Posted by Joseph Y. Calhoun, III

Bloomberg: The staunchest opposition to a universal fiduciary standard that would put clients’ interests first isn’t from securities brokers. It’s from insurance agents, comments to the Securities and Exchange Commission show.

The SEC is due to submit a report to Congress in January on investor protection with the option to create a universal standard as part of the financial-services overhaul bill that became law July 21. The rule would apply to anyone who gives retail investment advice, including insurance agents who are dually registered as brokers.

The agency requested comments on the effectiveness of the current standards and received about 2,700 responses, including 426 form letters, which is “a robust response,” according to John Nester, a spokesman for the SEC. Almost 240 form letters were from people in the insurance industry, who are opposed to the standard, whereas some responses from brokers were conditionally supportive. Comments were due Aug. 30 and will be considered by the SEC as it prepares its report, Nester said.

Brokers currently must meet a standard to offer clients “suitable investments,” while most registered investment advisers have a fiduciary duty to put clients’ best interests first. The Securities Industry and Financial Markets Association, Wall Street’s main lobbying group, had been opposed to a fiduciary standard for brokers until last year when the group said it supported a single national rule for brokers and financial advisers.

“The brokerage industry is now talking about a difference in degree rather than in kind,” said Mercer Bullard, founder of Fund Democracy LLC, an advocacy group in Oxford, Mississippi. “The source of firmest opposition is the insurance industry, which doesn’t want to disclose conflicts of interest.”

Well, I don’t know about you but I am shocked to hear that insurance agents don’t want to disclose conflicts of interest. Actually what they don’t want to reveal is the obscene commissions they get paid for selling too much insurance to people who don’t need what insurance agents are selling. Annuities are the single biggest source of investor complaints - by a very, very wide margin -  for a reason.

Insurance has its place but most people can cover their insurance needs with simple, cheap products rather than the overly complicated, expensive products on which agents make most of their money. The products agents push such as whole life and deferred annuities pay them ridiculous commissions. The agent will generally keep well over 50% of the first year premium on a whole life policy (that doesn’t include single premium policies) and commissions on annuities run as high as 8% of the principal, paid out to the agent immediately. Most types of policies also pay trail commissions as long as you stay in the product.

To me there are two major advantages to life insurance. First is tax deferral and second is that assets held in life insurance products are protected from creditors (creditor protection varies by state but here in Florida the entire cash surrender value of a policy is protected from creditors). Of course, both of these advantages are also available in retirement accounts so those should be fully utilized first. Neither of these advantages by the way justify the outrageous commissions paid to agents to sell insurance products. There are low cost alternatives and an agent adhering to a fiduciary standard would be required to disclose them which explains why they are opposed.

I am not licensed to sell insurance although I did take and pass the licensing exam in Florida many years ago. I never used the license as a broker because the products available to sell were too complicated and expensive. After a few years, keeping up with the continuing education requirements seemed silly so I let the license lapse. As an investment advisor I do sometimes recommend the use of annuities, but I only get paid as an advisor to manage the underlying investment allocation. In addition, I only use bare bones, low cost, no surrender charge annuities. Fidelity and Vanguard both sell good low cost annuities.

If you need advice about insurance the last person you want to ask is the agent selling you the policy. Unfortunately, independent, unbiased advice under a fiduciary standard is hard to come by for most people. And I expect the insurance companies’ lobbying will pay off. I do not expect the SEC to impose a fiduciary standard on insurance agents or stock brokers when the rules are finally written. There is simply too much money at stake for the brokers.

By the way, if you are currently invested in an annuity you should know that you can do a tax free exchange to a lower cost annuity. Send me an email if you want to learn more about low cost alternatives (jyc3@alhambrapartners.com).