The legality of charging a planning fee tied to an insurance sale

By Thomas Day

The National Care Planning Council

Attorneys, registered investment advisors and insurance agents who charge a fee for advice relating to legal issues, investments, financial planning or other personal life-structuring issues sometimes sell insurance products as a result of that advice. These consultants might be using certain methodologies to sell the insurance and provide the paid consulting at the same time. Some of these methodologies may not be legal under the insurance licensing rules of some states.

Anyone can charge a fee for advice unless that advice is regulated

As a general rule, any one person can charge another person a fee for advice. There is no federal or state prohibition to doing so. However, the providing of certain kinds of advice is regulated and as a result of this regulation, fees for this certain kind of advice are also regulated.

For example, legal advice is regulated in all states and in general, a person providing such advice must be an attorney and that attorney must abide by the fee provisions of his or her state bar. Advice relating to investments is also regulated, as is the charging of fees associated with that advice.

Another example is advice provided for veterans benefits. In order to provide specific one-on-one advice on benefits, a person needs to be accredited with the Department of Veterans Affairs. In addition, an accredited individual is prohibited from charging any fee for advice or assistance with a claim.

Practitioners who specialize in financial planning often charge a fee for advice. These individuals may also have certain designations that establish their credentials, such as CFP. Generally, there is no licensing requirement for providing financial planning for a fee unless it involves investment advice, legal advice or insurance consulting, which do require licensing. An exception is attorneys who can provide investment advice and advice on insurance products without licensing as long as this advice is incidental to the services being offered to the client. Registered representatives under a broker/dealer can also offer investment advice incidental to the sale of investment products.
State insurance rules regarding fee-based consulting and the sale of insurance

Individuals who charge a fee for financial planning often assume that if they are an attorney, a registered investment advisor or an individual with an appropriate designation, then they can charge a fee for planning and receive a commission from the sale of an insurance product as well. This may be acceptable in some states, but in most states, certain procedures must be followed or this practice of combining planning fees and insurance commissions may not be allowed under those states' insurance rules.

Most states accommodate licensing for an individual or an agency to provide fee-based consulting regarding existing insurance products or the purchase of new insurance products.Typically, a person licensed for such a purpose is called an insurance consultant. It should be noted that an insurance agent, or as most states define it, an insurance producer, technically cannot act as a consultant for a client and at the same time represent his or her insurance company as an agent producer. Wearing both hats at once and acting in the interest of both client and company can represent a conflict of interest.

Some states do recognize that practitioners may desire to operate under both categories of representation. These states will allow an individual who is licensed as a consultant and at the same time licensed as a producer to receive a consulting fee as a consultant and receive a commission from the sale of insurance as a licensed producer. These few states require a written agreement between both parties that discloses the conflict of interest to the client. Many other states prohibit this practice and anyone receiving a consulting fee for insurance cannot directly or indirectly receive a commission. Some states do not allow practitioners to be licensed as consultants and producers at the same time. You must check the rules in your state.

Many states do not address the separate issue of whether a licensed producer can provide advice not related to an analysis of current insurance products or the purchase of new insurance products and then transact a separate insurance sale that will produce a commission. In those states that do not address this issue, insurance code would probably prohibit this practice if the fee-based advice were directed towards an eventual insurance sale and the combination of a fee and a commission constituted a "double commission" as defined by these states. Or in other states, the fee-based advice combined with commissions could be prohibited under rules governing insurance consultations.

The key issue here is whether the fee-based advice could be construed as a solicitation for the sale of insurance, even if insurance were not discussed. If this is true, this activity could be prohibited in a number of states. It is probably true in all states that fee-based advice that avoids any recommendation or solicitation for insurance sales – disguised or overt – is allowable, even if a subsequent insurance sale occurs.

It should be noted that some states specifically address in their insurance rules the issue of fee-based planning and commissions derived from the sale of insurance products from further contact with the client. In these states, it is allowed if there is a written agreement with the client, spelling out the exact nature of the fee-based planning and disclosing the receipt of commissions from the sale of insurance products. This agreement should disclose that the fee-based advice is for a purpose other than the sale of insurance.

Disclaimer for legal advice: Information in this article is not intended as legal advice. I have pointed out some issues relating to the legality of charging fees and receiving a commission from the sale of insurance products. My interpretations are my own. Do not use this information as authority on which to base your practice. You should justify for yourself with whether your practice meets the insurance rules in your state.