by Sarah Mlynek Director of Compliance
Over the last few years there have been many questions, discussions and debates over what insurance-only licensed agents are allowed to discuss with their clients – particularly when it comes to a situation that may include a securities product without providing investment advice. Can an insurance-only licensed agent talk about the S&P 500® index? Can he/she talk to clients about their current financial products, investment objectives and risk tolerance, or how annuities might fit into their overall plans for retirement when the clients currently own securities?
In June 2011, the industry received welcomed news in the form of a bulletin from the Iowa Insurance Division. Iowa bulletin 11-4 lays out what an insurance-only licensed agent can and cannot discuss with clients to help avoid crossing the line of providing investment advice. Realizing that the Iowa division only regulates Iowa agents, we understand that other states may have differing opinions on what insurance-only licensed agents are allowed to discuss. However, knowing the Iowa division communicated with other regulators, industry groups and carriers to produce the bulletin, it serves as general guidance on the topic.
INVESTMENT ADVICE DEFINED
Before we can discuss the dos and don’ts, we first need to understand the definition of investment advice. It’s easy to inadvertently provide investment advice if you are not aware of what it is and the boundaries that surround it. There are two ways of thinking about investment advice: there’s the common definition and there’s the regulatory concept. The common definition of investment advice can be broadly stated as the opinion or recommendation given to buy or sell a security. This includes stocks, bonds, mutual funds, variable annuities, etc. Also included in this definition is the act of analyzing specific securities and the discussion of how a specific security the client owns has performed or whether it’s the right financial product for him or her.
The regulatory concept of investment advice consists of three necessary components surrounding the person offering the advice: 1) The individual holds him or herself out as having knowledge or expertise in the field, 2) provides direct or indirect advice regarding a securities product, and 3) as a result of the advice offered, receives compensation. An important note to take regarding compensation is that it includes direct or indirect forms of compensation, meaning the compensation doesn’t have to be received as a direct result of the sale of the securities product, but can include compensation or commission received indirectly as a result of repositioning the monies into other products. Lastly, keep in mind the legal concept requires all three components take place. For example, if no compensation is received (directly or indirectly), no investment advice occurred.
So what is the insurance-only licensed agent allowed to talk about? According to the Iowa bulletin, the agent can discuss clients’ financial situations, needs and objectives, including their risk tolerance. The agent can even talk generally about the stock market, including market risks and recent or historic economic activities that are generally known to the public and regularly discussed in public media. Additionally, the insurance-only licensed agent can discuss insurance products (life and fixed annuity products) and how the use of these products can assist in helping individuals and families achieve their overall financial goals and objectives (only because he/she is insurance licensed). The line gets crossed when advice is provided regarding specific securities investment performance, comparing specific securities investment performance with other financial products, or suggesting the sale, liquidation or replacement of specific securities in order to purchase another financial product, including a fixed annuity contract.
To be clear, the insurance-only licensed agent cannot recommend the liquidation of specific securities or identify specific securities that could be used to fund a fixed annuity. This is not to say that an insurance-only licensed agent cannot sell a fixed annuity to a customer who of his or her own volition intends to fund the annuity with money that is currently in a securities product. The client can choose to do just that, but the insurance-only licensed agent cannot recommend the client do that. In summary, a key takeaway for insurance-only licensed agents regarding investment advice is to remember the words “general” and “specific.” When you read the Iowa bulletin, the word “general” is used in the description of what an agent can discuss while the word “specific” is consistently used to describe what an agent cannot discuss. A good rule of thumb to remember is to keep it general, not specific.
WHERE FIAs FIT IN
This topic generates a high frequency of questions from insurance-only licensed agents. Most involve general questions regarding what can and cannot be talked about and ideas for protecting an individual’s practice from allegations of providing investment advice. However, one particular question stands out among the others: “Can I speak to my clients about how interest is credited in a fixed indexed annuity without giving investment advice?” This question arises because when speaking to a client about the index tied to an indexed annuity, the agent is talking specifically about a particular index and how its performance affects the client’s potential interest credited. On the surface this may seem to be crossing the line into investment advice, mainly due to a lack of understanding about the role the index plays within the fixed indexed annuity. This can be further complicated considering the wide variety of indexes and indexing options available. There are the S&P indexes, the Dow Jones, the EuroStoxx and even the ALTVI being used in some of today’s top fixed indexed annuities.
In order to answer this question, we’ll go back to the basics of fixed annuities. There is a common misconception that traditional fixed and fixed indexed annuities are two different types of annuities. In reality, the two different types of annuities are variable and fixed. Traditional and indexed annuities are both fixed annuities. Fixed annuities are insurance products and not securities. Two of the main things to keep in mind as you think about fixed annuities are that both traditional and fixed indexed annuities provide an underlying minimum guaranteed contract value and any investment risk is borne by the insurance company, NOT the policyholder.
The important difference between traditional fixed interest annuities and fixed indexed annuities is the method in which the insurance company determines how interest is calculated and when interest, if any, is applied to the value of the contract. In traditional fixed interest annuities, the insurance company declares a minimum rate of interest that will be applied to the contract each and every year while in deferred payout status. This rate can sometimes be higher in the first year or for multiple years based on the current interest rate environment, but it is determined at the beginning of the contract year and is guaranteed to be at least the minimum guaranteed interest rate. The fixed indexed annuity is different in that any interest applied to the contract, commonly referred to as interest credits, is based on the performance of the external index and the indexing methodology (point-to-point, monthly average, monthly cap, etc.). Interest credits are always guaranteed to be no less than zero.
YOUR QUESTION ANSWERED
Now that we’ve reviewed the basics, we can answer the question. “Can I speak to my clients about how interest is credited in a fixed indexed annuity without giving investment advice?” The answer is YES. An insurance-only licensed agent can talk about interest crediting and indexing options in a fixed indexed annuity without the risk of providing investment advice. The basis for this affirmative answer is that fixed indexed annuities remain insurance products that contain no direct investment component or market risk to the client. The only difference when talking to a client about a fixed indexed annuity compared to a traditional fixed interest annuity is describing how and when the interest, if any, is credited and applied to the contract’s value. When purchasing a fixed indexed annuity, policyholders are not buying options on the index, and they have no direct market risk if the index performs poorly.
The topic of investment advice and how insurance agents can assist clients without crossing the line will continue to be a hot topic in our industry. Creative Marketing is actively working with industry groups like NAFA to promote awareness and understanding of these topics as well as many other important issues. For more information on investment advice, the Iowa bulletin and many other compliance-related topics, visit the Compliance section on CreativeMarketing.net or contact your Sales Consultant.
Do you have a compliance conundrum you’re itching to solve? Submit your question via email to [email protected] and the answer could be featured in an upcoming edition of Creative Edge. We look forward to hearing from you!
FOR AGENT USE ONLY. NOT FOR USE WITH THE GENERAL PUBLIC. 12451 – 2012/8/28
Related terms: Annuities