State Farm, citing DOL fiduciary rule, cuts agents from mutual fund and variable annuity sales

The insurer, which is moving to a "self-directed call center" approach for certain investment products, is among the few companies which has publicized plans for compliance with the DOL rule

Sep 12, 2016 @ 1:49 pm

By Greg Iacurci

State Farm is changing the way the company and its agents handle some retail retirement accounts in response to a new Labor Department regulation that ups the standard of investment advice retirement savers receive.

Beginning in April 2017, when the Department of Labor rule comes into effect, State Farm will only sell and service mutual funds, variable products and tax-qualified bank deposit products through a self-directed customer call center, according to spokeswoman Rachael Risinger.

The news was originally reported by InvestmentNews sister publication Crain's Chicago Business.

State Farm's decision affects 12,000 State Farm agents around the country licensed to sell securities, two-thirds of the company's 18,000 total agents.

State Farm agents, who mainly sell the company's auto and home insurance, have sold investment products since the early 2000s. As of the end of 2015, State Farm managed $11.3 billion in assets it oversees in proprietary mutual funds, up from $10.6 billion a year before.

“Our self-directed call center representatives will make information and resources available to customers who will make their own decisions regarding their investments,” Ms. Risinger said in an e-mailed statement.

“We feel this decision struck the right balance between serving our customers and adhering to the DOL rule,” Ms. Risinger said.

The DOL regulation requires that advisers providing investment advice for a fee in retirement accounts such as IRAs and 401(k)s act as fiduciaries serving their clients' best interest. Brokers and agents today are held to a less-stringent standard of suitability.

In August, the Wall Street Journal reported that the brokerage Edward Jones will curtail mutual fund access for retirement savers in commission accounts and cut investment minimums to comply with the rule.

State Farm and Edward Jones are outliers, though — firms have largely been mum on how they're planning to handle the DOL rule when it comes into effect.

However, many more companies are likely to begin disclosing shortly their anticipated course of action, because the implementation deadline is drawing closer and firms must leave enough time to notify and train their adviser forces, who in turn must notify and educate their clients, according to Denise Valentine, senior analyst at Aite Group.

“I think we'll be hearing a lot more of this in the coming weeks,” Ms. Valentine said. “It's not something you want to leave until next year.”

Other companies may move to more fee-based business, avoid offering certain products in transaction-based accounts (similar to Edward Jones) or adopt a “self-directed” approach for some products (similar to State Farm) as a way to comply with the DOL rule, Ms. Valentine said.

Some firms have also strongly considered an approach whereby they level the commissions among similar products on a brokerage platform to avoid the appearance of a conflict of interest.

State Farm agents will be able to continue offering fixed annuities to clients. Unlike variable annuities, which need a special, and more stringent, exemption under the DOL rule to be sold on commission, fixed annuities don't require such an exemption.

State Farm doesn't sell fixed indexed annuities, a subset of fixed annuity which like variable annuities fall under the enhanced compliance framework of the best-interest contract exemption (BICE).

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