Brokers curtail equity- indexed-annuity sales

Sep 26, 2005 @ 12:01 am

By Dan Jamieson

IRVINE, Calif. - Independent-contractor brokerage firms are taking steps to restrict the sale of equity-indexed annuities in response to pressure from NASD of Washington.

Currently, most independent firms allow their reps to sell fixed annuities - including equity-indexed products - away from the dealer as an outside business activity. But several firms are soon expected to force their brokers to sell only firm-approved equity-indexed products, and some will require sales through the dealer's own insurance unit.

At press time, Raymond James Financial Services Inc. of St. Petersburg, Fla., was close to announcing to its independent brokers that beginning next year, they will be required to sell all equity-indexed products through the firm's insurance division, Planning Corporation of America.

Scott Stolz, the division's president, said some reps might lose access to their favorite products.

The firm will offer eight to 10 equity-indexed products from about seven carriers, Mr. Stolz said. In the entire market, about 40 insurers offer more than 150 equity-indexed-annuity contracts, so some brokers will no doubt be affected, he said. It's unknown exactly how many.

Mr. Stolz said the firm will encourage reps to let it know about any other products they want considered.

Independent-contractor reps at Raymond James and elsewhere have been able to pocket higher compensation from fixed-annuity sales by dealing directly with insurers or cutting deals with outside general-insurance agencies, known as GAs, which are independent wholesaling organizations.

The move by Raymond James has the potential to cut their pay. But Mr. Stolz said that it depends on "what type of deal we can negotiate with a GA. Some GAs, with the volume they do, could [offer] a better compensation arrangement to our financial advisers." In other cases, Raymond James might take less of an override than an outside GA.

Others in line

Other firms are right behind Raymond James.

Royal Alliance Associates Inc. of New York will be changing its policies regarding equity-indexed products within the next month or so, according to Mark Goldberg, president and chief executive.

He said the firm is developing a list of approved products, which will be handled as a private securities transaction, subject to firm approval.

Sales of equity-indexed annuities will no longer be done as an outside business activity, Mr. Goldberg said. "That's over," he said

LPL Financial Services of San Diego and Boston also is changing its policies, sources said.

The firm did not respond by press time, but William Cooley, president of Success Continuing Education, a Newport Beach, Calif., training firm, said LPL, which has set up its own general agency, has come out with its first product, a variable annuity that offers customized asset allocation features.

Reps have to sign up with LPL's GA if they want to sell the product, he said.

Another broker-dealer rumored to be about to restrict equity-indexed products is National Planning Corp. of Santa Monica, Calif.

Tim Padot, spokesman for NPC's parent company, Jackson National Life Insurance Co. in Lansing, Mich., said NPC has made "no final determination" as to how it will handle equity-indexed-annuity sales.

But the broker-dealer expects to have a policy formulated within the next month.

Motives questioned

Some feel that the moves by brokerage firms are being driven by the bottom line.

The desire to capture more insurance business - not compliance concerns - is behind the efforts to restrict equity-indexed-annuity sales, said the Milwaukee-based National Association for Fixed Annuities.

Equity-indexed sales have been booming, and brokerage firms "have been missing a lot of [commission] overrides," said Kim O'Brien, a NAFA spokeswoman.

Part of the trend to bring equity-indexed sales in-house is driven by economics, Mr. Cooley said. When the markets turned in 2000, some independent firms started requiring new recruits to run insurance business through the firm's designated GA, Mr. Cooley said.

This trend, driven by the increased liability of selling equity-indexed products, will continue, he added.

But Mr. Stolz disputes the idea that Raymond James is looking to bolster revenue.

As proof, he pointed to popular equity-indexed product from Allianz Life Insurance Company of North America in Minneapolis, which has one-third of the equity-indexed market share. Mr. Stolz said Raymond James does not sell the product and doesn't plan to.

"If money were the motivation, I would be approving it," he said.

The crackdown is being driven by an August NASD notice to members that required firms to supervise sales of equity-indexed products, even though the products are classified as fixed annuities and not subject to securities regulation.

One industry source, who asked not to be identified, said Washington-based NASD asked the Securities and Exchange Commission to reclassify equity-indexed products as securities but was rebuffed.

"The insurance lobby killed that idea," said the source.

The NASD's notice to members "was a revision of a widely circulated draft [that] was clearly designed, at a minimum, to exercise jurisdiction over the sale of indexed products and, in fact, to promote indirectly action by the SEC to find them to be securities," said the NAFA in a press release last month.

The final notice to members acknowledged that the NASD does not have authority to regulate equity-indexed products, but stressed that existing SEC rules treat equity-indexed products as securities if they are marketed primarily as investments.

Deep water, thin ice

NASD said, "The ice is thin, the water is deep, so skate at your own peril," said Michael Ebmeier, president of Producers Choice in Forest Hills, Md., and chairman of NAFA. The warning "didn't say, 'No skating,'" but nevertheless had the effect of chilling sales, he said.

Firms now run the risk that a particular sale could be seen as the sale of a security, "and the NASD can come back and say we should have supervised it," Mr. Stolz said.

Meanwhile, the SEC has begun a review of marketing materials used in selling products. Mr. Ebmeier said insurance carriers have been cooperating with the SEC.

If the SEC finds that the products are being marketed in the context of an investment portfolio, they could lose their existing "safe harbor" from securities regulation, said Lisa Roth, a San Diego compliance consultant.


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