As discussed in previous posts in this series, here and here, life insurance and annuities in the US have historically been understood exclusively through the lens of “suitably” sold product, and have not been systematically viewed through the lens of advice. Prior to the advent, and increasing popularity of, the Registered Investment Adviser (RIA) model for service delivery in the financial services sector, products sold by brokers was also the lens through which retail investment distribution was understood. In the last several decades, however, as the RIA model has become more well-known, a material proportion of mass affluent consumers have chosen to gravitate towards advice and away from sales models, and both state and federal regulators have established expectations for RIA advice conduct. This series of blog posts lays out the rationale for why Fiduciary Insurance Services believes that insurance, which historically has been distributed exclusively via a product sales model, without a well-documented regulatory view as to how insurance could properly be advised upon by insurance experts, is suboptimal to the insurance industry’s long term relevance. For our industry to both remain relevant, as well as to compete fairly, and integrate effectively with, the financial services sector, it is imperative that insurance evolve to also support advice models that offer minimization of conflicts, similar to what the investment industry supports.
Because insurance is regulated at a state by state level as a product sales industry, in fixed insurance, the distributor (“agent of record”)’s legal responsibility to the consumer, which is to sell a suitable product, in most states ends at the point of the product’s sale. This is true even though it is legal for an agent/registered representative to continue to earn a trail commission for many subsequent years on a sold insurance product, while providing little, if any, service on that policy. In order to earn a trail commission on a previously sold policy, it is required only that the agent of record remain legally appointed with the issuing carrier. There is no standardized requirement by either product issuers, or by a regulatory body (remember, insurance is regulated differently by each state!) that further evidence of client service be provided by the agent for those trail commissions to be deducted from the client’s policy, and paid to the agent of record. This does not mean that agents who want to merit a loyal client base don’t provide ongoing service- in many cases, they do so- but they’re not required to, and because attrition among insurance agents early in their careers is high, and insurers do not in all cases assign orphaned policies to new servicers, this criticism that is often levelled against insurance sales, for which no advice corollary exists, may be a valid one. It becomes particularly concerning when there is no singular, known-to-consumers, centralized, independently validated source for a consumer to refer to when seeking the type of insurance professional who provides these long term services that to me feel quite a bit like advice abut how the product works and what the consumer can do with it once they own it.
This insurance distribution horror story continues when we observe the effects of how this lack of centralized control of the industry plays out when the term “advisor” is used in the fixed insurance space. There is currently no arbiter of when it is appropriate for a fixed insurance agent who does not hold a FINRA affiliation to call themself an advisor. This is because, to date, the SEC, post Reg BI, has defined either spelling of advise(o)r to mean either a fee only RIA, or a reg rep who also holds an RIA affiliation (hybrid), irrespective of whether the person with hybrid authority is performing advisory services for the customer in question.
While many career agents of insurance companies hold FINRA affiliations as well, career agents are no longer the dominant US insurance distribution model, and most purely insurance agents are now independent, receiving marketing marketing support from an FMO/IMO that may or may not have an affiliated broker dealer. The proportion of independent insurance agents that have dropped their FINRA licenses in recent years is material, and that phenomenon is speculated to be highly correlated to the advent of fixed indexed products, which are regulated as fixed insurance products and are not addressed by FINRA. Fixed indexed annuities perform over the long term in a range perhaps slightly above where Multi Year Guaranteed Annuities (MYGAs) can generally be expected to perform, with investors hoping that the extra risk they take of a possible 0 return year increases their expected yield over MYGA by a bit. Chronic manipulation of indexed product illustrations that cause indexed products, especially indexed life, to appear to perform better than what most analysts expect to occur in reality, however, are a story for another series of blogs. Back to the issue at hand, FIAs permit for a modicum of market index participation in cash value accumulation rate, while very importantly insuring against loss of principal, subject to the insurer’s creditworthiness. When fixed insurance agents sell FIAs, as distinct from their experience selling variable annuities, they do not forfeit a portion of commissions to a broker dealer that oversees their conduct (this is to say, FMO/IMOs are supported by issuer overrides on top of the agent’s commission, whereas broker dealers overseeing variable annuity sales are compensated by a haircut from the agent’s commission, with gross dealer concession passed through the BD’s grid to a net payout to the agent). The FMOs/IMOs that support independent agents do not currently have responsibility for providing conduct oversight (whether or not that changes with recent EBSA guidance on rollovers is a carefully watched and lobbied phenomenon in the insurance industry).
Because there is no formal contemplation currently given to what the word “advisor” means to a financial professional who is a fixed-only insurance distributor, many wacky outcomes ensue. May this person call themself an advisor? If so, which authority so grants and polices this authority? There is currently no national regulator for monitoring the conduct of those financial professionals who work exclusively in insurance. This results in:
- No advice-based starting career track available to financial professionals who might want to become insurance specialists, leaving a paucity of risk professional specialists among the next generation of financial professionals. Those graduating from college with high student debt loads in general cannot afford a 100% commission starting career, and accordingly, the average age of licensed insurance product experts was 59 when last reported by McKinsey. This lack of young people entering the profession to become experts in insurance further increases the risk that fewer Americans have appropriate risk protections in place. The life insurance coverage statistics in the link provided below are already evidence of this phenomenon. When these stats are updated post-pandemic, since a material proportion of those who do have life insurance had it provided by their employer, I am not expecting to observe a majority of adult Americans still covered with life insurance: https://www.linkedin.com/feed/update/urn:li:activity:6672831419338805248/
- Material and undeserved identity diminution for those insurance professionals, of which there are many, who are experts in their field and who have every intention of adding material value both to their clients’ psychological well-being, as well as to their clients’ risk-adjusted balance sheets.
- Poor distributor conduct in other instances. If all other financial industries are nationally policed, but my industry is not, then the risk that my industry becomes the parking lot for those who do intend financial harm to others increases. Not acceptable. Implications such as those highlighted by Morningstar’s David Blanchett then occur: https://www.morningstar.com/articles/1001102/protecting-yourself-from-fraudulent-financial-professionals
The salient question for the business of Fiduciary Insurance Services then becomes: Does the insurance industry want to pave the way towards a world of “insurance advice”? Does insurance advice require no commissions? If so, do we as an industry want to double down on making fee-only products available via systematic architectures for which bp or service fees can be charged, so that insurers have an additional, legitimate revenue source beyond the sale of a product wrapper? Can only RIAs provide advice around insurance, or is there a role for specialist insurance advisors working within RIA teams on the same footing of fee-based solution delivery on insurance expertise? There absolutely are individuals who do so now, but this is a cottage industry at the moment. Investing collectively as an industry in creating an architecture for those who wish to systematically be insurance advisors, thus adding to the ways in which our industry can work with adjacent industries in complementary ways, could provide insurance companies collectively with a sustainable business reason for issuing fee-based insurance products in an environment that requires not only material risk-taking for an issuer of guarantees, but also heavy infrastructural investment by issuers. Since insurance is about protection against risk, and it is easy to observe that there is a growing desire among Americans for advice services relative to sales, wouldn’t it make sense for the insurance industry to protect itself against the risk of unpreparedness in the face of fiduciary trends continuing by diversifying across distribution channels, and by proactively defining what “insurance adviser” means?
Cambridge University Press defines adviser as: “someone whose job is to give advice about a subject”. I think this definition naturally leads someone to conclude that an adviser (outside of RIA/FINRA context) is someone who is paid for giving advice. For now, I have claimed for myself the title insurance adviser, and I will interpret it to apply whenever someone is being paid for properly providing advice that’s related to the subject of insurance. But as someone who thrives on both definitions and on low E&O coverage costs, I sure would love to know what someone with the power to legally interpret this question believes it means!!
Should there be a singular curriculum and certifying body for a class of educated insurance professionals to become “insurance advisors”, similar to the intention of the Certified Financial Professional (R) designation in the investment field? There certainly are many designations available to professional insurance agents to gain expertise in certain arenas, but should there be a distinct one for “insurance advisors” that includes requirements for conduct standards? Can insurance advice become a regulated construct? And is it necessary for the insurance space to retain strategic relevance in the 21st Century?
What do you think?
FIS invites inquiries from Leaders.