Javelin Marketing: The Misunderstanding about Equity Index Annuity Distribution

I hear a lot of people in the industry complain that the NASD is trying to regulate the EIA as if it were a security when its not. In fact, I see no attempt by the NASD to regulate EIAs. In fact, they are acting on their mission to regulate the behavior of people who sell securities. And even if licensed securities reps sells a non-security, the NASD is telling broker dealers that the BD is responsible for the behavior of their reps. This distinction seems to be lost by some in the insurance industry—the NASD regulates not only securities products but also the behavior and representations of people selling products whether those products are securities or not. And apparently, there’s been a too frequent number of reps selling this product without complete understanding and making misrepresentations be them intentional or unintentional. Thus, the NASD steps in to take on their responsibility.

The NASD has told broker dealers that they need to review and are responsible for all activities of their reps. Even most reps do not understand that if they want to buy even a part interest in a restaurant, they must first disclose that to their BD and get permission. Once you become a registered rep, the entirety of your financial dealings come under the scrutiny of your BD. As a rep, your BD regulates your life. Many BDs already tell reps where they will receive email, that they cannot take business calls on their personal cell phone and they may not have a web site.

This recent oversight of EIA sales by BDs causes a problem for the BD, the rep and the fixed annuity distributor. There’s a solution for all three.

For the rep—there are two ways to be in the securities business in the United States, either as a registered rep regulated by the NASD (through a broker dealer) or as a Registered Investment Advisor (RIA). Depending on the activities of the RIA, they will be regulated by their State or by the SEC. There is no involvement of the NASD and there is no BD. The RIA is a fully self employed individual. However, RIAs may not sell securities on commission. Rather, all of their income must come in the form of fees: for financial planning services or for portfolio management services (e.g. 1% of the portfolio value). As an RIA, the individual does whatever they choose on the fixed insurance side of their business. The financial professional who registers as an RIA wears two totally independent hats—one as an RIA, the other as an insurance agent and there is no crossover of regulation. I have set up an educational site about practicing as an RIA.

For the BD—any BD thinking clearly will force all reps to do their fixed insurance business through the BD. If the BD does not already have an insurance agency established (many do), they all will and will force the rep to do ALL fixed insurance business through that agency. This is the only sane approach for a BD else they take on liability for the rep’s activities hidden from their view. That exposure could mean the BD being fined for lack of supervision and no BD wants liability that they can avoid. One very large distributor of EIAs, Allianz, has already moved in this direction by distributing their EIA products directly through BDs rather than through traditional FMOs. The writing is on the wall that reps will not be able to distribute any product outside their BD, security or not.

For the FMO—FMOs can kiss away doing business with registered reps. Those days are about to end. Therefore, FMOs will be competing for the smaller pool of non-NASD-licensed insurance-only agents. What FMOs can do is assist their NASD licensed reps to leave their BDs and establish themselves as RIAs. That way, the RIA can continue their relationship with the FMO unhindered.

While opinions will continue to fly about the right of the NASD to regulate EIAs (which is not even the issue), the lines have been drawn in the sand. Smart business owners will act accordingly to do what’s best for their business and their clients.