NAIFA Blog

NAIFA submits comments to SEC on fiduciary standard of care

NAIFA submitted comments to the Securities and Exchange Commission on issues surrounding the Commission’s forthcoming study on the standard of care governing broker-dealers and investment advisers.

The comments serve not only to respond to the SEC's questions, but also to provide the Commission with a clear understanding of the products and services NAIFA members provide their clients. These clients are the very investors the SEC seeks to protect. They are individuals, families and small businesses that NAIFA members serve every day. The point is:  NAIFA members are Middle America and serve Middle America. They would not survive without client relationships built on trust and respect. NAIFA members serve their clients ethically and in their best interests - this ensures a vigorous level of investor protection that rivals any new standards that may be put in place.

Read NAIFA's comments, and thanks to all NAIFA members who submitted their own comments to the SEC over the last month.

The Latest Case Against STOLI

Yesterday's Wall Street Journal reports that Deutche Bank AG has sued two California insurance agents for alleged fraud and breach of contract. The suits involve efforts by the agents to sell life insurance policies on elderly people to Deutsche Bank, which would in turn pool them with hundreds of other policies and repackage them as notes, funds or securitized investments. Grimly, the investors would reap profits as the insured people began to die. The agents, who deny wrongdoing, also face felony embezzlement charges brought by the state of California, and their licenses are under review by the state insurance department.

The cases point out many of the problems with stranger-originated-life insurance (STOLI) products, and also show why NAIFA and other leading industry groups have opposed these transactions for years. Unlike legitimate life settlement transactions, in which an insured person decides to dispose of a no-longer-needed insurance policy bought in the past for legitimate purposes, STOLI policies are intended from the outset as investments for people who have no emotional or other connection to the people being insured. Why are these things so bad?

• STOLI transactions violate the essential social purpose of life insurance - to provide financial protection to families or businesses.
• They skirt state insurance laws, because they allow investors to buy policies the law would prohibit them from taking out on their own.
• They undermine the integrity of life insurance. If life insurance is seen as an investment product rather than a financial safety net, calls for governments to tax and regulate insurance benefits as investment income could gain traction. And when STOLI deals go bad, as in the California case reported by the Journal, they threaten to give the entire industry a black eye.
• These transactions sometimes prey on the elderly and their families, who may not understand all of the consequences of entering a STOLI arrangement. For instance, people cannot buy unlimited amounts of life insurance and STOLI policies can prevent them from buying policies they need for legitimate purposes. STOLI transactions also open them to potential fraud or tax liabilities.

  That's not what life insurance is about.

More information is available from the STOLI Alert newsletter, a quarterly publication by NAIFA and the American Council of Life Insurers.

 

NAIC Recognizes the Role of the Agent

The National Association of Insurance Commissioners, at its recent Summer 2010 National Meeting in Seattle, passed a resolution "to protect the ability of licensed insurance professionals to continue to serve the public." The resolution affirms that agents and brokers provide crucial assistance to employers operating under myriad federal and state regulations and IRS guidelines. Agents also advocate for employees and individuals in the health claims process, help employers develop proposals and renewals for insurance coverage, and "often fill the role of an HR department as well as professional consultant" for small businesses.

The resolution points out that because of the complexity and massive scale of the ongoing federal healthcare reform, "employers and consumers will need professional guidance even more in the future."

Finally, the resolution calls on Congress and federal regulators to acknowledge that insurance professionals are crucial to protecting the interests of consumers and to ensure that future laws and regulations safeguard the profession and ensure that producers are fairly compensated.

We couldn't agree more. Let's hope that Washington listens.

70% Against Fiduciary Standard

Approximately 70% of the comments on the SEC web site are against the recommendation that broker-dealers and their registered representatives should be bound by a fiduciary duty. 

However, a recent story in AM Best's BestWeek* makes it sound as if there are just as many advisors in favor of the fiduciary standard. Most comments lean toward this sentiment:  At the present time, the suitability standard governing broker-dealers and registered representatives is a robust and heavily enforced standard. In contrast, a legal fiduciary standard would impose unnecessary consequences to broker-dealers, representatives and consumers. Read all of the comments from the SEC web site.

* Note: viewing this article requires a paid subscription.

• NAIFA Blog posts on August 5 and August 12 provide some excellent excerpts from comments sent to the SEC by NAIFA members.
  
• The SEC is accepting comments through the end of August, so it's not too late to add your voice to the debate. The SEC will consider the comments when deciding whether or not to establish a universal fiduciary standard.

Where Is the Agent? HHS Needs to List Certified Health Insurance Professionals Online

At www.healthcare.com, the new web portal unveiled by the U.S. Department of Health and Human Services, you can get a listing of insurance companies able to sell you coverage, along with a breakdown of the various plans they offer. You can find healthcare facilities that provide different treatment options. You can get a wealth of information on the new healthcare reform law. But what if you need more personalized service — not just a computer database, but someone you can talk to about your options and who can help you navigate the numerous complexities of our evolving heathcare system? Where can you find a qualified agent? Not at www.healthcare.com — at least, not so far.

HHS has to this point provided no information on state-licensed health insurance professionals via the portal, despite calls from NAIFA and our association partners as well as members of Congress. In the wake of our country's massive healthcare overhaul, the role of the agent is more important than ever. An agent, for instance, can help a small business comply with complicated state and federal obligations, including COBRA, ARRA, CHIP, ongoing CMS reporting, HIPAA, and Mental Health Parity requirements. Also, licensed health insurance specialists design benefit plans, explain how individuals can coordinate available public and private benefits, and solve problems that may occur once coverage is in place. Insurance professionals also help create and implement wellness programs for employers, which everyone agrees are key to reigning in runaway healthcare costs.

The public should be able to turn to the government's premier resource on healthcare to find licensed agents they can trust. HHS plans to finalize the healthcare web portal on October 1. Up until then, you can write to HHS Secretary Kathleen Sebelius and tell her how important it is that the final website includes information on licensed agents and how they can help businesses and the public.

NAIFA Members Sound Off on Proposed Fiduciary Requirement (Continued)

NAIFA members continue to submit comments to the SEC on whether broker-dealers and their registered representatives should be bound by a fiduciary duty. See our previous post for more information. The comment period runs through the end of August, and you can make your opinion known on the SEC web site. The SEC will consider the comments as it completes a study on the issue and decides whether to require a fiduciary standard for broker-dealers.

Below is a sampling of some of the outstanding arguments being made by NAIFA members against a universal fiduciary standard. Please click the author's name to read his or her complete comment. All of the comments received by the SEC are available online.    

• Maximilian A. Ruszkowski believes "that a lot of ... veteran representatives would not be as successful as they are without doing the right thing for their clients. After all, a business owner that treats customers poorly is apt not to have any customers left.... Having an imposed Fiduciary duty only adds to the regulation, paperwork, and liability taken on by all broker-dealers in this industry."
• Suzette Moline writes, "Please consider that while it is unfortunate there are 'bad apples' in the barrel, most of us work hard to provide the very best of what we have to offer to our clients. Do not regulate the industry based on their actions vs. the majority who truly care about what they do and the clients they assist."
• Michelle A. Fuller writes, "Regulations equal more work and more work equals higher fees. This makes no sense to any of us who care about our clients. More red tape is not in the best interest of the clients - it's wrong, wrong, wrong."
• Kevin D. Lindblom writes, "Please understand that your help and concern in the area of protecting the American people is at the top of my list as well, but in my opinion the effect of fiduciary restraints would make the process for the client ... exponentially more difficult and costly."
• Barry Delp writes, "There are enough rules in place to punish the bad guys. Lift the burden that the new fiduciary standards would create for those that are trying to work in the industry. The added cost of more compliance and regulation means the client receives less at a time when they really need more."
• Bradley Schlafer writes, "If I was to move to a completely fee-only business, many of my clients would have to find someone else to help them plan for their retirement and other financial dreams. I would be forced to charge them a fee that they could not afford. Who is going to help the lower-middle-class people? The big, big firms already ignore them and Fiduciary regulation will force another group of Registered Representatives to ignore them as well."

Social Media and Financial Professionals: Not-So-Big Business... At Least For Now

 Financial professionals have yet to fully embrace the likes of Twitter, LinkedIn, Facebook, YouTube and MySpace as business tools, but recent surveys show that social media may be gaining a toe-hold in the industry. A poll of U.S and Canadian financial planners, brokers and registered investment advisors by American Century Investments found that 73% use social media, either professionally or socially. And while only 26% say social media is valuable to their businesses right now, 44% recognize it as a growing trend with business potential.

Almost half of the advisors who responded to the poll said regulatory or compliance worries may be the biggest obstacles to increased social media use. Additionally, 21% cited privacy concerns and 14% cited home office restrictions as potential limiting factors.

Additional Notes:

• In a separate study, 94% of financial advisors polled have Linkedin accounts.
• NAIFA maintains a social media presence using Twitter, Facebook, LinkedIn, YouTube, Flickr, Ning and, of course, the NAIFA Blog.
• NAIFA's Advisor Today magazine has released a new podcast, "15 Minutes a Day to Social Media Success."

"What Am I Missing Here?"

A not-so-flattering spotlight has been put on insurers’ use of retained-asset accounts in the wake of a Bloomberg article that focused on the mother of a soldier killed in Afghanistan who received her son’s death benefit through this practice.

As an Aug. 6 Wall Street Journal article notes, the courts have been looking at these accounts for years, and several federal judges have rejected claims that the use of retained-asset accounts suggest breach of fiduciary duty, breach of contract and unjust enrichment.

According to the Journal, judges who have dismissed lawsuits filed against insurers concluded that “beneficiaries are in virtually the same position they would be in had the insurer sent them a check, because consumers can immediately withdraw the full proceeds.”

Before dismissing a case, one judge asked, "What am I missing here?"

We agree – there’s always more to the story. See a previous post on the subject.

NAIFA Members Tell the SEC How a Fiduciary Standard Would Impact Them and Their Clients

The SEC is accepting public comments on whether the Commission should impose a legal fiduciary standard on broker-dealers and their registered representatives. NAIFA opposes the fiduciary standard because it would not protect consumers any better than existing regulations (and could increase consumer costs for financial services) and it would make doing business more costly and difficult for broker-dealers. A NAIFA GovAlert explains the issue in greater detail.

So far, hundreds of NAIFA members have submitted thoughtful comments on the subject. Here are excerpts from several of them. (Click on the authors' names to read their complete comments on the SEC website.)

• James R. Johnson writes, "The adding of a fiduciary duty to my work will add costs which may result in my retiring (I am age 58) or slowing down substantially. I have significant experience to share with young advisors and my early retirement will deny them the opportunity to learn more about our profession." He adds that under a mandated fiduciary duty, "My expenses will rise. My errors and omissions insurance cost will skyrocket due to the litigation costs that will surface... . Seasoned professionals like myself will leave the trade to retirement rather than deal with the mess. Average Americans will either not be able to afford up front fees or they will not be willing to pay them. Financial advisors will increasingly focus on the wealthy and abandon the middle class. This is simply reality."

• Kristi L. Schaeffer writes, "We dedicate 25% of our time a day to compliance activities so additional paperwork and rules will not better serve clients, it will in fact do the opposite."

• Julie Veltus writes, "The new proposed oversight and regulation will continue to discourage us as we are already heavily burdened with compliance, testing, continuing education and industry surveillance to continue assisting the public with sound financial advice. ... [I]n all honesty I cringed at the thought of being forced into retirement because I really do not like to cook." 

• Brian Urie writes, "I wonder what problem(s) the proposed application of fiduciary standard for the solicitation of registered and licensed financial products are intended to solve. The SEC and insurance commissioners ought to have a good feel for the number of consumer complaints related to these transactions. Is the system that regulates the products to which I have referred broken?" 

• Daniel Moericke writes, "The bottom line is that you can't legislate integrity. Those of us who have it and are driven to do what is best for our clients (the vast majority) are already forced to jump through a lot of duplicative hoops to meet current standards. Those reps who do not have their clients' best interests at heart will find ways around any new requirements."
• NAIFA's letter to the SEC states, "the insurer and producer should make the decision when and if to use an illustration in connection with the purchase of a particular annuity."

You can browse through all of the comments submitted so far on the SEC website.

The comment period is a short one (only 30 days) and ends August 30, 2010. If you want your voice to be heard, please add your comments soon!

Retained Assets Accounts: Agents Can Answer Consumers’ Questions

As any life insurance agent knows, retained-asset accounts have been a fixture in the industry for decades. The insurance companies originally came up with the accounts (in which settlement funds remain with the company, bearing interest for the beneficiary, until the beneficiary is ready to use them) at the request of consumers. They provide a flexible way for grieving loved ones to receive their benefits at a time when finances might not be foremost in their minds. Beneficiaries always have access to their total account balances and can cash out the accounts at any time.

Retained asset accounts recently came under fire after an NPR report based on a Bloomberg.com article claimed that because of these accounts “[m]illions of Americans are being duped by life insurance companies.” On its face, the charge is very misleading. However, the report unintentionally shows how important insurance advisors are to their clients.

NPR and Bloomberg.com highlight the story of the mother of a soldier killed in Afghanistan who received her son’s death benefit as a retained asset account. Notably, her son’s coverage was through a federal government contract with a company. It is heartbreaking to hear Cindy Lohman talk about the difficulties she had trying to access the account while grieving her fallen son. We can only wonder, however, how her experience might have differed had she been working with a qualified agent rather than a bureaucracy. An agent might have easily and compassionately explained the account to her and helped her allocate her money any way she wished. This is an important part of what agents do every day.

• See this fact sheet about retained asset accounts from the American Council of Life Insurers.
• Read a statement by Jane L. Cline, president of the National Association of Insurance Commissioners, on the retained asset accounts “controversy.”
• Here is an article from the American Thinker examining some of the issues raised by the NPR item and the Bloomberg.com article.