Be careful when walking the blurry line between insurance agent and investment advisorArticle added by Antoine Orr on June 20, 2012
Antoine Orr

Antoine Orr

Nottingham, MD

Joined: July 13, 2011

My Company

Life-only agents may unwittingly hold themselves out to be investment advisors the moment they give opinion or advice about the past performance of the stock market, S&P 500 index, or mutual funds for compensation. By law, this is forbidden territory unless an agent is licensed to do so.

Not too long ago, insurance agents marketed themselves as, well, insurance agents. They did not call themselves retirement planners, estate planners, or financial planners. When did all of this change?


It has been said that the need for agents to rebrand themselves was initiated by Art Williams and his buy-term-insurance-invest-the-difference concept. Others feel it started in the early 1980s with the arrival of the 401(k) plan and the protracted phase-out of defined benefit plans.

Regardless of when this transformation began, the line between insurance agents and financial advisors/planners has now become blurred. To make matters worse, insurance agents offer products that look, sound and act like investment products, and yet they are not. Furthermore, these agents use sophisticated financial planning software that should only be used by a licensed financial adviser/planner or investment advisor.

The end result is that life-only agents may unwittingly hold themselves out to be an investment advisor the moment they gives an opinion or advice about the past performance of the stock market, S&P 500 index, or mutual funds for compensation. By law, this is forbidden territory unless an agent is licensed to do so.


So, the question is, when is a life-only agent acting as an investment adviser? The answer can be found on the Securities Exchange Commission's website (
    ‘‘Investment adviser’’ means any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities…

In an attempt to curb this unethical sales practice, the Arkansas insurance and securities commissioners have decided to go after agents who break this law in their state by imposing fines of $5,000 and $10,000 on a per occurrence basis. If the client is over the age of 65, a $25,000 fine can be doubled. Other states have indicated that they, too, will start going after agents engaged in this type of unauthorized sales practice. Perhaps this will be a new way for states to generate much needed revenue.

The trap

So, what is a life-only agent to do when he or she is asked by a client to render advice on an IRA, variable annuity, the historical performance of the S&P 500 index in an IUL, or a 401(k)? The temptation for many agents is to tell the client that it is best to move the money to a fixed product if preservation of capital is of the utmost importance. However, any life-only agent who offers such advice is holding him/herself out to be an investment advisor.
And then we have the new NAIC annuity suitability requirements that go into effect in 2013. Some of these new standards require life-only agents to collect information and perform an analysis on topics that have been traditionally left to licensed securities professionals. The information includes:
    1. Age

    2. Tax status

    3. Intended purpose of the annuity

    4. Financial time horizon

    5. Existing assets

    6. Source of funds

    7. Other insurance and annuity products

    8. Investment objectives

    9. Liquidity needs

    10. Liquid net worth

    11. Risk tolerance
Asking life-only agents to perform a risk tolerance interview or to question clients about their investment objectives places these agents in an uncompromising position.

For more NAIC annuity suitability information, click here.


With the advent of the Dodd-Frank Act and the new NAIC annuity suitability standards, it appears that regulators are pushing for a day when all insurance agents will be required to hold a securities license. The upside is that this new system will provide a more uniform code of conduct, create a more compliant delivery system, produce a more qualified financial services professional and position agents to increase their earning potential.


It should be obvious to everyone that changes are coming to our industry. No longer will the insurance industry be allowed to operate with a laissez-faire, 19th-century attitude. With investment companies competing for every dollar through legislation, consumers having access to more information through the Internet and the court system looking for any opportunity to make an example out of an agent, a 21st century approach is needed. Failure to recognize this inevitable change may result in unwelcome legislation.
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