Will commission-based registered representatives and insurance agents really begin to turn away middle-income consumers if the professionals are forced to live with a fiduciary standard that requires them to put customers’ best interest before their own?
Jason Berkowitz, a representative of the annuities industry, argued during a nationally broadcast Securities and Exchange Commission panel discussion last week that the answer is yes and that research shows that as many as 56% of professionals will stop working with Main Street investors entirely if a fiduciary standard is forced on them.
In contrast, Erin Koeppel, managing director of government relations at the CFP Board said the board’s research shows the opposite. In fact, the 102,000 advisors who are CFP licenses have grown their business, their revenues and their clientele—many while explicitly serving the middle-income market—not despite of but because of the board’s explicit fiduciary standards.
“Far from going out of business our increased numbers show that providing fiduciary advice is good for business,” said Koeppel, who also serves as the CFP Board’s public policy counsel.
“CFPs report compensation that is 10% higher than non -CFPs. Saying advisors will stop working with clients, especially middle-class clients if they are subjected to fiduciary standard, is contrary to our experience. What is restricted [by the standards] are financial advisors’ ability to take advantage of clients,” Koeppel said.
According to the latest 2024 poll of CFP registrants, 42% said they don’t require any asset-based minimums to work with a client, half of CFPs provide services to clients with household incomes ranging from $0 to $75,000 and 67% to clients with household income from $75,000 to $150,000, Koeppel said. “When we introduced fiduciary standards in 2007… we were told that the number of CFP professionals would decline, but instead they increased by approximately 90%,” she said.
Also worth noting, most CFP licensees accept commissions, CFP Board officials have testified before Congress. Koeppel said that 67% of CFPs are registered reps of broker-dealers; 88% are investment advisor reps and 64% hold insurance licenses. What is most troubling Koeppel and Edwin Hu, a former SEC economist, said during the SEC panel, is that right now there are regulatory gaps that expose customers to financial conflicts of interest.
Specifically, insurance agents and reps who recommend fixed annuities and IRA rollovers claiming they’re providing one-time advice are all currently excluded from SEC and state regulation best interest standards and subject only to state insurance annuities standards, which critics say are far weaker. The Department of Labor fiduciary standard which would have applied a fiduciary standard to agents who recommend fixed annuities to retirement rollover customers in September has been stayed by two federal courts as a result of lawsuits brought by annuities and brokerage industries.
But the regulatory gaps may be imperiling investors. Hu said in recent research performed with his former boss, ex-SEC Commissioner Robert Jackson, they found that 93% of bad brokers who give up their securities licenses due to regulatory pressure maintain their insurance license and sell fixed annuities, which are non-securities and not regulated by the SEC. “In short, we identify state insurance sales as an area that appears to have fairly weak oversight and which attracts high-risk brokers that leave or are forced out of the securities industry,” said Hu, now an associate professor of law at the University of Virginia Law School.
Hu also said the National Association of Insurance Commissioners (NAIC) created the model regulation governing agents who sell fixed annuities, failed to make commissions a conflict of interest.
In stark contrast, Jason Berkowitz, chief legal & regulatory affairs officer for the Insured Retirement Institute, defended state insurance regulation and the role of agents and brokers who sell fixed annuities, who he said would cut off lower- and middle-income Americans if they lost their current carve out and are subject to a fiduciary standard. Americans “need access to the right kind of advice. But there is a difference between being able to trust and having a relationship of trust and confidence. I trust the person who cuts my hair, but I don’t think I’d consider them my fiduciary,” Berkowitz said.
Still, the NAIC’s regulation omitting commission-based conflicts “was perhaps not as artfully drafted as it could have been,” Berkowitz admitted. “NAIC is considering possible future guidance. But I’ve talked to people at table. Their intention was never to say compensation is never a conflict. They’ll acknowledge that if there is a conflict related to compensation, it will be dealt with,” Berkowitz said. While it is hard for large working groups to come up precise language, “I can tell you that it is being enforced.
Hu, however, countered that there is no way to verify that, since the NAIC did not respond to his requests for enforcement data, nor do they have a public website of enforcements like the SEC and FINRA do.
To prove the insurance iindustry’s point that agents and brokers will cut off the middle class, Berkowitz cited a 2017 Deloitte study (Deloitte White Paper on the DOL Fiduciary Rule - August 2017 (sifma.org) showing that 53% of firms limited of eliminated access to brokerage advice for smaller retirement accounts in response to the DOL 2016 fiduciary rule, causing more than 10 million Americans (with $900 billion in retirement assets) to lose access to products and services.
Berkowitz also said that the National Association of Insurance and Financial Advisors (NAIFA) surveyed its members and found that only 30% have a minimum asset requirement today but 72% – more than double – would establish a minimum asset requirement if a DOL fiduciary rule takes effect.