UNIFORMITY’S BEST POLICY: SO SAY PLANNER GROUPS, URGING ONE SET OF RULES FOR INSURANCE ADVICE

As if financial planners don’t have enough regulatory headaches, they also have to struggle with regulations in many states that could prohibit them from advising their clients about insurance.

The two biggest planner organizations are pushing to bring uniformity to differing laws in 21 states governing what licenses, experience and education one must have to give insurance advice, an integral part of the financial planning process.

“There is wide diversity in what the statutes require or don’t require,” says Dale Brown, associate executive director of the International Association for Financial Planning in Atlanta, which is lobbying for uniformity along with the Denver-based Institute of Certified Financial Planners.

Susan John, chairman of the government affairs committee for the National Association of Personal Financial Advisors, says that some states — including New Hampshire, Maine, California and Massachusetts — require licenses to give advice about insurance products. California, Texas and Maine require people to sell insurance before they can give insurance advice. “It’s a problem for everybody that’s in financial planning if they’re doing comprehensive work,” she says.

In Texas, an advisory committee formed by Insurance Commissioner Elton Bomer at the request of the Legislature is expected to recommend Sept. 1 that its insurance counselor law be left unchanged despite pleas by financial adviser groups that it be altered to accommodate planners. An insurance company official who serves on the committee says he will try to change the panel’s position within the next few weeks.

In California, another battleground state, an insurance department ombudsman is prepared to agree with planners that rules should be dropped requiring candidates for life and disability insurance analyst licenses to have five years’ experience as a life insurance agent. Planners and others wanting the license would still have to pass a qualification exam.

Two of Texas’s rules serve as horrible examples to planners. One prohibits them from charging a fee for advice on insurance if they earn a commission by selling insurance.

“The question is, does that fee for financial planning advice constitute, in the eyes of this statute, a fee for advice on insurance,” Mr. Brown says. He calls the separate exams and licenses required for planners to give insurance advice “unnecessary duplication.”

The second rule requires those dispensing advice on insurance to have an insurance counselor’s license, and effectively requires licensees to have an appointment from an insurance company. Fee-only planners complain that they cannot get such appointments because insurers will appoint only those who will sell their insurance.

John Henry McDonald, president of Austin Asset Management Co., a planning firm with $52 million under supervision, says the Texas law is a Catch 22 for fee-only firms like his. “In order to receive a fee for giving insurance advice, you have to be licensed to sell insurance. If I’m fee-only, I can’t sell insurance.”

forced to break law

Mr. McDonald, formerly an insurance salesman, says the law “won’t allow me to provide the kind of advice the consumer wants and needs. Consumers want objectivity.”

How does he cope? “I break the law. I advise people on insurance all the time. When I develop a financial plan for somebody and it calls for me to make insurance recommendations, I make those recommendations.”

Robert Hoagland, an insurance executive who sits on the Texas advisory committee, says he intends to try once more in the next two weeks to persuade it to reverse itself and recommend that the law be changed.

One of the law’s requirements is that financial advisers who make insurance recommendations have held a life insurance agent’s license for at least three years.

“I have 22 years of insurance experience but would have to wait three years to get a counselor’s license,” says Mr. Hoagland, vice president for property and casualty insurance at San Antonio-based United Services Automobile Association.

USAA, which sold $4.8 billion in earned premiums last year and has $25 billion under management in mutual funds, this year began a pilot program offering financial planning services in Texas.

Other insurance companies that are getting into the planning business say they have no problems with state insurance regulations. “We’ve made a huge attempt to reduce any potential conflicts of interest,” says Robert Kloby, vice president of individual insurance group compliance for Prudential Insurance Co. of America. The Newark, N.J., mutual is building a fee-based planning business through its Preferred Financial Services unit.

American Express Financial Advisers doesn’t see the state laws as impeding its business. Lynn Closway, spokeswoman for the Minneapolis-based unit, says the company is “confident we’re exempt (from insurance adviser requirements) in several states,” including Texas. “In states where we are not exempt we still feel strongly we are not in violation” of their laws. “We’re not in the business of analyzing existing insurance policies and charging fees for that. The fees that we charge are for financial planning.”

California’s requirements for its life and disability insurance analyst license are probably the nation’s most onerous. As a result, there are only 50 or so licensed analysts in the state. Jeffrey Kenny, assistant ombudsman with the Department of Insurance, opposes efforts to waive the insurance analyst exam requirements for financial planners.

Still, he says he may be willing to support the planner groups’ proposal for dropping the five-year waiting period before candidates can take the exam, which would have to be approved by the state Legislature.

He is currently reviewing scenarios posed by financial planners to help them understand what the law requires. “If you’re charging a fee to give insurance advice and you’re analyzing a contract, that’s when the line starts getting crossed.”

Not that the state is vigorously enforcing the law. One California certified financial planner who supports the statute, Errold Moody of San Leandro, filed complaints in 1995 against two other planners who he says are violating it. He would not name the planners — nor would the state, which is still investigating the cases. “Fee-only planners have a complete disregard for insurance because they (insurers) charge commissions,” says Mr. Moody, who earned an insurance analyst license this year.

“I think the organizations are doing a disservice to the consumers by not requiring that their agents adhere to the law. The consumers don’t know anything about insurance, and when you have the planners that don’t know what they’re doing, it could result in financial disaster” by leaving clients underinsured or with the wrong type of insurance.

‘outdated’ but on the books

Edythe Pahl, vice president of the CFP Board of Standards in Denver, testified in Texas asking that the state allow CFPs to substitute their own credentials and continuing education requirements for its requirements for insurance counselors.

The insurance adviser laws in 21 states were “passed a long time ago,” she says. “They’re outdated, but they’re sitting there on the books. Some states have used them and some haven’t.” Many CFPs — particularly those operating on a fee-only basis — lack insurance sales licenses, which in some of the 21 states prevents them from getting licenses to give advice on insurance.

Napfa’s Ms. John says there should be a national insurance consulting exam to qualify planners for giving insurance advice, along with requirements for financial planning experience. That would help planners who have clients in more than one state.”It’s a problem for consumers as well as planners,” says Ms. John, who is president of Financial Focus in Wolfeboro, N.H.

“If the only people in California who are licensed to give insurance advice are either salespeople or those (approximately 50) consultants, how is one to find a source of unbiased advice? That should be the consultant’s role, to sort through the various products.”