oversight will “probably slow down the approval, underwriting and issuance of various annuity products, said the National Association of Insurance and Financial Advisors (NAIFA) president-elect, Terry K. Headley.
• New advisors not only need to first affiliate with a broker/dealer, but ensure it’s one that allows the sale of indexed annuities.
• Changes in regulation could lead to shake-up in the distribution channel, especially if fewer life-only agents choose not to pursue the securities route.  Meanwhile, those who do securitize might find themselves tempted to recommend any number of new investment products now available to him or her when an indexed annuity might, in fact, be the best option.
• Insurance companies will face increased suitability responsibilities similar to FINRA’s requirement that principals review all annuity transactions to ensure suitability. Groups like NAFA, the National Association for Fixed Annuities, worry that allocating the additional responsibility (not to mention funds) to their supervisory staffs for reviewing each and every annuity transaction would not only be detrimental to their primary focus of looking for malfeasance along all product lines, but would also open insurers to greater liability.

In the end, the investment advisors who strongly feel that insurance producers should get a taste of real regulation will certainly get their wish. But when you add it all up, it’s clear that they’ll get far more than a taste — they’ll get the full-course meal. Many producers will take this opportunity to add more offerings and services to their practice’s menu. Some agents will keep what’s on their plate to a select few, perhaps familiar, offerings. Still others will become overwhelmed and leave the table entirely.

It’s up to each producer to decide what they want their job to be, and most experts agree that even if it takes a few years, the rules for selling indexed annuities will certainly change, and a securities license will likely be required. Like it or not, indexed annuities may be losing their traditional insurance-product status, but not their broad public appeal. And in this highly competitive game, it never hurts to be just slightly ahead.