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dodge a bullet

With the recent DOL Fiduciary rule did insurance agents dodge a bullet?
Maybe yes Maybe No.

Is the sky falling? What can agents do to protect themselves? I would highly recommend becoming a fiduciary investment advisor...RIA, Registered Investment Advisor
The three main reasons why insurance agents should consider becoming an RIA Registered Investment Advisor:

1) Protection from regulations:   (DOL fiduciary rule and Source of Funds (SOF)

2) Earn significantly more income (and create a reoccurring revenue stream)

3) Provide more comprehensive services to clients: Most important reason

Reason # 1)

Protection from regulations and violations of Securities Laws.

While the SEC was not able to regulate certain fixed insurance products (under rule 151A), the State Securities Commissions have not been deterred and are now looking to force insurance only licensed advisors to obtain a securities license to avoid state securities law violations when selling certain fixed products.

Be Proactive and Protect Your Livelihood

For years there were no real regulatory investment nightmares that caused insurance agent’s grief. Then came 151A. Rule 151A almost ruined the careers of thousands of agents—Rule 151A was passed by the SEC to regulate Fixed Indexed Annuities (FIAs) as securities. If 151A wasn’t struck down in the courts, every non-securities licensed insurance agent would have been forbidden from selling FIAs, which would have put many insurance only agents out of business.

While it’s true that 151A is dead for now, the State Securities Commissions (the bodies that regulate securities transactions in their states) are picking up where 151A left off.

Answer the following questions:

-If you tell a client to buy an FIA inside an IRA, do you need a securities license?

-If you tell a client to take money from a brokerage account to fund an Equity Indexed Universal Life Insurance (EIUL) policy, do you need a securities license?

-If you tell a client to move money from mutual funds to fund an SPIA (Single Premium Immediate Annuity), do you need a securities license?

Most advisors would say no to the above questions. But you know who is starting to say that is not the right answer? The State Securities Commissions. How? .... with The Source of Funds Rules (SOF).

Source of Funds (SOF)

Have you ever heard of an insurance only licensed advisor getting in trouble for violating the SOF rule? It's happening and it's something you need to watch out for. All you need to do is read Arkansas Insurance Department Bulletin No. 14-2009 (links below).

What is SOF? —it is simply asking where did the money come from to fund a fixed life or annuity contract (what is the source of funds?). If the money to fund a fixed insurance product came from the liquidation of stocks, mutual funds, etc., you may have a real problem if you don’t have a securities license. This includes money in IRAs. If money is coming from investments and you don't have an investment license then you can be considered giving investment advice without an investment license.

Violations of the SOF rule in Arkansas will subject advisors to a fine up to $20,000 per violation.

My position is all insurance agents eventually will need a securities license and in the very near future. Every insurance only licensed agent will need to obtain a Series 65 if they want to sell FIAs or IULs and not run the risk of problems with the State Securities Commissions.

The State Securities Commissions will continue to pursue actions against non-securities licensed agents who are telling clients to move money from mutual funds, stocks, etc. into FIAs, EIULs, or other fixed instruments.

Reason #2)

Earning significantly more income is such an important issue that we have need to have a separate discussion on that. Agents can double their income in a short period of time, do a better job for clients, comply with the law and build a true residual business.

Reason # 3)

Provide more comprehensive services to clients.

Most insurance-only licensed agents are only able to provide advice on the fixed products they sell. Such agents are not supposed to discuss money management. Because of this limitation, insurance-only licensed agents are NOT providing the most comprehensive advice to their clients.

Let’s look at an example that should drive home this point. Assume Mr. Smith is a 55-year-old small business owner who has the following assets and income:

-income = $200,000 (pre-tax take-home pay of which $50,000 of it is income he can use to grow wealth for retirement).

-$500,000 in a brokerage account

-$500,000 in a rollover IRA (in mutual funds)

What advice could an insurance-only agent provide that would be “prudent” advice?

The client is a great candidate to use guaranteed income rider Fixed Indexed Annuities (FIAs) to grow his wealth in the IRA with a product that can guarantee him an income for life he can’t outlive.

The client is also a candidate to use Indexed Universal Life (IUL) insurance as a supplemental/tax-free/risk adverse retirement vehicle.


How much of the money in his IRA should be allocated to FIAs with income riders and how much should be budgeted for premiums into an EIUL policy (and should some of his brokerage account be used to fund the policy)?

An insurance-only licensed agent may be tempted to tell the client that “ALL” of the money in his IRA should go into an FIA with income rider and that “ALL” of his brokerage account should be funneled into an EIUL policy over the next seven years in addition to the extra income he takes home from work every year.

Is this good advice? Is this comprehensive advice?

The answer is NO to both questions, but this highlights the dilemma of an insurance-only licensed agent.

What prudent advice should an insurance-only agent provide? The agent should identify X amount of the money in the IRA that should be earmarked for an FIA with a guaranteed income rider and Y amount, if any, from the brokerage account should be used to pay the IUL premium.

Depending on how much the client needs to have a diversified retirement portfolio, a significant portion of the brokerage account money will NOT be going into the EIUL policy and maybe 50% of the money in the IRA will NOT be going into the FIA.

A “good” insurance-only licensed agent would have to tell the client that he can only give advice on what to do with the money not going into fixed products. Unfortunately, most insurance-only agents will not make this comment because they want ALL the client’s money to go into fixed products so the agent can make more money or because the agent will not want a securities-licensed competitor to come in and potentially mess up the sale of the fixed products.

Neither of the reasons are good reasons for not bringing in a securities-licensed agent to help this client.

If the insurance agent was also an RIA, he could have a prudent discussion with the client about asset allocation and give information to the client about, “conservative” money-management.

The bottom line is that the insurance-only licensed agent is limited in what can be provided to clients and will eventually rule a foul of securities regulations.

Good advice can be offered on fixed products; but by not being an IAR, agents are not able to provide the most comprehensive advice possible, and they are also leaving significant money on the table.



Iowa Insurance Department Bulletin 11-4 (