As the comment period ends this Wednesday on an SEC proposed rule that would regulate certain index annuities as securities, independent distributors are gearing up in anticipation of the rule's enactment.
If the rule is approved, the annuities will fall under the jurisdiction of the
Financial Industry Regulatory Authority Inc. of New York and Washington.
Members of Congress have requested a delay.
The distributors, which provide broker-dealers with annuities, fear that insurers would turn over their index annuities to a sales force already focusing on one brand as opposed to maintaining business with independent-marketing organizations representing an array of carriers, said Michael S. Bartolotta, president of M3 Financial of Glastonbury, Conn. M3 Financial distributes a variety of insurance products to broker-dealers.
Such a move could hurt distributors that do most of their business in index annuity distribution.
"It's difficult to know how to prepare, because it's not just whether the rule passes; it's how carriers plan to distribute [their products] if it does pass," Mr. Bartolotta said.
"If you have carriers with company-paid [variable annuity] wholesalers and they don't stay committed to the IMO channel, it marks the end of distribution through IMOs and [brokerage general agencies]," he said.
"The other option for marketing firms would be to go back to selling fixed annuities, such as interest rate or declared-rate annuities," said W. Andrew Unkefer, president and chief executive of Unkefer & Associates Inc., a national annuity and life independent-marketing organization in Glendale, Ariz.
His firm, which has been around for 14 years, historically has worked with traditional fixed products but distributes mostly index annuities.
"That's the rub: It would be [so] debilitating for marketing firms that there is no way to survive," Mr. Unkefer said.
As a result, IMOs with other product lines expect to pick up the potential lost business by marketing other fixed annuities and life insurance, he said.
Unkefer & Associates does 90% of its business distributing index annuities.
"If the carriers decide to give the products to their variable annuity wholesalers, then all bets are off — we'd have to turn around and focus on traditional fixed annuities," Mr. Bartolotta said.
His firm does 30% of its business distributing index annuities to broker-dealers but doesn't distribute variable annuities.
"It's very challenging for a lot of marketing firms," Mr. Unkefer said.
"There's a significant amount of firms distributing products that started as a single successful salesperson," he said. "Those firms have a sales culture and will have a less discipline-oriented compliance model."
Independent marketers of insurance products think that they would have to change their business process to work with both insurers and broker-dealers.
They anticipate spending more time educating advisers and competing with insurers' wholesalers for business if the sales of index annuities end up falling under federal jurisdiction.
For instance, distributor Imeriti Inc. already does copious work for small broker-dealers, checking the backgrounds of carriers and their products and training salespeople on how the products work.
That workload will likely pick up if the rule passes, said Carl R. Stern, founder and chairman of the Del Mar, Calif.-based firm.
Potentially, the firm could lose 15% of its business with insurance agents who don't become securities-licensed, he said.
Other marketing organizations, such as Mr. Unkefer's firm, expect to align with their peers and share techniques in the hopes that this networking will lead to more work with other independent agents.
Firms anticipate spending more time explaining the rule and the products to registered reps.
"We all need to be concerned that the brokers are doing the right things, that they have the information they need and that they know how the products work," Mr. Bartolotta said.
"Some [firms] supervise sales now, and it means you have to work with an approved list of carriers," he said. "But if you call one of the reps, they tell you that they can't sell them. They know there's controversy surrounding the product."
Mr. Bartolotta added: "Without question, we're going to spend more time having to clarify the rule. We've already had to do that, and right now, it's just a proposed rule."
E-mail Darla Mercado at [email protected].
