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  • ACT II – Pulling Back the Curtain on Brokerage – Dept. of Labor Fiduciary Rule Impacts Distribution.

    June 14, 2017 by Kim Purnell

    As the industry moves forward into January 2018, it will be important to distinguish the difference between traditional Independent Marketing Organizations (IMO) and the emerging BICE Distribution Partners IMO/FMO (BDP). Remember, not every Independent Marketing Organization will be considered a Financial Institution and have BICE Exemption designation from the US Department of Labor.

    If your agency is among one many thousands boutique and mid-size brokerage insurance firms throughout the country, you too are probably very concerned and uncertain of how this DOL Fiduciary Rule will affect independent distribution and/or the ability to support producers.

    The DOL impact will not just affect these independent brokerage firms, it will also affect the hundreds of thousands of independent brokers/agents and/or producers that are caught in the hierarchical structure of one of these non-BDP firms or “financial institutions”. Since my first post on this subject, I have had numerous calls from mostly independent GAs and producers around the country.  

    There is surprising number of independent brokers/agents and/or producers that do not fully understand how their current selling agreements, with some insurance companies, are structured within a two, three or possibly four tier hierarchy, i.e., Tier (1)Independent Marketing Organization (IMO), Tier (2) Brokerage General Agency (BGA), Tier (3) Personal Producing General Agency (PPGA), Tier (4)Broker/Writing Broker/Producer (WA). Take into consideration the following scenario. Imagine you are at Tier 3 or Tier 4 and the up-line Brokerage General Agency (BGA) or Independent Marketing Organizations (IMO/FMO), where you have conducted your business and submitted your applications for IRA rollovers, qualified annuities, etc., is not considered a Financial Institution as defined by the DOL,  or has not entered into an arrangement to extend Best Interest Contract Exemption to you or your producers. What is the impact?  If you are like most brokers/agents and/or producers you’ll probably wait until the last minute, panic and then try to find an outlet for you to submit your business. Probably not a good position to be in from a “fiduciary” perspective for your client(s). 

    For the record, just because there is a 3 or 4 tier hierarchy doesn’t mean there are 2 or 3 overriding layers between the you, the producer and the insurance company. Sometimes there may be one layer, sometimes there may be more. There are also insurance companies that go direct to the broker/agent and/or producer and bypass this hierarchy structure entirely. 

    Sometimes the firm’s relationship with distribution is overt or simply a necessary pass-through to facilitate processing and support. Then there are other times the relationship/structure are covert and the producer has no knowledge or understanding he/she is in a multi-level hierarchy structure. Regardless, as we move into the new “fiduciary era’ of distribution, a broker/agent and/or producer needs to know how his/her selling agreement is structured and will there be BICE extended?  Like I mentioned in the previous post, don’t be surprised to see E&O companies make changes to include DOL Fiduciary Rules and distributions and you can bet rates for E&O are on the rise. 

    As January 2018 approaches, and assuming the DOL Fiduciary Rule stays intact as is, it’s going to be curious to see which companies, take the path of going “direct” to the broker/broker/producer and which implement or reassert their commitment to a hierarchical distribution model and utilization of a Bice Distribution Partner IMO. For those carriers looking to go direct to the producers, a creative wholesaling-marketing campaign with an intuitive understanding how to best identify non-incidental producers could give them a unique position in the annuity marketplace and foster broker/agent loyalty.  

    Let’s discuss how brokers/agents or producers obtains access to or represents a product manufactured by an insurance company. Before I do this, let’s get the proprietary products and distribution off the table. There are certain carriers that only allow their captive or career representatives to sell their company product(s). However, these same carriers “may” allow their representative to “sell away” and provide access to non-proprietary products negotiated through selling agreements with third-party intermediaries or other insurance carries. These selling agreements are generally established to allow their captive distribution salesforce to have access to a niche product, market or unique underwriting variations. These relationships are not unique and are often established on a regional or national basis. There are two nationally based intermediaries that come to mind and both are well recognized and respected in the industry. One is a Brokerage General Agency (BGA) within one of the traditional Life Insurance IMOs and the other a subsidiary of a large banking institution.

    Depending on the relationship between the intermediary and the proprietary distribution channel, the sales of insurance products is considered ‘brokerage’ even though the producers are not technically “independent brokers“. The agent’s negotiated compensation will usually be funneled through a corporate payment system often referred to as a “Grid” before any commissions are paid to the captive writing agent.  Although this is considered brokerage sales, the underlying concern to the writing agent is ownership of the “client” and the vesting of first year and renewal commissions. The truly independent brokers/agents and/or producers are paid directly by the insurance company and fully vested in their first year and renewal commissions. For those captive agents that “broker” outside non-proprietary products which are funneled through their “grids”, this issue(s) comes to the surface when a captive representative leaves a particular career distribution channel.   

    It will be interesting to see how various career or captive sales groups might alter their accessibility of non-proprietary products to their distribution “since agents and their affiliated firms that receive any form of compensation for giving financial advice will now need to satisfy aProhibited Transaction Exemption (PTE) to receive commission-type compensation.” “Prohibited Transaction Exemption (PTE) is a form of “best interest contract” (BIC) exemption. It would allow commission type (third party) compensation arrangements only if the financial institution and the client enter into a contract”. [i]

    In Financial Institutions that have controlled distribution channels such as with an insurance company, carrier captive sales forces, Broker-Dealer, RIA, and Bank and where there is an existing employee/employer relationship and fiduciary oversight the selection of a BICE Distribution Partner might not be necessary.  If you are in one of these channels, check with your leadership and compliance departments before ‘selling-away’ or brokering business outside at vetted distribution relationship.

    For those independent agents/brokers and/or producers that want access of various IRA instruments or IRA qualified Indexed, and/or variable annuity products, they will need to select a Financial Institution, One solution might be to select an insurance intermediary (BDP Independent Marketing Organization) to partner and thus receive compensation in connection with fixed annuity transactions that may otherwise give rise to prohibited transactions as a result of the provision of investment advice to plan participants & beneficiaries, IRA owners and certain plan fiduciaries (including small plan sponsors). 

    When reviewing which distribution options might be ideally suited to your situation, consider your current distribution model then determine if the relationship will support the model outlined in this article. If not, consider establishing a selling relationship, early on and before January 2018, with a brokerage firm that has entered into an agreement with a Financial Institution, such as an RIA or Broker-Dealer that will extend BICE to non-registered FINRA producers, brokers & agents. There are a couple of marketing organizations actively looking to establish this type of arrangement for their distribution. I know of at least one of the most respected and industry recognized traditional Independent Marketing Organizations, which is not considered a Financial Institution, is in the processing of establishing this type of relationship for brokers/agents and/or producers within the hierarchy of its BGA affiliated firms. This could be an excellent option. I’ll be glad to share the name of this organization if you drop me a note.

    In closing, there are going to be many distribution groups and sales organizations that will get lost in the distribution abyss that will arise from the Department of Labor Fiduciary Rule.  One example might be all those independent Property and Casualty Insurance Agencies that have direct access to hundreds of thousands of existing clients and policyholders looking for retirement advice. Has this distribution or trade organization thought about a solution? If so, I have not seen anything in print. Another example might be all those affinity groups or associations, currently endorsing or have vetted various insurance products with members. They too will be looking for retirement advice.  I’ve personally seen hundreds of these relationships over the years and they too will be challenged.

    Continue reading for definitions and Frequently asked questions

    Financial Institutions

    \DEFINITION\: defined in the exemption to include banks, investment advisers registered under the Investment Advisers Act of 1940 or state law, broker dealers, and insurance companies, and individual “Advisers” must adhere to basic standards of impartial conduct (Impartial Conduct Standards), namely, giving prudent advice that is in the customer’s best interest, avoiding misleading statements, and receiving no more than reasonable compensation. * [ii]

    Best Interest Contract Exemption Insurance Intermediaries

    \DEFINITION\: Allows certain insurance intermediaries (IMOs), and the insurance brokers and insurance companies they contract with, to receive compensation in connection with fixed annuity transactions that may otherwise give rise to prohibited transactions as a result of the provision of investment advice to plan participants & beneficiaries, IRA owners and certain plan fiduciaries (including small plan sponsors).

    DEPARTMENT OF LABOR Employee Benefits Security Administration 29 CFR Part 2550 [Application No. D-11926] ZRIN 1210-ZA26 Proposed Best Interest Contract Exemption for Insurance

    [The proposed exemption would be available for insurance intermediaries satisfying the definition of “Financial Institution,” and insurance brokers (Advisers) and insurance companies with whom they contract, as well as their affiliates and related entities (as defined in the proposal), when they make investment recommendations regarding Fixed Annuity Contracts to retail “Retirement Investors.” Retirement Investors are plan participants and beneficiaries, IRA3 owners, and non-institutional (or “retail”) fiduciaries. As a condition of receiving compensation that would otherwise be prohibited under ERISA and the Code, the exemption would require the Financial Institutions to acknowledge their fiduciary status and the fiduciary status of the Advisers with whom they contract in writing. The Financial Institution and Advisers would have to adhere to enforceable standards of fiduciary conduct and fair dealing with respect to their advice. In the case of IRAs and non-ERISA plans, the exemption would require that the standards e set forth in an enforceable contract with the Retirement investor. Under the exemption’s terms, the Financial Institution would not be required to enter into a contract with ERISA plan investors, but it would be obligated to adhere to these same standards of fiduciary conduct, which the investors could effectively enforce pursuant to ERISA section 502(a)(2) and (3).. * [iii] ]

    If you hold a license is Life and Health only or just Life insurance, and not working with a firm that has an established Financial Institution with a BICE pass-through relationship or is a Bice Distribution Partner don’t wait until the last minute. You might want to start reaching out one of the 22 or so insurance intermediaries that submitted applications to the Employee Benefits Security Administration to be recognized and considered for “Financial Institution” designation by the U.S. Department of Labor (DOL) under the Best Interest Contract (BIC) Exemption, which is part of the DOL’s recently released Fiduciary Rule. 

    Frequently asked questions (FAQ) and Definitions Below.

    Q- Will you continue to submit your business through your current brokerage general agency channel? 

    Q –Are you giving retirement advice and receiving any form of compensation or simply selling fixed insurance products not attributed to giving ‘retirement advice”? 

    Q- Will the annuity business be contingent on providing retirement planning advice be submitted to BICE Distribution Partner while all other business will be submitted through another distribution channel? 

    Q – What is the advantage of splitting your business?

    ·        Product accessibility

    ·        Compensation

    ·        Service- loyalty

    Q – What is the disadvantage of splitting your business?

    ·        Administrative

    ·        Compliance

    Q- Will your life insurance and other insurance business go to different channel or brokerage firm if the BDP has access to the same products, compensation levels and service commitments?  Why and Why Not?

    Q- I’m FINRA Registered and have a Broker-Dealer relationship, what should I do?

    A – Check with your Broker-Dealer.

    Q- I’m a captive broker with an exclusive selling agreement and permitted to “sell away”, what should I do?

    A – Check with your management and/or distribution leadership.

    Q- I’m an independent broker with a life/health and variable license with no FINRA registration, what should I do?

    Q – If your brokerage firm belongs to a traditional Life IMO not considered a Financial Institution by the DOL, will brokerage firm or IMO be entering a contractual relationship with a Financial Institution. i.e., Broker-Dealer or RIA? And will that Financial Institution extend fiduciary oversight and BICE to non-registered representatives of the brokerage firm? 

    – If a contract has been extended, obtain confirmation and documentation as to the stipulations of the agreement and the impact if will have on your ability to provide retirement advice to your clients.

    – Determine if the products available through that relationship encapsulate the DOL definition of Fiduciary and will those products provide you with the “Suitability”confidence to make retirement advice recommendations that are in the Best Interest of your clients. (Old and New definitions of Fiduciary & Suitability below)

    Q – With the Dept of Labor Fiduciary Rule, will your carrier direct selling agreements be retained or must you select either a Bice Distribution Partner IMO or another Financial Institution defined by the US Dept of Labor?

    FI-DU-CI-AR-Y                          

    Prior to June 9, 2017

    \DEFINITION\: A person legally appointed and authorized to hold assets in trust for another person. The fiduciary manages the assets for the benefit of the other person, rather than for his own profit. *

    \USAGE\: A register investment agent, who is held to a “fiduciary standard,’ looks after the assets of another person on the person’s behalf, is fully transparent, and required to disclose any potential conflict of interest.                                                                                                *Investopedia.com

    FI-DU-CI-AR-Y          

    As of June 9, 2017

    \[RE] DEFINED DEFINITION\: ‘‘Fiduciary’’: A Conflict of Interest Rule-Retirement Investment Advice; Best Interest Contract Exemption (Prohibited Transaction Exemption 2016-01); Class Exemption for Principal Transactions in Certain Assets Between Investment Advice Fiduciaries and Employee Benefit Plans and IRAs (Prohibited Transaction Exemption 2016-02); Prohibited Transaction Exemptions 75-1, 77-4, 80-83, 83-1, 84-24 and 86-128.

    The Fiduciary Rule treats persons who provide investment advice or recommendations for a fee or other compensation with respect to assets of a plan or IRA as fiduciaries in a wider array of advice relationships than was true of the prior regulatory definition (1975 Regulation).

    Suitabilityonce meant that if an product recommendation met a client’s defined need and objective, it was deemed appropriate. For example. The client’s “need” was to roll-over 401k assets upon leaving an employer: The “objective” was to allow those assets to grow in financial instrument that has the appropriate risk tolerance for the client: a “suitable” recommendation could be an annuity, i.e., fixed, indexed or variable. As the definition pertains to the industry, if all three boxes, 1) need, 2) objective and 3) appropriate product recommendation, were checked, the insurance broker/agent and/or producer met suitability standards. 

    As of June 9, 2017, Suitability” now means, financial professionals, regardless of you state license type such as life & health, only, life, health and variable, resident or non-resident, FINRA registered, or non-registered, professional designations, CLU, ChFC, RIA, etc., are now legally obligated to put their client’s best interests first rather than simply finding “suitable” investments.

    Originally Posted at LinkedIn on June 14, 2017 by Kim Purnell.

    Categories: Industry Articles
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