By Dean Zayed
Since NASD Notice 05-50 was released on Aug. 8, 2005, the financial-services world has changed dramatically. Compliance, once an issue mostly concerning only NASD-registered representatives, is now of tantamount concern to anyone in this industry. The hoops that an advisor must now jump through are indeed rings of fire. Fail to follow the rules and you will be badly burned.
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Fail to follow the rules and you will be badly burned. |
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The compliance focus is narrowing in on you. Just consider these recent events:
- In a suit filed against two insurance agents domiciled in his state, the attorney general of Massachusetts charges that the pair provided unlicensed investment advice. The suit alleges that in assisting two elderly clients reposition their assets from mutual funds to fixed annuities, they tacitly offered investment advice without being properly licensed to do so.
- In a separate but related matter, the Securities and Exchange Commission recently overturned the so-called “Merrill Rule.” This rule allowed NASD registered reps to open “wrap accounts” and charge fees based on the value of assets in the account, as is done by registered investment advisors (or investment advisory reps under a corporate RIA). Although the rule change is being appealed, it has at least temporarily stopped non-RIAs from charging fees. Broker-dealers with wrap account programs are closing the doors on establishing new accounts.
- And of course, there is NASD 05-50. This rule notified broker-dealers that NASD strongly suggested that broker-dealers supervise the sale of indexed annuities because NASD considers these fixed insurance products to be securities. This put the “kibosh” on the sale of indexed annuities for the reps of many, if not most broker-dealers, who decide which, if any, may be sold and who now run the commissions through their securities payout grid, capturing a portion of the revenue generated by the rep.
- A Wall Street Journal article appearing on May 30, 2007, quoted Joseph Borg of the Alabama Securities Division who is president of the North American Securities Administrators Association (NASAA) as saying that pilot probes of “free dinner and lunch seminars” netted 26 positive actions against reps for providing unregistered investment advice or misleading information to consumers. Borg added that the association is expanding the pilot probe from seven test states and hopes to have investigations under way in all 50 states.
- In an address to the Society of Certified Senior Advisors in May 2007, Borg said that the association considers indexed annuities to be securities even though they are not classified as such by the SEC. NASAA’s position is that since assets in indexed annuities may be lost through a surrender charge, they are securities. While he admitted that he does not have jurisdiction to regulate the products—for now—he does have jurisdiction over how they are marketed.
Agents in the spotlight
What’s this got to do with you? Everything. These examples illustrate how a powerful beam of light is being focused on your practices. If you hold lunch or dinner seminars, you should assume that someone from the state securities division is listening and taking notes of everything you say. You should also assume that someone from that division will set an appointment with you and go and hear what you say during your appointment process. If you say the word “investment” and you are not an RIA, you’ve virtually cooked your own goose. There is a simple solution to this situation. Become an RIA.
Many insurance reps are holding themselves out as financial advisors or financial consultants even though they hold only a life or life and health insurance license. They then lead prospective clients to believe that they are providing unbiased advice, when in reality they are moving assets principally into fixed annuities or life insurance.
Concrete steps
Here’s what you can do to protect yourself and your clients:
- Obtain your Series 65 to protect yourself and your practice.
- Help your clients establish a balanced portfolio that incorporates the more traditional asset classes such as equities and debt (stocks and bonds) with conservative savings vehicles like fixed annuities.
- Use risk-tolerance questionnaires to help you and your client determine the right asset allocation on a case-by-case basis. Having these questionnaires in your file will help protect you if a client becomes dissatisfied in the future, and questionnaires will give you a better understanding of how to assist your clients in allocating their money.
Not sure how to do asset allocation? That’s OK. There are many RIA firms that can help you develop suitable investment portfolios and understand how to appropriately incorporate fixed and fixed indexed annuities into traditional asset classes.
By following this path, not only do you ensure that you are not targeted, you are also doing the right thing for your clients.
And in most cases, you will earn the right to manage all of their assets—not just a small portion that might be suitable for an annuity.
Also, by building a portfolio of assets under management from which you earn an annual fee, you will be developing a recurring income stream. This income builds over time and on the first of January each year, you will no longer be “starting from zero.” And when you decide to retire, you will have an asset with a known value you can sell to help fund your own retirement.
Used with permission. All Rights Reserved.
Dean Zayed is the founder and CEO of Brookstone Capital Management LLC in Chicago. You may reach him at 630-653-1400, or dean@brookstonecm.com.
August 2007
The Midas Touch
Wrapping Up
More Tips From the MDRT Annual Meeting
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