Distribution networks representing independent insurance agents are weighing, and in some cases forging ahead with, plans to launch broker-dealers to continue selling fixed-indexed annuities in retirement accounts under the Labor Department's fiduciary rule regime.
Annexus, an independent insurance-product design and distribution company, is one prominent example of such a network pushing to establish a broker-dealer ahead of the initial implementation date of the regulation in April 2017.
“We're full steam ahead,” said David Rauch, chief operating officer and general counsel at Annexus. “I expect there are more independent industry players like us who are contemplating the same thing.”
Annexus comprises a network of 17 field marketing organizations (FMOs), also known as independent marketing organizations (IMOs), which market insurance products such as fixed-indexed annuities to independent insurance agents. These agents have exclusive access to Annexus insurance products.
Independent agents are by far the largest FIA distribution channel, representing almost 60% of overall sales in the first quarter this year, according to Wink Inc., a market research firm. Sixty percent of those sales were in the qualified market.
(More: Everything you need to know about the DOL fiduciary rule as it develops)
Annexus, which has developed fixed-indexed annuity products for Nationwide and Athene USA, had about $4 billion in FIA sales through these products in 2015, more than 7% of the year's
record $54.5 billion in sales.
'UNPRECEDENTED'
Sheryl Moore, president and chief executive of Moore Market Intelligence, who tracks the fixed-indexed annuity industry, said it's “unprecedented” for a “super-FMO” — essentially an FMO aggregator — such as Annexus to establish a broker-dealer.
Similar large distribution networks include Legacy Marketing Group and Market Synergy Group, Ms. Moore said. The latter is currently
spearheading one of several lawsuits fighting the Department of Labor's fiduciary rule.
Although a handful of individual FMOs have their own broker-dealers, “I've never seen [a super-FMO] develop a B-D,” Ms. Moore said.
But language in the DOL's fiduciary rule, which
raises investment advice standards for retirement accounts, seems to make it
riskier for insurance companies to distribute through networks of independent agents who only sell life insurance.
That's because to sell fixed-indexed annuities on a commission basis in tax-qualified accounts, an investor and financial institution
will have to enter into a contract, known as the
best interest contract. While the DOL's definition of financial institution includes insurance companies, broker-dealers and banks, FMOs don't qualify.
This poses a problem for insurance companies, who would be in the position of having to sign the contract with a policyholder sold through an independent agent, thereby exposing them to liability for an agent's recommendation, even though the insurance company is unable to fully monitor their conduct.
“We have serious questions about whether or not we could exercise the proper oversight of those agents, given that they are independent and could be selling for multiple distributors,” said John Matovina, chief executive of American Equity Investment Life Holding, last year's
No. 2 seller of FIAs, during the company's first-quarter earnings call.
Mr. Matovina went on to say he thinks the “risk is too great” to continue distributing FIAs through the independent channel. Naturally, this has independent agents a bit concerned.
“There's been a lot of chatter with FMOs freaking out and wondering who'll serve as the financial institution for them,” Ms. Moore said.
One way around the snafu: FMOs and their networks can set up their own broker-dealers. That would allow them to execute contracts with policyholders on behalf of their independent agents, and remove the additional risk for insurance companies.
Annexus' intent by setting up a broker-dealer is to be the financial institution in fixed-indexed annuity transactions conducted by its network, Mr. Rauch said.
EXEMPTION MAY MAKE B-D UNNECESSARY
However, it's a backup plan of sorts, he said. The DOL will allow FMOs to apply for an individual exemption that would let them be the financial institution even without a broker-dealer.
But an application for “financial institution” status isn't a guaranteed success. The DOL hasn't provided guidance on what such an application would look like, and Annexus is working with outside counsel to determine a path forward and if that avenue is feasible, Mr. Rauch said.
The process to set up a B-D takes long enough that Annexus had to start planning for its necessity now, according to Mr. Rauch.
“That's an expensive Plan B. It's a huge undertaking,” Ms. Moore said. “It would probably be something other FMOs would want to explore, but I don't know how many would be in a position financially to start their own broker-dealer.”
There are additional business reasons for Annexus' interest in establishing a broker-dealer, such as the ability to market and distribute registered products, Mr. Rauch said.
A foreseeable route would be for middle- and lower-level FMOs to band together to form new distribution networks to pool resources and establish a broker-dealer, Ms. Moore said. Existing networks such as Annexus' are traditionally closed to new members, she said.
Of course, insurers could always choose to take on the extra liability and serve as a financial institution in FIA transactions. One of the two insurers Annexus works with on FIA design and distribution — Nationwide and Athene — has indicated its intent to do just that, Mr. Rauch said. He declined to identify which one.
Spokespeople for Nationwide and Athene declined to comment.
“I expect that essentially some or all carriers are exploring it, and may be forced to do it just to maintain business, and I expect that pressure will mount as other carriers come out and say they're going to do it,” Mr. Rauch said.
However, Ms. Moore expressed skepticism, saying it's “inconceivable” based on the information available today that insurers wouldn't take the safe route and avoid the liability.
