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FIA Supervision Under Fiduciary Rule: ‘Suitability on Steroids’

Marketing organizations that are authorized to act as financial institutions under the Department of Labor fiduciary rule are proposing new supervision frameworks for their agents or representative affiliated with a registered investment advisor (RIA).


So what does this mean for independent insurance agents who sell fixed indexed annuities? The agents can expect those new frameworks to be more rigid and require stiffer due diligence. There also will be an increased transparency about how much commission-based agents will be paid. That’s according to application materials from the organizations seeking to be authorized as financial institutions under the new rule, which takes effect in April 2017.


Agents can expect more preapproval of compensation, a more limited set of products to sell and no compensation side deals, documents show.


“One of our carriers called it suitability on steroids,” said David Rauch. He is chief operating officer and general counsel of Annexus, a product-design and marketing company in Scottsdale, Ariz.


But it may be a different story once agent information and product details are loaded into computer platforms, and once the compliance machinery is in place and agents are fully trained, he said. In the long run, agents may find many processes more user-friendly than in the past. 


Seven marketing organizations have filed applications with the DOL to become “financial institutions.” This is considered critical for independent agents who want to continue selling commission-based FIAs.


These types of annuities are popular with certain investors, as they promise income but have potential to earn higher rates of interest than bank deposits. FIAs are on track for a record year of $60 billion in sales.


More marketing organizations are expected to file for financial institution status over the next several weeks.


Heaped Compensation

Agents who sell fixed indexed annuities under the DOL’s Best Interest Contract Exemption can expect a commission payment structure to resemble a broker/dealer model. The structure would include paying out through a grid and through levelized commissions. That’s according to Chris Eaken, vice president of compliance and administration with Legacy Marketing Group, an independent marketing organization (IMO) in Petaluma, Calif. Legacy has applied for financial institution status.


Legacy executives foresee their financial institution offering “heaped compensation,” similar to that of a broker/dealer. But they also may support agents moving to a fee-based business model such as an RIA.


Heaped compensation is where advisors receive most, if not all, of their compensation upfront. Trail compensation, by contrast, is paid out over the life of the contract.


“Our financial institution will offer insurance and financial advisors proprietary products through multiple carriers,” said Preston Pitts, president of Legacy Marketing. “Heaped levelized compensation will remove conflict of interests for our advisors so they can focus on providing products and services that are in their clients’ best interest.”


Broker/dealers also identify what are known as Offices of Supervisory Jurisdiction (OSJs). These are branch offices that recruit representatives and monitor the sale of products and programs in accordance with the Financial Industry Regulatory Authority (FINRA).


“Legacy envisions a similar pattern in which the IMO will work with subindependent marketing organizations, or sub-IMOs, much like a broker-dealer works with Offices of Supervisory Jurisdiction or branch offices,” said Niju Vaswani, chief marketing officer of Legacy.


But “to what degree the IMO will assume responsibility and operate in a capacity similar to an OSJ or branch office is yet to be determined,” Pitts also said.


Building a New Suitability Desk

Futurity First Financial, which owns three IMOs, is planning to support a commission and a fee-based model for its agents, CEO Mike Kalen told InsuranceNewsNet.


While insurance carriers are still developing their post-DOL commission options, it’s most likely agents will opt for a commission-based model, for which Futurity First will offer three options.

For 10-year-plus surrender charge products with full income riders and index options, the company will offer an upfront commission of around 7 percent for the same product class regardless of the insurance carrier offering the product.


A second option, a hybrid commission, is expected to offer agents a 3 percent to 4 percent upfront sales commission with a 50 or 60 basis-point asset-based or trail commission. It’s expected there would be a third option as well: a 1 percent trail commission for the length of the annuity contract.


“Compensation will be aligned with the complexity of the product, and agents will have choice of the type of commission,” Kalen said. “Everything with a full income rider and a 10-year-or-more surrender period all will have essentially the same commission to ensure objectivity across insurance carriers. More complex products receive more services (from the agent) and therefore higher compensation.”


Less-complicated products will have lower commissions, but also offer commission options, Kalen said.


Supervising agents will be done by Futurity First’s sales and suitability desk, which will be staffed by professionals who have advisory experience.


The policies of supervision will be created and monitored by senior managers and their compliance officer, he said.


The group will be headed by an industry veteran with advisory experience and educational credentials such as Chartered Life Underwriter, Chartered Financial Consultant, Retirement Income Certified Professional or Certified Financial Planner designations. In addition, the head of the group will be paid through a salary and bonus, tied to quality rather than sales volume, Kalen added.


The staff will have a strong mix of sales and suitability experience. They also will be paid salary and bonuses tied to quality rather than sales volume.


IMOs and insurance companies have “internal sales support” desks to manage sales, but the Futurity First sales and suitability/best-interest desk is completely separate from the support desk, Kalen said. It will be led and primarily staffed in Hartford, Conn.


The sales and suitability desk will sign off on the sales of an FIA for BICE-related sales conducted by independent agents and advisors in Futurity First’s three IMOs, as well as the 100 or so partner agencies and sub-IMOs affiliated with them, Kalen said.


Also, Futurity First will have a set of tools to support broker/dealers who distribute FIAs to help integrate them with their BICE policy, he added.


Variations on a Theme

The DOL’s fiduciary rule was developed to prevent agents from “steering” retirement plans and retirement investors into products that, while suitable, weren’t necessarily in the best interest of the retail investor yet paid higher commissions to agents.


Regulators, therefore, are most interested in how marketing organizations are proposing to supervise independent agents to ensure that the terms of the DOL rule are enforced.

In response, the marketing companies have proposed slightly differing models but remain vague about the exact details.

Financial Independence Group, a marketing organization based in Cornelius, N.C., favors a framework modeled after an RIA. The framework “will be adapted as appropriate for insurance-only agents” to monitor and supervise sales of FIAs, the company said in its DOL filing.

InForce Solutions, a marketing organization for Allianz Life, has indicated it prefers a supervisory framework modeled after FINRA, which supervises broker/dealers.


Legacy seems to favor a hybrid model, company executives told InsuranceNewsNet. Meanwhile, Futurity First is building an entirely new desk through which to supervise agents.

Supervision of independent agents emerged as an issue in the spring. At that time, some insurance companies indicated they would not stand behind independent agents who face the potential of future litigation exposure, on the grounds that the product they sold wasn’t in the best interest of a client as required by the DOL rule.


This reluctance on the part of insurers caused some independent agents to wonder about the future of FIA sales.


In response, marketing organizations are seeking financial institution status from the DOL to stand behind the thousands of agents whom organizations recruit to sell billions of dollars’ worth of FIAs every year.


“The most important aspect is what each of the (IMO) entities says about how they are going to supervise the agents who are going to work for them and whether an IMO can serve as a financial institution,” Bruce L. Ashton, partner with Drinker Biddle & Reath, told InsuranceNewsNet.


Drinker Biddle represents several marketing organizations in their applications before the DOL.


InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected]

Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at cyr[email protected] [email protected].

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