Are you considering changing your broker/dealer because of their position on FIAs?
By Jason Kestler
Kestler Financial Group, Inc.
Over the years, we’ve learned that someone will not leave their current broker/dealer until the pain to stay exceeds the pain to move. So, if you are currently experiencing pain at your B/D, what should you do?
If you are not securities licensed, you can stop reading right here – maybe. When FINRA issued its Notice to Members 05-50 in August 2005, they “suggested” member firms (broker/dealers) should supervise the sales of equity indexed annuities (fixed indexed annuities) sold by registered representatives of the firm.
One of FINRA's "suggestions" has turned an entire industry upside down. There is no argument that an FIA is not a security – only the Securities and Exchange Commission can make that determination. However, once an individual becomes securities licensed, they voluntarily subject themselves to the full scrutiny and authority of FINRA.
Additionally, if FINRA “suggests” that sales of FIAs be supervised, member firms will supervise those sales. Non-securities licensed individuals are not subject to FINRA jurisdiction – yet.
FINRA has set its sights on making FIAs a security. If they are successful, you will not be able to sell FIA products without a securities license. For now, agents who are not securities licensed are in the clear.
SEC Rule 151(a) has added a new wrinkle to this discussion. In this ruling, the SEC proposed that FIAs be considered a security beginning January 2011. After some heavy legal wrangling, on Dec. 8, 2009, the SEC acquiesced to a two-year stay on the ruling. Time will tell where these products end up.
What about those of you who are securities licensed? You who have invested a tremendous amount of time and effort acquiring and maintaining securities licenses have some serious decisions to make.
These decisions could have a huge impact on your future. We strongly suggest not putting them off. You may already be feeling the pain of broker/dealer interference in your FIA business. If not, it may just be a matter of time. Allow me to share my experience.
My firm is a national, independent marketing organization that specializes in FIAs. In addition, for 10 years, we ran one of the largest branch offices in the country for a broker/dealer owned by one of the industry leaders in the FIA marketplace. With almost 30 years experience in insurance and securities, we have come to understand both industries very well.
In 2006, it became clear we would have to change broker/dealers. The firm we were with was making processing business increasingly difficult. This was a decision we did not take lightly. With a large number of reps depending on my advice and millions of dollars in gross dealer concessions at stake, we set out on a quest to find the next broker/dealer for the truly independent registered rep. The search was an eye opening experience. Here are a few of the things I learned:
1. Broker/dealers don’t want to be in the FIA marketplace any more than we want them to be in it. They have no choice. FINRA has spoken.
2. Most B/Ds don’t understand the insurance market – especially FIAs. They don’t understand the product; nor do they understand how to deal with the companies or the marketing organizations.
3. B/Ds are baffled (and often short-changed) by the contracting process. In their world, everything about commission is disclosed – it’s called GDC. If the GDC on a $100,000 trade is 5 percent and a representative is at an 80 percent payout, the representative gets $4,000 and the B/D keeps $1,000. It’s that simple.
Insurance commissions, on the other hand, are guarded like a national secret. There’s the GA commission, the top GA commission, MGA commission, IMO commission, UFO commission, etc. I’ve spoken with several B/Ds that inadvertently signed the wrong kind of contract and are now stuck with a commission level nobody likes and an undesirable marketing organization.
4. B/Ds, for the most part, have a bias towards traditional securities products – stocks, bonds, mutual funds, variable annuities, etc. Given the choice, they will always lean toward these vehicles.
5. In an effort to protect their IMO distribution networks, most insurance companies will not offer an IMO contract to a broker/dealer. Therefore the B/D must choose to affiliate with one of hundreds of IMOs nationwide as their partner in the marketing of that carrier’s product line. Then, they begin the process all over again for the next carrier.
6. Very, very few IMOs truly understand the securities market. They are insurance guys and carry equal and opposite biases towards fixed products. They often spout slogans like, “We’re your safe money guys.” They make big commissions on FIAs and much smaller commissions (if any) on securities.
7. B/Ds owned by insurance companies may offer a convenient outlet for the insurance producer who does some occasional securities. But, the parent company biases show through when you examine the product menu and politics of the fixed distribution system.
8. Small B/Ds may be a great choice for a small producer if they are close to the B/D’s home office. But, FIA choices and commissions will probably be very limited. They just don’t have the critical mass to provide an infrastructure necessary to do the job well.
1. Develop a transition plan. Once you make the decision to leave, begin creating a list of questions to ask prospective broker/dealers.
2. Don’t major in minors. Things will always be different. Look for deal-breakers. A weekly commission payout versus a daily commission payout is a difference – not a deal-breaker.
3. Affiliate with an IMO that is actively involved in the securities business. They can make for a smooth transition and help you avoid some significant landmines now and later.
4. Conversely, choose a B/D that embraces rather than just accommodates the FIA business.
5. Do not be blinded by payout alone. There are only so many dollars in the deal. Extraordinarily high payouts often are a way of compensating for a lack of service or support. Look at the entire package. It’s not how much you make, but how much you keep.
6. Take time to understand the culture. Is it a big firm with egos to match? Do they have a partnership attitude? Do they look for ways to make things work, or do they just say, “No – we don’t do it that way.” Who is in charge? Marketing or compliance (or possibly the parent company)?
7. Visit the headquarters and talk to the staff – top to bottom. What is their attitude? What is their turnover rate?
8. Interview existing reps of the firm. Would they refer new reps to the firm or are they themselves looking to leave?
9. Look for transition assistance. With block transfers a thing of the past, moving your clients will require individual dealer change documentation. Although this may seem like a huge burden, consider FINRA’s Know Your Customer Rule, which requires you to maintain current client information in your files. Although the term current is not specifically defined, most experts agree a new customer account form every two to three years is sufficient.
If you haven’t kept up with this, a transfer may be a perfect opportunity to do so. In our case, our technology department was able to merge and pre-populate all the required forms so that packets could be sent to each client very efficiently.
10. Above all, make a decision. Do not allow inertia to set in. If it is time for a change, you probably already know it. Humans are extremely adverse to change. They will often subject themselves to all kinds of known indignities rather than risking the unknowns of a change.
Once you examine all the pros and cons, you may decide that you should stay where you are. If you decide to move, most of the pain associated with the unknown can be alleviated by asking questions and gathering knowledge. Do your homework and everything will fall into place.
1. Current commissions – This concern can be easily addressed. Experienced support and proper timing are essential. Your resignation with your old broker/dealer could be effective one day and you could begin writing business with your new broker/dealer the next day.
2. Trail commissions – Since trails are typically paid quarterly, timing again is essential. A systematic, detailed approach to client transfers will ensure that all accounts are moved to the new broker/dealer before the next trail commissions are paid.
3. Paperwork – Although block transfers appear to be a thing of the past, automation and experienced support can streamline the process. We have actually begun using a software package called LaserApp. Besides automating the form completion, LaserApp becomes a valuable database to complete all kinds of future documents in seconds – perfect for people who loathe paperwork.