Insurance-affiliated brokers face major changes under Obama plan

Fiduciary requirement could force them to choose advice or transactions

Jun 28, 2009 @ 12:01 am

By Darla Mercado

Broker defections, a loss of market share and spinoffs could be on the horizon for insurance-affiliated broker-dealers if the Obama administration's proposed regulatory reforms force them to act as fiduciaries. If the proposal to require broker-dealers that offer investment advice to act as fiduciaries is enacted, it will likely upend the insurance broker-dealer business model and force carriers and their registered representatives to decide whether they belong in the advice arena or in the transactional realm, industry experts said. “The current industry definition of "fiduciary' is to put the client's needs first,” said J. Corey Vertich, a principal with Uhler and Vertich Financial Planners LLC in Fort Myers, Fla. “If you sell, exclusively or principally, proprietary products, you can't meet the standard under that definition.” Mr. Vertich, now an independent registered investment adviser, started his career working with Prudential Financial Inc. of Newark, N.J., and worked at IDS Financial Services, now Ameriprise Financial Inc. of Minneapolis.

“Either President Obama puts those broker-dealers out of business, or he needs to make an exception,” he said.

“You are separating the product and the transactional facilitation of the sale of those products from the advice,” said Jason C. Roberts, a partner at law firm Reish & Reicher in Los Angeles. “The days of having reps out there touting their products over others when rendering advisory services are numbered.”


The nature of the insurers' conflict in adjusting to a fiduciary standard within its broker-dealer networks goes back to the days when carriers worked primarily with a captive sales force of agents.

“Back in the "80s, IDS was among the first to market and sell financial plans for fees,” said Robert K. Haley, president and founder of Advanced Wealth Management in Portland, Ore., and an IDS veteran. “The pitch was that it was an objective plan — and to a large extent it was — but every problem had an IDS solution that included insurance.”

Emphasis on selling the house product was part of the business model and became ingrained in the culture of many insurance-owned broker-dealers. That dependence manifested itself in shelf-space arrangements and incentives to sell propriety products, even after firms opened their product platforms to competitors, financial advisers said.

Because of insurance-owned broker-dealers' history, it may be that much harder for them to adhere to a fiduciary standard, advisers said.

“The synergies that worked for the benefit of the broker-dealers that are affiliated with those carriers won't be there with the new legislation,” said David Zuckerman, principal and chief investment officer at Zuckerman Capital Management LLC in Los Angeles. “I think there's a high likelihood of that business model losing prominence in the industry.”

Mr. Zuckerman was once affiliated with Royal Alliance Associates Inc., the American International Group Inc.-owned broker-dealer. Both companies are based in New York.

Advisers think that reps who are already focused on offering advice could part ways with their insurance-owned broker-dealers if they are required to operate under a fiduciary standard.

“Having been there, it's not that you can't do what is in the client's best interest at these broker-dealers, but unfortunately the management structure makes it hard to do so,” Mr. Zuckerman said.


In adjusting to the proposed fiduciary standard, insurers will also have to do some soul-searching about whether they want their broker-dealers to move toward advice or sales, experts said.

“From the risk-management standpoint, firms need to choose,” said Sean Cunniff, director of research for brokerage and wealth management at The Tower Group Inc. of Needham, Mass. “From a practical standpoint, the hybrid model of being both the adviser and broker becomes more challenging from a compliance oversight standard.”

Those insurers that see themselves as product manufacturers first will likely spin off their advisory firms or prohibit their reps from giving advice, while those that focus on advice will change from a commission-based compensation model to fees, Mr. Roberts said.

Still, while a transactional approach may work for some firms, it could hinder them in the fight for market share against their advisory peers.

“From a competitive standpoint, the advisory firms will see the strongest asset flows — they can say that their rivals are trying to sell products,” Mr. Cunniff said.

Insurance broker-dealers that want to keep a foot both in sales and advice could manufacture level-compensation products to protect their reps from running afoul of fiduciary duties, Mr. Roberts added.

Because the proposal just came out, insurers are grappling with how they would contend with the imposed fiduciary duty.


“Some of the good ones have over time realized that they should hold themselves to a higher standard, and in practice, they did it,” said Marcia S. Wagner, an attorney with The Wagner Law Group in Boston.

Those who relied on suitability, however, will need to review their training, compensation and protocols, as well as find an ombudsman and legal experts to manage the duty, she said.

Gerry Gunderson, a senior vice president and general counsel of Santa Monica, Calif.-based National Planning Holdings Inc., said he does not expect his firm's business to be greatly affected, but he pointed to possible hiccups. The firm is an independent-contractor broker-dealer that is affiliated with Jackson National Life Insurance Co. in Lansing, Mich.

For instance, he noted that if reps act as fiduciaries, there would be questions about their responsibility for trades initiated by self-directed investors. Also, he cautioned that the fiduciary duty could affect recommendations that reps have made in the past, and that arbitration might change.

“I'm concerned it would change the standard for review and focus more on hindsight rather than taking into account what the rep knew” at the time, Mr. Gunderson said.

“In theory, that shouldn't change,” he said. “We try to make everything as clear as we can today.”

Industry observers are waiting for the Obama administration to clarify its expectations of how the fiduciary duty would apply to -broker-dealers. Just how much that definition would accommodate insurance-owned broker-dealers remains to be seen.

E-mail Darla Mercado at


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