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Life in the Fiduciary Lane

Anybody of a certain age, and certainly any writer who goes back that far, will tell you that no group of human beings were quicker to express their outrage, or more explicit and at least hintingly violent in those expressions, than life insurance salespeople.  This is a group of individuals who thought you had grievously insulted them by saying, for instance, that their primary goal was sales, or pointed out that membership in the Million Dollar Roundtable was predicated on sales statistics.  Angry letters would pour in demanding a retraction.

In the public policy arena, life insurance agents have been quicker than anybody to mobilize their outrage at any politician or regulatory organization that dares intrude on, for example, their right to sell an annuity with 20-year surrender charges and more expenses than the monthly maintenance bill at Windsor Castle.  And so I was (to put it mildly) surprised to read a new amendment to the New York State Department of Insurance Regulation, basically imposing a mashup of the infamous DOL Rule and the recent SEC regulatory proposals on life insurance salespeople operating in their state.  The word “fiduciary” doesn’t appear anywhere.  But the gist of the new rules is that life and annuity recommendations, if they are made inside the borders of the Empire State, now have to be in the best interests of the customer.

Whoever wrote these regulations knows full well that the life insurance “advisor” is actually selling products.  Instead of directing the regulation at “life insurance agents,” the regulation addresses “producers.”  As in:

“In recommending a sales transaction to a consumer… the insurance producer, or the insurer where there is no insurance producer is involved… shall act in the best interest of the consumer.” (paragraph 224.4(a))

Yes, I left out 51 qualifying words in the middle of that sentence, but this is indeed the first and last part of it.  And to make the point clearer, the state regulators included bits of the fiduciary definition, stating just a paragraph later, that the producer is acting in the best interest of a consumer when:

“The producer’s… recommendation to the consumer is based on an evaluation of the relevant suitability information of the consumer and reflects the care, skill, prudence and diligence that a prudent person acting in a like capacity and familiar with such matters would use under the circumstances then prevailing.  Only the interests of the consumer shall be considered in making the recommendation.”  (Paragraph 224.4(b)-1)

Wow!  Later, we are told, in different places, that the amount of the compensation or receipt of incentives should not influence the recommendation, and that the standard can only be met if it can reasonably be shown that the consumer would benefit from the recommendation and ultimate sale.  You see echoes of the DOL Rule in a provision that the “producer” disclose

“all relevant suitability considerations and product information, both favorable and unfavorable, that provide the basis for any recommendations”—“documenting the basis for any recommendations made and the facts and analysis that support that recommendation.” 

And echoes of the SEC proposal here:

“A producer shall not use a title or designation of financial planner, financial advisor or similar title unless the producer is properly licensed or certified and actually provides securities or other non-insurance financial services.  Although a producer may state or imply that a sales recommendation is a component of a financial plan, a producer shall not state or imply to the consumer that a recommendation to enter into a sales transaction is comprehensive financial planning, comprehensive financial advice, investment management or related services unless the producer has a specific certification or professional designation in that area.”  (Paragraph 224.4(i))

This by itself is huge news.  It is, to my knowledge, the first time insurance “producers” (their term, remember) are held to, well, any reasonable standards at all.  If you’ve seen the blatantly garbage insurance and annuity products that some “producers” get away with selling, you realize that a near-fiduciary standard is likely to change some industry behavior in a very serious way. 

I wouldn’t necessarily say that “as New York goes, so goes the nation.”  But it is certainly reasonable for the citizens of other states to ask why their insurance “producer” isn’t being held to the same standards.

I think the bigger picture question is: how did this happen with all the insurance industry’s lobbying might and instant grass-roots support?  I know that if I had written this up as a modest proposal and published it 20 years ago, I would reasonably have expected a mob carrying torches to show up on my front lawn.  Whenever we writers and commentators offered suggestions to the insurance community, we would then duck our heads.

I think this regulation is one more sign of three things: first, that the insurance industry is finally realizing that it has long had kind of a stinky reputation, well-earned by its least-ethical brethren, but applied in blanket form even to the better firms.   The firms that believe they can compete on quality and price—that is to say, those aforementioned better firms—are starting to decide that they can take their chances in a competitive marketplace, where insurance and annuities are bought, not sold.

Second, these firms also realize that this transition requires that independent, fiduciary financial planners will do that competitive analysis and recommend insurance products to their clients, when needed, the way they now recommend mutual funds and ETFs.  When the insurance executives look at the ethical norms in the fiduciary financial planning world, they may see something that more closely mirrors their own (perhaps aspirational) ethical standards than pretending to be a financial planner in order to sell high-commission garbage.

And finally, the rabid defenders of the old insurance order are getting older, retiring, or morphing to this interesting new way to do business.  The traditional insurance industry survived the “buy term and invest the difference” innovation, but financial planning and acting in the best interests of the customer were tougher competition for the old commission model.  I look forward to the day, hopefully soon, when we can all write openly about the challenges in the insurance world and not be subjected to instant vilification.