A Source of Headaches: “Source of Funds”

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One of today’s most widely-miscommunicated issues is the fixed annuity market’s “Source of Funds” matter. The issue? It’s figuring out where the prospective purchaser of a fixed or indexed annuity is getting his or her money from, so they can use it to purchase the annuity? Some believe ‘Source of Funds’ means that if you’re an insurance-licensed-only producer, and not a registered representative, that you cannot replace securities products (such as variable annuities and mutual funds) with fixed and indexed annuities. You may even hear these folks talking about states such as Arkansas, and how their regulators have taken a tough stance on this issue.

Did you get all this? Some believe that if your client comes to you, asking you to help them stop their bleeding – and stop their loss of money in their variable annuity – that you cannot do it unless you’re a registered rep.

Can You Replace Securities Products with Fixed and Indexed Annuities if You Aren’t a Registered Rep?

Of course you can! As long as it’s suitable AND as long as you aren’t giving ‘Unregistered Investment Advice’ to your clients.

Let’s talk about all of this.

You must be registered (via Series 6, 7, 63, 65, 66) with proper securities regulators (i.e. the Securities and Exchange Commission and/or the Financial Industry Regulatory Authority) to discuss securities products such as stocks, mutual funds, and variable annuities. If you aren’t properly registered, and you discuss these products with your clients, you’re providing ‘Unregistered Investment Advice.’ ‘Unregistered Investment Advice’ is a big no-no; in every state, not just Arkansas.

Big deal!

Right? Well, it IS a big deal.

Depending on the circumstances and the state, the penalties for providing ‘Unregistered Investment Advice’ include prison time (even felony convictions!), fines, and loss of insurance licensure.
Why care? Well, this is a particularly sticky issue when you consider indexed annuities. After all, this retirement income products’ gains are credited based on the performance of stock market indices, commodities, mutual funds, and other securities. How often do you suppose that a prospect asks their insurance-licensed-only producer to explain to them what the FTSE 100 index is? If you aren’t a registered representative, and you respond when your client asks this question, you could be in very hot water.

“Well Sheryl…” you declare, “what about the S&P 500 index?!? This is a stock market index too, and people didn’t bring this up back in 1995 when S&P 500 indexed products were introduced!”
Here’s the deal: the regulators assume that even the least-financially savvy prospects know what the S&P 500 is. It’s in the newspaper. It’s featured in the evening news. It’s even on Yahoo! Finance for goodness’ sakes! Should your average American need to check the values of the S&P 500 index, it isn’t that difficult. It’s pretty much the household brand index of the stock market. For these reasons, the S&P 500 gets a pass. However, when you get into some of those more exotic, foreign, and lesser-known indices, this is when you’ll get the regulators’ attention.

Compounding the issue is the fact that close to half of all salespersons marketing indexed annuities are not registered representatives

Complicating the issue even more is the fact Americans want to exchange “risk money products” (such as variable annuities) for “safe money products” (such as indexed annuities) – and in record numbers.

Let’s look at this from an outsider’s perspective.

In 2012, 18.8% of the $33.9 billion in indexed annuity sales was allocated to indices outside of the S&P 500 (and fixed bucket strategies); which is $6.3 billion dollars. Now, let’s assume that 45% of this is sold by insurance-licensed-only agents – becoming $2.8 billion. I bet those outsiders may be wondering how much ‘Unregistered Investment Advice’ is going-on with that nearly $3 billion dollars. Don’t you?
So, just what can, and can’t, you do when it comes to these types of replacement situations? If you’re a registered representative with an insurance license, you can replace any product you deem appropriate with any suitable product of your client’s choice. If you’re an insurance-licensed-only producer, you can do the same. You just cannot discuss the client’s investments, give advice regarding the investments, or even suggest a replacement of the investments.

Now does this mean that I advise you to go out and become a registered rep to avoid the headaches involved with these situations? NO! Making the decision to become a registered representative is NOT one I would take lightly. The type of securities registration you choose could mean the difference between taking on a fiduciary standard as opposed to a suitability standard. Trying to skirt ‘Unregistered Investment Advice’ isn’t sufficient motivation in-and-of-itself to warrant securities registration.

My advice is merely to listen carefully, and think before you speak. Choose your words carefully. Document, document, document. And no matter WHAT – don’t advise your clients on securities products, nor suggest that they replace them, if you aren’t properly securities registered.

CYA! (Cover Your Annuities!)

Sheryl Moore is President and CEO of Moore Market Intelligence, an indexed product resources in Des Moines, Iowa. She has over a decade of experience working with indexed products and provides competitive intelligence, market research, product development, consulting services and insight to select financial services companies. She may be reached at sjm@indexedrockstar.com.


Sheryl Moore is President and CEO of Moore Market Intelligence, an indexed product resources in Des Moines, Iowa. She has over a decade of experience working with indexed products and provides competitive intelligence, market research, product development, consulting services and insight to select financial services companies. She may be reached at sjm@indexedrockstar.com.

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