As the long expected DOL fiduciary proposal nears its re-release, the anxiety levels for all the various stakeholders are reaching a boiling point. There's a great deal at stake that could materially change the retail financial services business if commission products must be replaced by fee based accounts for the retirement marketplace. The argument against it is that the ruling will force all products from commission to fee based putting the small market advisor out of business and forcing the less sophisticated client to go it alone. Another less popular but extremely important part of the proposal shifts the liability and burden of proof from the DOL to the advisor (or firm employing/supervising the advisor) should there be a claim. Moving claims from arbitration to the courts could be a B/D CEO's nightmare. On both sides of the argument, there are multiple groups and associations fighting, but it seems to me by reading the various industry publications that SIFMA and FSI are most often cited as the prime opponents. Clearly, the constituents of SIFMA & FSI, made up of B/D’s and asset managers of varying sizes and types, have something to lose if the DOL gets its way (FSI viewpoint here: http://www.financialservices.org/fiduciary/ ). However, last year advisor comp was made up of about 60% in fees and by the end of this year, that fee number could be over 75% and trending upwards. That tells me that a great many of SIFMA’s and FSI’s constituents are already being held to a fiduciary standard for much of their business. While the threat to securities based firms is certainly there, I’m more surprised by what appears in the media a lack of fight from the insurance industry. The firms that should really be shaking in their boots are in the life and annuity insurance industry.
Ignorance is always afraid of change
The life and annuity insurance business is primarily made up of two basic types; The “career” agent and the “independent” agent. The true independent B/D that does not manufacture product will be impacted by the DOL proposal, but it is the proprietary product manufacturers who maintain a sales force that will be impacted the greatest. While several industry publications categorize many of the career insurance firms as “independent B/D’s” (Northwest Mutual, AXA Advisors, Mass Mutual, Lincoln Financial, etc.) the truth is that they are insurance product manufacturers first and maintain a tied sales force to distribute those products often through their owned B/D secondarily. These B/D’s are not truly independent. The relationship between the insurance company and their agent only works to the extent that the agent sells/recommends/distributes the proprietary manufactured products. For doing so, they receive benefits qualifications, pension contributions, conference qualifications, recognition and managers receive overrides and bonuses. This is the “value proposition” for affiliating with a career company. It worked great in an era gone by where the majority of producers sold primarily life insurance. However, you will find that a great many agents in these career models have drifted away from selling life insurance over the years and towards retirement products/services and asset management. These types of practices will be impacted the greatest.
So fast forward to a DOL fiduciary as proposed becoming the law of the land. These insurance company manufactured products for retirement which are primarily fixed, variable and indexed annuities, will have to be repriced and restructured to accommodate the DOL requirements. The possible implications are the following:
- Career agents may lose differentiated benefits (benefits, pension cont., overrides, etc) for selling proprietary products over non-proprietary products further eroding the "value proposition". All products would need to be on a level playing field
- Pricing of the annuities may be forced towards AUM comp and away from commissions impacting agent compensation flows and managerial overrides as structured today Read NAIFA's point of view here: http://bit.ly/1yrWAn1
- If the career insurance company cannot respond to this shift from proprietary manufactured commission based products towards fees AND restructure their career producer “value proposition” towards asset based products, they stand to lose producers to the Independent B/D models (LPL, Cetera, Commonwealth, etc) at a staggering pace
- Some career models will give up career distribution or drop their B/D to become a “super OSJ” of an true independent B/D (As Kansas City Life did last year with Securities America http://bit.ly/1tlvIte )
This is not to say the insurance career shops are doomed. Many have the leadership and resources to respond to the market forces in play and some have already moved towards fee-based products. But for those with their heads in the sand hoping for business as usual, it could be a disaster.
Is it ignorance or apathy. Hey, I don’t know and I don’t care -Jimmy Buffet
And what about the independent agent who places product through a Brokerage General Agency (BGA), many of which are not FINRA registered and sell primarily fixed and indexed products. For those who sell fixed/indexed life insurance, they can keep flying under the radar for now. For those marketing fixed and indexed annuities for pension rollouts and IRA rollovers, which includes a great many of them…bulls eye. These advisors who heretofore have been loosely regulated by state insurance departments will now have to meet the strict DOL requirements.
The five stages - denial, anger, bargaining, depression, and acceptance - are a part of the framework that makes up our learning to live with loss. They are tools to help us frame and identify what we may be feeling. But they are not stops on some linear timeline in grief.
Reading both investment and insurance industry publications, it seems that this threat is going relatively unnoticed by the independent agent and to some extent the career agent segment. Most I speak with haven’t even hit the first stage of denial which seems odd given what's at stake. When change happens there always seem to be winners and losers. Should the DOL get this through, the winners for the insurance based models could be the few career firms that have the resources and leadership to implement change immediately. Another winner from collateral damage will be the forward thinking Independent B/D’s who can become the safe haven of choice for those agents/advisors currently stuck in firms that will not/cannot make the shift. And contrary to popular belief, many insurance based advisors have already made the transition towards asset management thereby controlling the client relationship on all levels (asset management and risk management). For those IBD’s that have a robust insurance support offering, and there aren't many of them, these advisors and teams are a real find.
Regardless, it remains a question mark as to if/when either the SEC and DOL will not only pull the trigger, but then get it through. The fiduciary debate is going on 5 years now and still nothing has been resolved. But there is a real sense that 2015 will be the year it may happen. Where there is great change, there is equal opportunity and it will be interesting to see who will seize this opening to take the lead. Are insurance based distribution models prepared to compete in a new regulatory environment? Are IBD's positioned to recruit and support the insurance based advisor as the field harmonizes? Let me know what you think....