Don't Become a Fiduciary... Unless You Mean It!

[DHK]

I've been studying up on all these "source of funds" issues, complaints, etc. And while I am NOT an attorney... I am finding that there is a common thread in all these complaints:

Either:
- The person is unlicensed to act as an investment advisor, yet is giving investment advice and analysis.

or

- The person IS licensed to act as an investment advisor, yet is only selling fixed indexed annuities.

There are a lot of articles (biased by those who are with RIA firms) who say "get your Series 65 and protect yourself from future regulation" - citing 151a as a reason to get the license.

Here's the problem: They FAIL to disclose that by having the license and registration subjects you to a HIGHER FIDUCIARY STANDARD in everything you do - including selling insurance and fixed indexed annuities.

Here are some threads to review:

http://www.insurance-forums.net/for...alling-yourself-financial-planner-t27412.html

This one, I began to look at the legal complaint and saw that he was giving investment advice, but was steering ALL his clients to fixed indexed annuities. Read it for yourself.

Missouri Securities :: Tracy Wayne Mitchell, CRD # 5521674; and Guidepost Financial Limited Liability Company : Case AP-10-45


If you're going to embrace being an RIA/IAR and gather assets under management for a fee, by all means, get your Series 65.

If you're not wanting to gather AUM, DON'T.

If you WERE and no longer want to be an RIA/IAR... CHANGE YOUR SIGNAGE and your business cards, etc., to show that you are no longer a fiduciary advisor.


To anyone who has NEVER had securities licenses: I highly recommend that you get them and do some time with a broker/dealer before being an RIA/IAR. You'll learn about compliance and the strict measures used. You'll have an immediate supervisor to monitor everything... but it'll keep you out of trouble if you decide to be an RIA/IAR.

If you have a Series 6/7/63... you are letting your B/D run your insurance business.

If you have a Series 65... you are holding yourself out to the public as a fiduciary and will be regulated as such.

If you have NO INTENTION of offering securities... DON'T GET A SECURITIES LICENSE.

Review this article from Jack Marrion regarding his conclusions on the "source of funds" non-issue:
Source Of Funds; A Source Of Pain | InsuranceNewsNetMagazine.com


In short - don't give any advice on a portfolio - whether to buy or sell any security for any reason, unless you are licensed and qualified to do so.

 

[Ron Van D]

In short - don't give any advice on a portfolio - whether to buy or sell any security for any reason, unless you are licensed and qualified to do so.

Or, unless you have a TV and/or radio show. Then you can tell folks to BTID and get 12% on a good fund, etc. No licensing needed!

 

[DHK]

Well, when you're on radio/TV... you've always got the disclaimer that "this show is for entertainment purposes only".

At least Suze Orman decided to end her TV show.

 

[scagnt83]

Review this article from Jack Marrion regarding his conclusions on the "source of funds" non-issue:
Source Of Funds; A Source Of Pain | InsuranceNewsNetMagazine.com


In short - don't give any advice on a portfolio - whether to buy or sell any security for any reason, unless you are licensed and qualified to do so.

While I do not disagree with anything Jack said in that article, it only focuses on state level regulation.

The DOL is working hard on the fiduciary issue... and many ERISA attorneys believe they will include Source of Funds Regulations in the new version of the law... or they will add it within the next 5 years as they amend and "improve" the regs.

I just sat in on a webinar with one of the most prominent ERISA attorneys in the nation and he firmly believes that Source of Funds will become part of DOL regs within the next 5 years.... I have heard multiple others claim the same thing.

Of course any DOL regulation will only affect Qualified Funds... but it would override any state regs...

Imo the source of funds issue will be an issue for the annuity industry within the next 5 years. There is way too much momentum behind things right now. It will start with IRAs, then filter down to state regs and affect NQ too.


And to play devils advocate for a minute, I could think of 5 different scenarios just off the top of my head where a consumer could be screwed by not being properly advised on the sale of a security. The issue for many regulators, especially the DOL, is not necessarily "is the agent giving advice", it is "the consumer should receive proper advice when selling securities".
Those scenarios are especially true for NQ funds (which ironically would not be included in any DOL regs... lol)

 

[DHK]

For me, I know what being an RIA/IAR entails and what standards I need to uphold, as I've already "been there and done that". But there are so many other articles that say "Get a Series 65 and now you can do everything you want" and they don't emphasize what they've REALLY committed to becoming.

If one gets a series 65 in order to "attract more fixed annuity business"... they are thinking completely wrong about what the license means and the regulations behind it.

 

[Charpress]

I've been studying up on all these "source of funds" issues, complaints, etc. And while I am NOT an attorney... I am finding that there is a common thread in all these complaints:

Either:
- The person is unlicensed to act as an investment advisor, yet is giving investment advice and analysis.

or

- The person IS licensed to act as an investment advisor, yet is only selling fixed indexed annuities.

This is so, so true. Anyone who wants to just sell annuities had better stick to just that.

This is all a gray area and you walk a thin line being dually licensed. And by the way, all the FMO's who are touting getting an RIA designation had better watch their backs as well. I will bet anyone here wanting the action $100 that we will see reports in the next two years of FMOs in trouble over this. All FINRA, the SEC or your state level regulator will need are some of those nifty FMO PowerPoint recruiting slides showing how to sell annuities based on your standing as a licensed RIA rep. Is there anyone here who hasn't seen the pitch?

So, the reality of being securities licensed has an even uglier component if complaints come up. Many of us use the RIA and a trading platform like a broker-dealer to ACAT the account away from the brokers into fast liquidation and then on to the insurance company. No waiting by us for the broker to try and conserve the account, by gum! But wait. If just churning business into annuities can get you into trouble, how much worse is it to use your "fiduciary" position to make a faster sale through instant transfers of accounts? A significant amount had better be left under management. If you have a trail of $XX coming in, and then $XX going out to Allianz or whoever on a regular basis, I think you would be toast as this thing ramps up.

Now, personally I handle FDIC insured market linked CDs, I suggest having a portfolio that includes dividend paying stocks, I present a wide range of products and I make sure all seminars and literature have annuities as a second thought sort of thing. Now, when you get down to what a good investment might be, annuities are frequently the natural choice. However, I sure don't want any indication that what I do is a front end for selling annuities.

This is going to be huge within the next year or so.

 

[DHK]

Exactly. When you are an RIA/IAR, fixed indexed annuities (or any kind of annuity for that matter) becomes an asset allocation decision for a portion of funds, not necessarily for the entire account or multiple accounts.

It's been a while since I was registered, but you'll need to document a fact-finding session, risk tolerance, assets, liabilities, cash flow, etc.

And a "switch letter" is your very best friend! Document where the assets came from and their costs (any surrender charges), and the advantages/disadvantages of the new recommendation.

You'll also have to disclose that according to fiduciary duty, earning a commission up front is considered a "conflict of interest" (compared to earning a recurring fee for the life of the account).

If you're selling an annuity for the lifetime income rider to guarantee a minimum living standard, I see that as very acceptable. Just disclose everything that you're supposed to.

----------

New article today from Benefits Pro regarding DOL and fiduciary standards:

The fiduciary exemption for commissions | BenefitsPro

 

[pfg1]

I would agree that alot of companies are pushing folks to get a 65 as a tool to ultimately help them gather assets to fund annuities. If that is your only reason, it could definitely present an issue.

However, just because you have a 65 doesn't mean you can't sell insurance or annuities, or even have that be your focus. It just has to be documented on your brochure, and the RIA brochure. One could do 90% insurance business and 10% RIA business and that is not a problem, as long as its documented properly.

 

[jmarkk1]

So, the question is...what "model" allows you to both? Securities and annuities without the pressure to do one or the other?
I'd love to do both as long as I could be independent and client focused.

 

[scagnt83]

So, the question is...what "model" allows you to both? Securities and annuities without the pressure to do one or the other?
I'd love to do both as long as I could be independent and client focused.

RIA/IAR.

As PFG said, as long as its on your form ADV and you are disclosing when you are acting as agent and when you are acting as Adviser then you are fine.

Also, best practices would be to have a separate entity for running insurance biz through so it is all completely separate.