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Debate Over Suitability Standards Rages On

“Snu?” The response to this old joke: “Not much. ‘Snu’ with you?”

Well, for one thing, this column is “nu.” Having the privilege to be this column’s first writer, I’d like to tell you a little about the Society of Financial Service Professionals (FSP). Over the next few months, I’ll write about some of the big issues we believe all financial practitioners are or will be facing.

Members of the “86 year young” Society of FSP carry on a reputation for world-class know-how in the practical, sophisticated application and uses of life, health, disability and long-term care insurance, as well as annuities.

Tracking with The Society of FSP’s diversified membership is how the various planning fields have overlapped. It’s no longer about the “INsurance” agent versus the “stock jock.” Along with the other peer professions under the financial services umbrella, client-facing professionals must be aware of and become knowledgeable about the broad scope of virtually all aspects of the things that affect and concern clients. It’s not enough for a financial planner to ask their client, “Do you have an insurance broker?” and, with the client’s head nod, move on to the next topic. For example, the Society of FSP’s Code of Professional Conduct requires a member to put the “client’s interest above his/her own.” In turn, this implies that the member’s commitment is not just to inquire about a homeowner’s policy – or a life insurance policy or any of the other insurance coverage appropriate to the situation. Instead, the member’s commitment is either to be the insurance expert, or to network with such an expert to make certain that all aspects of the client’s financial life – including risk management – are coordinated and reviewed for adequacy and appropriateness on an ongoing basis.

The great debate about appropriate standards of care within the securities, advisory and insurance segments of the financial services industry began in 2010 with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Included was the requirement that the Securities & Exchange Commission (SEC) evaluate harmonizing the different standards of care between a (generally fee-based) Registered Investment Advisor (RIA) and a (most often commission-based) Registered Representative. Caught between these two communities are life insurance agents, who may be acting neither as advisors nor as securities brokers but simply as insurance agents. Should an agent be held to a “client’s interest above my own” standard – as is the obligation of the RIA – or to the lesser “suitability” standard of securities brokers?

Four years after Dodd-Frank was passed, not only is the debate about standards of care still raging, but also more regulatory agencies are getting involved. The Department of Labor (DOL) is expected to rule later this year on a possibly elevated standard of care for those working with consumers and their retirement plans, while the Financial Industry Regulatory Authority (FINRA) is focused on strengthening and heightening its own compliance directives to broker/dealers.

Dodd-Frank also created a mandate for state departments of insurance to establish FINRA-like suitability requirements for insurance agents selling annuities and life products. Many insurance producers are certain to be “caught in the crossfire” of conflicting standards if they are licensed to sell both general account and securities-based products. But will insurance agents who don’t sell securities or render financial advice continue to be drawn onto the battleground for still higher standards of care? While it’s unlikely to be resolved in the near term, the Society’s Standards of Care Committee anticipates that regulators will ultimately bring all financial services into a “client’s interest above my own” environment.

An issue often overlooked by those opposed to standards of care is that many practitioners may already be held to a high standard simply by the professional or industry organizations to which they belong. The Society of FSP, the Certified Financial Planner Board of Standards, the American Institute of Certified Public Accountants, the American Bar Association and the Investment Management Consultants Association (IMCA) – among others – all impose the higher “client’s interest” standard as a condition of membership. The Million Dollar Round Table, the National Association of Insurance and Financial Advisors and other insurance industry organizations have similar statements of ethical conduct on behalf of clients. A high standard may also be applied in a trial or arbitration complaint about an alleged misrepresentation made by the agent to the client. If you use the phrase “financial advisor” on your business card or website, or otherwise give the impression of providing comprehensive financial planning when you’re only helping to fulfill insurance needs, you may be making the plaintiff’s attorney’s job so much easier.

Richard M. Weber, CLU, MBA, AEP (Distinguished), is past president of the Society of Financial Professionals. A 45-year veteran of the life insurance industry, he is a consultant to insurers and their agents on the topic of effective and ethical selling. Contact him at [email protected] [email protected].

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