Reps rap broker reins on equity index sales

Jan 23, 2006 @ 12:01 am

By Gary S. Mogel

NEW YORK - Some registered representatives are angry about broker-dealer restrictions - some of which went into effect Jan. 1 - that limit their outside business activities involving equity index annuities.

Several broker-dealers, saying they fear potential NASD fines and client lawsuits, are prohibiting their reps from selling equity index annuities that they do not offer or that aren't on their "approved" lists. Behind their concerns is the NASD guideline that encourages them - though it doesn't require them - to oversee equity index annuity sales by their reps.

"The reps have a lot of hostility against broker-dealers that instituted these restrictions, to the point where many are considering switching their affiliation," said John Olsen, principal of Olsen Financial Group LLC of Kirkwood, Mo.

His opinion is based on talking to many reps at conferences and forums where he often is a speaker. Mr. Olsen's broker-dealer is Securities America Inc. in Omaha, Neb., which hasn't announced restrictions.

But several major broker-dealers have instituted curbs.

National Planning Holdings Inc. in Santa Monica, Calif., an affiliate of Lansing, Mich.-based Jackson National Life Insurance Co., as of Jan. 1 barred its reps from selling equity index annuities that it hasn't approved.

Raymond James Financial Services Inc. of St. Petersburg, Fla., as of Jan. 1 requires all its reps to sell only its own equity index annuity offerings.

AIG Financial Advisors Inc. of Phoenix announced a similar limitation that will go into effect this month.

"The restrictions sound like a captive situation where the reps can only sell the products of one firm," said Greg Zandlo, president of North East Asset Management in Coon Rapids, Minn., which manages $35 million in client assets.

Questionable motives

Although many broker-dealers' motives are cloaked by concerns over impending oversight from Washington-based NASD and concerns over much-publicized abuses in how and to whom the annuities are sold, what they are really after is their "haircut," according to Mr. Olsen. "The broker-dealers want to take something off the top from business that usually doesn't flow through them," he said.

"That Massachusetts lawsuit [against Lynnfield, Mass.-based Investors Capital Corp.] is behind the broker-dealers' actions," said Michael Kitces, director of financial planning at Pinnacle Advisory Group Inc. in Columbia, Md., which manages $370 million client assets. "This trend will continue until equity index annuities are classified as securities and regulated by the NASD."

In addition to the loss of income, the reps don't want to damage their relationships with the independent marketing organizations through which many of them offer the annuities.

"Commissions paid by IMOs on fixed products such as equity index annuities are often considerably higher than the commissions paid by broker-dealers," said David Macchia, chief executive of Wealth2k Inc., a financial services marketing consulting firm in Hingham, Mass.

"Commission levels for equity index annuities sold through the IMOs can be as high as 15%, while commissions for similar products sold through broker-dealers are about 8%," said Jim Livingston, executive vice president of operations at Jackson National Life Distributors Inc. in Denver. IMO products also often have higher surrender charges, and they sometimes use insurers with lower ratings, he added.

The IMOs are becoming concerned about the potential loss of business and are considering buying broker-dealers to maintain their flow of business from advisers, Mr. Livingston said.

"Many IMOs have the financial wherewithal to buy out broker-dealers," Mr. Macchia said.

But not all annuity sellers have a favorable opinion of the IMOs.

"I was invited to a group presentation by Asset Marketing [Systems Insurance Services LLC in San Diego], and they encouraged me to leave the room when I wouldn't agree to sell their products exclusively," said Bryan Russell, president of Russell Asset Management LLC in Huntsville, Ala., which manages $25 million in client assets. "It seemed like a conflict of interest to me to have to tell a client that one annuity is better than another just because it's the one offered by the IMO."

A spokesman for Asset Marketing had not returned a call for comment by press time.

Not all reps are up in arms about the broker-dealer restrictions.

"I haven't heard about any restrictions from my broker-dealer, but I'd follow them if any are implemented," said Chris Provo, president of Provo Financial Services Inc. in Worcester, Mass. He is affiliated with Jefferson-Pilot Securities Corp. in Concord, N.H.

"I applaud the broker-dealers that are doing what they believe is in the best interests of consumers," said Tim Wyman, a partner with the Center for Financial Planning Inc., a Southfield, Mich., firm with $500 million in assets.


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