Insurers Show Clout In Advisor Standards Fight

(Dow Jones) The most vocal opposition to the push to make financial advisors more responsible to clients hasn't come from Wall Street firms or giant banks, but a corner of the industry with a lot to lose: insurance companies.

Citing concerns that new standards might crimp profits for insurance companies' brokerage and investment-product subsidiaries, trade groups have pushed the U.S. Congress to block a proposal requiring financial advisors to recommend clients buy the best possible products rather than ones simply deemed suitable for them based on factors including age and wealth.

In a recent letter to members, National Association of Insurance and Financial Advisors President Tom Currey called for extra study and opposed "one size fits all" regulation, language that closely mirrors that of a provision Sens. Tim Johnson (D-S.D.) and Mike Crapo (R-Idaho) managed to nudge into Sen. Chris Dodd's (D-Conn.) financial regulation bill.

"We have a real fight on our hands and we are running a marathon--not a sprint--to the finish," Currey said in the letter.

Insurance groups say the fiduciary standard of care is anathema to the way they run their businesses of providing "incidental" advice based on the products they sell, and that they shouldn't be lumped in with other financial advisors. "It's a different standard altogether than the investment advisors who mostly focus on advice," Currey says.

In many ways insurers seem like an odd voice to be shaping the market for financial advisors. Although about one in five financial advisors has ties to the insurance industry, they handle just 3% of the $8.3 trillion overseen by these professionals, according to Cerulli Associates, a research and consulting firm in Boston.

Insurance advisors focus largely on selling their own employer's investment offerings, such as mutual funds and annuities, while offering advice only on which of this limited list of options best fits clients' needs. Raising standards may eliminate this rudimentary service, leading "middle-class families to be priced out" of investment advice and financial services, Currey says.

While similar arrangements were once common throughout the financial services industry, banks and brokerage firms have moved away from them over the past decade because of arguments that selling inferior in-house investments ended up costing clients later in terms of lower investment returns.

As financial advisors' responsibilities changed, Wall Street firms' longstanding role of offering advice to businesses and wealthy families made them well-suited to become Main Street's financial mentor, too, brokerage analysts say.

By contrast, the insurance industry has continued to view financial advisors primarily as a sales force for its investment products. To wit, variable annuities, insurers' signature investment vehicle, rely almost entirely on the insurance industry's own advisors and others who take the same sales approach, working for commissions rather than continuing fees.

Although variable annuities have improved in recent years, their gimmicky features and hefty, hard-to-decipher fees have long made them a punching bag for many professional investors--and it's not clear that advisors who had to act solely in their clients' best interest would continue to use them.

Consumer advocates and industry analysts don't necessarily deny stricter standards for financial advisors might hurt insurance industry profits. The problem, they argue, is that most consumers don't understand the difference between financial advisors who dispense advice and insurance brokers who mainly sell products. As a result, few potential customers can tell which recommendations reflect their best possible interest and which are part of a sales pitch.

The government needs to close "a regulatory loophole that has led to substantial investor confusion and abuse," said Knut Rostad, founder of the Committee for the Fiduciary Standard.