No doubt you have recently gotten e-mails or letters from marketing firms advising you to “join their broker-dealer or RIA” because your index-annuity selling days are numbered. The reasons cited are Rule 151(A) or because regulators will indict you when money from a security goes to a fixed annuity. Of course, problem solved if you join their broker-dealer or RIA, buy their compliance material or purchase their services. This nonsense is a ploy to scare you into action. Of course, you should not give investment advice involving securities unless properly licensed or registered. Let’s look at the current situation and best solution.

The brokerage industry is on a mission to put annuity-selling insurance agents out of business. The reason is simple: losing market share is costing them money. Under the influence of future jobs, lobbying money and more, the guardians of the brokerage business – SEC, FINRA, securities commissioners, elected officials and others – have closed ranks to fight index annuities. They now realize that SEC Rule 151(A) will not stop their market share erosion, because the safety-minded want the Guaranteed Lifetime Withdrawal option that fixed annuities provide. What’s more, fixed annuities have no downside risk and provide generous roll-up rates during accumulation. The brokerage industry must attack on a different front to protect their wallet share.

The most likely attack point will be “what was the source of the money used to buy the annuity”. If from a security – mutual funds, VA, 401(k), stock, bond, etc. – this must be prima facie evidence that the selling insurance agent gave investment advice; therefore, without being licensed or registered to give such advice you’ve violated the law. The logic would also imply that bank tellers opening CDs with mutual funds money or auto dealers taking money coming from securities are similarly giving investment advice. If a safety-conscious retiree that has suffered a massive market loss wants to move their remaining retirement money to a safe harbor, can they not put it in an annuity? This ludicrous position by the overzealous regulators will not pass muster in the courts. Yet, it is never advisable to get into litigation with someone who prints money – and regulators use your tax money to cover their legal expenses. So, how do you protect yourself?

Become a Registered Investment Advisor (“RIA”). Do not become an Investment Advisor Representative (“IAR”) because this is tantamount to being a registered representative (“RR”) of a broker-dealer. In due time, the IAR is going to be told what to do, or not do, by the RIA – just like the RR is servant to the BD. Yes, becoming a RIA is a nuisance but necessary to avoid the crosshairs of brokerage regulators’ scopes. As an RIA you do not have to charge fees for investment advice nor do you have to sell securities, but you are free to render opinions about securities. State securities commissions regulate smaller RIAs with the SEC overseeing larger ones.

How do you become an RIA? You must pass the Series #65 exam. You must then make application to and be accepted by your state’s Securities Commission. On-going you do have recordkeeping responsibilities, but they are not overly burdensome. Most insurance professionals become RIAs by hiring third-party firms to prepare/file the needed paperwork and help them maintain the needed records. In addition to the recordkeeping for the RIA, you’ll still have fiduciary responsibilities to your clients, and you must continue high business and ethical standards. If you do charge for giving investment advice and managing money, you must do so on a fully-disclosed fee-only basis. If you choose not to become an RIA, do not under any circumstances render investment advice. If Rule 151(A) becomes effective, you can still sell annuities that have the Guaranteed Lifetime Benefit option, but they cannot use today’s index-linked crediting. If you’d like a referral to a professional firm that can help you become a RIA, BHC can lend a helping hand as well as get you a discount – just give us a call.

Shelby J. Smith, Ph.D.
November 2009
President & COO
BHC Marketing, Ltd.  

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