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Mark Schoeff Jr. looks at what's really happening on Capitol Hill - and the upshot for advisers.

Can an adviser affiliated with an insurance company be fee only? Yes.

State rules on insurance affiliation complicate fee-only status for some CFPs

Jul 21, 2014 @ 1:16 pm

By Mark Schoeff Jr.

For nearly two years, the issue of compensation descriptions has roiled the investment-advice business. The topic becomes even trickier when insurance licenses are thrown into the mix.

Whether investment advisers like it or not, the Certified Financial Planner Board of Standards Inc. rules on planners with a broker-dealer affiliation are clear. They cannot claim fee-only status — even if they charge their clients only fees — if they work for a firm that has a B-D arm, because that side of the house can collect commissions.

With insurance affiliation it's less clear. For planners who don't sell insurance but work in states that require insurance licenses in order to provide advice on the products, there's a wrinkle. Some states make licensing contingent on an adviser's appointment with an insurance firm, which obviously can collect commissions.

The appointment affiliates planners with a commission-taking company. That disqualifies them from fee-only status, right? No, not necessarily.

First and foremost, planners must comply with state law, said Michael Shaw, the CFP Board's managing director for professional standards and legal.

Beyond state requirements, the CFP Board considers whether planners sold insurance within the last year, whether they plan to sell in the future and whether they receive trailing insurance commissions.

“If that CFP is not actively engaged in selling insurance products, it is possible for that CFP to satisfy CFP Board's definition of fee only,” Mr. Shaw said. “We have to take them on a case-by-case basis and take into account a number of factors. We have to peel back the onion and dig deeper.”

In peeling back the onion, however, the CFP Board may cause tears of frustration from planners who must use the fee-and-commission label if they work for a firm that also has a broker-dealer arm — even if they themselves only charge fees for investment advice — while those affiliated with an insurance company need not.

On the surface, this looks unfair: A planner can get a pass for an affiliation with an insurer but not for one with a broker-dealer. But Mr. Shaw insists it is not a double standard.

Brokerages are regulated nationally and operate under a different oversight structure than insurers, who are regulated state by state. The CFP Board has to consider the variances in state regulations, Mr. Shaw said — and has the flexibility to give planners a pass, if they are forced by state law to affiliate with an insurer.

Some advisers could argue they have no say in whether their firm has a B-D arm that has nothing to do with them.

But given the fact that at this point the broker-dealer affiliation is black and white but serious confusion remains with insurance affiliation, some adviser groups are taking the matter into their own hands.

The Financial Planning Association of Florida wasn't taking any chances when it pushed through the state legislature this year a law establishing a non-producing insurance license, which doesn't require an adviser be affiliated with an insurance company to get the license and give advice. Previously, the state required advisers be appointed with a carrier to do so.

It's difficult to tell how many other states require an insurance license and appointment by an insurance company to give advice. The National Association of Insurance Commissioners doesn't keep such statistics. Neither do any insurance-industry lobbying organizations I contacted.

Many states don't require a license for insurance advice. Iowa is one of them, according to Nick Gerhart, commissioner of the Iowa Insurance Division. A knowledgeable adviser told me that Illinois does require a license, but an official from the state's insurance department didn't respond to a request to confirm that.

Virginia does require a license but offers an “insurance consultant” license that doesn't include appointment with a carrier, according to Kenneth J. Schrad, director of the Division of Information Resources at Virginia's State Corporation Commission.

California offers a life and disability insurance analyst license, according to Madison Voss, a spokeswoman for the state's Department of Insurance. Before an adviser can qualify for that license, he or she must hold for five years a life and health agent license, which does require appointment.

There are 31 (yes, 31, that's not a typo) people and businesses in California who hold the analyst license, while there are more than 450,000 agents. But — and this is a big exception — investment advisers do not need a license to provide insurance advice if that advice is rendered “in their role as an investment adviser,” Ms. Voss said.

With a rapidly aging population, advisers are getting more and more questions about insurance. They'll have to check with their state regulators to see what license, if any, is required to give answers. And if affiliation is required, and the adviser wants to maintain their fee-only status, it sounds like they'll have to check with the CFP Board and just hope their facts and circumstances withstand scrutiny.

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