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There have been a number of significant developments in state actions against sellers of annuities that provide great insight into what regulators and prosecutors are watching these days. In the last issue of Annuity Outlook Magazine, we spoke about the “State of the States” on these same pages and provided a list of what was happening in various states. In this issue, we will focus on what we’ve learned from these activities and what you should be doing to protect your annuity sales business and ensure you are both compliant and successful.

Whenever we at NAFA speak to annuity professionals, we are most commonly asked the following three questions:

1.  What licenses should I get?

2.  What designations may I use?

3.  How can I be sure my seminars, website, and marketing materials are compliant?

In this issue, we’ll address licensing.


We recently read an interesting article that theorized that insurance professionals shouldn’t pick annuities over investments or investments over annuities, but should instead consider both investments and annuities. We agree with this theory, but only if the professional pursues a business model that also provides investment advisory services and/or mutual funds and variable annuities. However, we also believe that insurance professionals who specialize in insurance, and therefore understand the value proposition of the insurance contract, are equally valuable to both our industry and consumers.

Fortunately, we work in a very competitive annuity marketplace — one that offers consumers a multitude of choices among financial professionals who offer a variety of services and cost structures. Granted, you do have to be an insurance-licensed professional in order to sell fixed annuities, but that doesn’t prohibit you from offering security products or investment advisory services as well. Conversely, you are not obligated to offer products beyond insurance, so you’re free to choose to specialize in insurance offerings as a select client service.

At NAFA, we recommend annuity professionals follow a very simple rule:

Obtain only the license you will need for the type(s) of service(s) you want to provide. Do not get an investment advisor license — or a Series 6, Series 7, Series 65, or Series 63 license — just to “avoid the regulator.” 

Before determining what licenses to pursue, NAFA suggests you consider these basic questions:

  • What kind of practice do you want to build?
  • What model provides the best services and flexibility?
  • What model best suits your expertise?
  • What does your practice look like today?
  • What do you want it to look like tomorrow?

As we have seen in Illinois and Arkansas, some state securities departments believe they have the authority — and have, in fact, used this presumed authority — to take action against someone without an investment advisory license because he or she was allegedly “acting as” an investment advisor. This naturally begs the question: How and when is one considered to be “acting as” an investment advisor?  To help answer that question, NAFA has developed a guidance memo on permitted and prohibited activities designed to help insurance-only and broker-only professionals who sell fixed annuities (in other words, everyone except for investment advisors) conduct their licensed activities compliantly.

NAFA’s guidance memo, adopted by the insurance departments of Iowa and Tennessee, discusses both the permissible and impermissible activities of those without investment licenses. In particular, using state insurance and security laws and regulations, it helps provide parameters when recommending the purchase of an annuity or life insurance policy to a consumer who may choose to liquidate a security in connection with the purchase and vice versa. The guidance was developed so non-investment licensed professionals may gain a better understanding of the types of activities and conduct within and beyond the scope of permissible activities.

Furthermore, according to Discovery Data1 reports there are approximately 600,000 Registered Representatives and 330,000 investment advisors in the United States, the District of Columbia, and the U.S. territories. The National Association of Insurance Commissioners (NAIC) also reports that as of 2010, approximately 220,000 producers were licensed to sell annuities in all NAIC jurisdictions. Without going into a detailed analysis of all the findings Discovery Data lists (e.g., duplicate entries and those identifying non-selling, dual-licensed, or no longer active professionals, etc.), we can intuitively assume that with almost five times more security-licensed professionals than insurance-licensed professionals, there must be a substantial number of professionals who hold securities-only licenses. Therefore, NAFA felt it was also important to outline the parameters for a non-insurance professional regarding his or her ability to provide insurance-related advice to consumers, as well as the role of the investment advisor relative to insurance planning.

Specifically, NAFA’s guidance memo covers the following:

  • Permitted Activities for Insurance-Only Persons
  • Permitted Media for Insurance-Only Persons
  • Activities Specifically Excluded for Insurance-Only Persons
  • Permitted Insurance-Related Activities for Security-Only Persons
  • Activities Specifically Excluded for Security-Only Persons
  • Exceptions and Limited Insurance-Only Advice

The detailed guidance memo is available to members at the NAFA website (, and, in the interest of space, can be oversimplified by stating that it differentiates between specific advice and general advice. In short, specific advice about an individual’s asset performance and risk exposure, specific diversification advice regarding risk assets and insurance assets, and recommendations to liquidate a security or non-insurance holding is considered to be, and has always been, “investment advice.” However, discussions about the stock market in general terms, including market risks and recent or historic economic activities that are generally known to the public and regularly discussed in public media, are a necessary component of insurance services and should be used to give the insurance-only professional reasonable grounds for believing that the recommendation to purchase, borrow against, exchange, or replace an annuity or life insurance product is suitable for the consumer.

It was also important to include that it was permissible to discuss and complete suitability, replacement, exchange, or transfer forms as required by state regulations. This may include a general discussion about the expectations of the funds being considered to purchase an annuity or life insurance policy.  The insurance-only professional must be permitted to discuss the following in order to perform a proper suitability review: that the funds need protection from market risk; the tax status of the funds and that tax deferral needs to be utilized or maintained; that the funds may be needed to provide a lifetime income stream; that they need to earn a guaranteed interest rate; and that there are other funds available during the surrender period of the annuity or life insurance policy for emergency or urgent needs.

Additionally, as necessitated by the suitability review and in order to get a full understanding of the consumer’s financial objectives, it must be permissible for insurance-only professionals to discuss balancing risk, considerations regarding diversification, or other similar points that support an insurance position within a consumer’s financial plan. Finally, but of critical importance, the insurance-only professional must be allowed to provide advice as part of a financial plan or in connection with providing financial planning services. When doing so, insurance-only professionals should clearly identify themselves as an individual who holds a state insurance license and indicate that said license authorizes the sale of annuities or life insurance products.

NAFA felt so strongly about these permissible activities that its Education Committee created a disclosure statement (which was subsequently approved by the Government Relations Committee and the Board of Directors) that insurance-only professionals can use to cover the areas of discussion that must take place for a suitability review, including the individual’s licensing status as well as which advice the license covers and what it does not. The NAFA Insurance-Only Professional Disclosure Form is available to NAFA members upon request.

At NAFA, we believe that a fixed annuity should always be considered in any financial plan. But this doesn’t mean that an annuity is always the right or the only choice for any individual. An annuity and its features that may help your clients achieve their financial goals should always be considered to ensure they receive the breadth and scope of options and opportunities, and yes, the limitations available to them in the financial arena. It is only those brokers, advisors, and insurance professionals who offer “advice” (be it investment or insurance) in absolute terms (e.g., all annuities or all investments are wrong) that not only harm our industry, but also Americans saving for retirement. Our competitors and detractors often forget that the role of the suitability review is not just to ensure the most suitable annuity, but also its importance to ensure consumers are protected from risk-based investment products that aren’t suitable for their age, risk tolerance, or retirement horizon.

In the next issue, we will discuss guidelines for professional designations and compliant marketing and sales materials.

Based on information drawn from custom Discovery Data.

Kim O’Brien is NAFA President & CEO. NAFA membership represents over 85% of all premium for fixed indexed, declared rate and income annuities written through the independent distribution system. Kim has over 30 years of experience in the insurance industry beginning as in 1981 as office manager for an insurance agency. In 2002 Kim developed and ran her own marketing organization and received the 2002 Entrepreneur Award from Sun Life. In between, Kim worked as a marketing executive for major insurance companies and was responsible for their annuity and term life insurance product line development, marketing, and training processes. In 1993, Kim served as interim deputy director of the Wisconsin Department of Insurance under Governor Tommy Thomson and served Governor Thompson until a permanent replacement could be found. In July 1992, Kim was the first women in Wisconsin to pass the CFP exam established in 1991 by the CFP Board as a single comprehensive examination modeled after the licensing examinations given to attorneys or Certified Public Accountants (CPAs). Kim O'Brien received her BA from Ripon College, her MFA from the University of Northern Colorado, and an MBA with an emphasis in Economics from Edgewood College, Madison, Wisconsin. In 2008, Kim was accepted into the Juris Doctorate program at the William H. Taft Law School and completed her first year and passed the preliminary California Bar as required before continuing her degree. She has recently re-instituted her studies to begin this summer after a hiatus due to her NAFA workload. As an avid musical theater fan and dancer, Kim has directed or choreographed over 60 shows in Milwaukee and Madison, Wisconsin. She lives with her husband and college sweetheart of 39 years, Kelly, in Phoenix nestled in the Thunderbird Conservatory she enjoys hiking the mountains with their Irish setters.

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