WASHINGTON — State Farm Insurance says it will not be accepting liability under the Best Interest Contract (BIC) on the sale of annuities or mutual funds by the more than 12,000 of its agents throughout the U.S. who have licenses to sell securities.
At the same time, Allstate, USAA and Nationwide, three other insurers with large property casualty divisions whose captive agents also sell investment products, appear to have decided to remain in the commission investment business.
However, in comments to us, these companies declined to be specific about how they will comply with the new Department of Labor regulation fiduciary standard rule.
One reason for that is that they could be awaiting the disposition of various lawsuits that seek to delay implementation of the rule pending further court proceedings.
|Act within clients' best interests
This rule is being phased in effective April 2017. It requires agents and advisors to act within their clients' best interests when selling investment products for a fee or commission into their customers' IRA and 401 (k) accounts as well overseen under the Employee Retirement Income Security Act of 1974 (ERISA). Currently, the sale of these products is covered under the less strict suitability standard.
In comments in August, Jason L. Smith, CEO and founder of Clarity 2 Prosperity in Cleveland, an independent marketing organization, theorized that issuers and distributors are delaying action until they see what the courts do.
His firm has filed to offer the best interest contract exemption (BICE) to its independent agents by applying to be a "financial institution" under Department of Labor rules. But only six IMOs have applied for FI status, Smith said. Many others may be awaiting action on the various lawsuits. "I think many are putting their head in the sand and hoping that through the lawsuits the whole DOL thing goes away," Smith said.
A federal district court in Washington, D.C. heard arguments Aug. 25 in one case filed by the National Association of Fixed Annuities. The judge declined to rule immediately, but appeared to indicate that NAFA didn't appear to meet the threshold required to delay implementation of the rule.
State Farm's actions, however, offer insight into the potential reaction by various businesses within the financial services industry to the new rule. State Farm and Allstate may primarily sell auto and home insurance to customers nationwide, just as USAA does to military or retired military personnel worldwide. But investment products are an important part of their portfolios.
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Many of their agents are licensed to sell fixed annuities through state licenses and variable annuities and mutual funds through securities licenses.
Two-thirds of State Farm's 18,000 agents sell investment products, for example.
State Farm, in comments by Phil Supple, its director of public relations, said that as of next April, State Farm will sell and/or service mutual funds, variable products and tax-qualified bank deposit products through a self-directed customer call center.
He said State Farm will continue to offer fixed annuities through authorized agents. (State Farm does not offer fixed indexed annuities.) He said State Farm agents "will also continue to serve customers for all other insurance and financial services needs."
The "self-directed" call center will be "a place where customers can learn about what retail investment products State Farm offers," Supple said. "Customers will make their own decisions regarding their investments," he added, but declined to disclose whether those answering the calls at the centers will be licensed to sell investment products or able to earn a commission on the sale of those products.
|Impact on agents' income?
Supple said it is "not really possible" to answer whether or not allowing agents to sell investment products will have a deep impact on their income. "Income would have varied greatly from agent to agent," Supple said. Besides, he said, "any actual numbers, we believe, would be proprietary."
USAA, Allstate and Nationwide were somewhat opaque in their responses.
Arguments in a case similar to the NAFA lawsuit in that it involves fixed indexed annuities will be held Sept. 21 in federal court in Kansas. The suit was filed by Market Synergy Group.
And nine groups, including the U.S. Chamber of Commerce, have filed suit in Texas seeking an injunction against the rule. The case is being heard in Federal District Court in Dallas and a decision could be handed down as early as October.
In its statement, USAA said, "We are committed to adhering to regulatory requirements and to ensuring our members receive the financial products, services, advice and solutions they expect and deserve."
The statement added that, "USAA will inform members of expected changes to our delivery of those products and services before the required compliance date in 2017. As usual, we will continue to monitor development of the DOL Fiduciary Rule with our members' interest in mind.
In its statement, Allstate said that, "Many middle-market customers rely on Allstate for access to life and retirement products. We are committed to providing the products that our customers expect from Allstate agencies and financial professionals as we adapt to the Department of Labor fiduciary rule scheduled to begin taking effect in April 2017."
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