Broker/Dealer Options with EIAs

Broker/Dealer Options with EIAs

by Jonathan Henschen, CFS and featured in ProducersWeb
October, 2006:

Since January, 2006, I’ve been caught in a whirlwind of activity centered on Equity-Indexed Annuities (EIAs). Advisor after advisor have contacted me looking for a broker/dealer that takes a friendlier approach to this area of their business that at one time, was not of any concern to broker/dealers.

The debate swirling around EIAs is confusing and comes with widely varying opinions. One day I’ll be speaking with a broker/dealer who assures me EIA’s are going to be declared securities; the next day another broker/dealer will be just as confident that will never happen. From the broker/dealers’ perspective, I would think the reality of EIA’s becoming securities would make them cringe. If they were declared securities, they run the risk of all the previous transactions being viewed as “unregistered securities” transactions. That could open a flood-gate of litigation and cause many of those transactions to be rescinded. All anyone can say for sure is that the NASD has not declared EIAs a security, and may never do so; but nonetheless, broker/dealers are being held liable for EIAs sold by their advisors.

Investors Capital Corp. vs. The State of Massachusetts

Creating even more insecurity among broker/dealers is the landmark legal case, Investors Capital Corp. v. The State of Massachusetts. For the uninitiated, Massachusetts wants to hold Investors Capital Corp. liable for outside business activity, with a specific focus on EIAs. The case has been a huge headache for Investors Capital, which has already sunk over $500,000 in legal fees fighting the State, and the matter remains unresolved as this is written.

Broker/dealers aren’t the only ones caught up in this mess; insurance companies have been affected, as well. With broker/dealers restricting the EIA products advisors can sell, insurers, such as Allianz, have laid off hundreds of employees due to sharp fall offs in EIA production.

Advisors have strong opinions about running EIA’s through their broker/dealer. To advisors, this is just a ploy by their broker/dealers to justify another profit center. To broker/dealers, it’s a matter of being compensated for the cost of additional liability and due diligence.

Following are the EIA options B/Ds are offering

1. EIAs Go Through the Broker/Dealer and the Payout Grid –This is the least attractive option because advisors must run EIAs directly through the B/D, which means being limited to B/D-approved products. This puts most if not all EIAs with 10+ year surrender periods and/or forced annuitization out of bounds. In addition, EIA commissions must go through the B/D’s regular payout grid.
2. EIAs Go Through Broker/Dealer Networks of Insurance Agencies, With Regular or Enhanced Grid Payouts — Here advisors may choose among EIAs offered by several insurance carriers, but will still have a finite list of approved products. Although payouts can be through the B/D’s regular grid, some B/Ds are offering enhanced payouts of 95% to 97%.
3. EIAs Go Through Broker/Dealer Networks of Insurance Agencies, With 100% Payout – These days, we’re seeing more B/Ds offering this reasonable option. Here again, advisors have limited product availability, but a lot of insurance agencies are competing to offer advisors the best commission rates. With this option, however, B/Ds are satisfied receiving an override from the insurance agency, and won’t apply any payout grid to EIA commissions. Some broker/dealers throw in an extra perk by having EIA business count toward advisors’ securities production, even though the business isn’t going through the B/D’s payout grid.
4. EIA Paperwork Runs Outside Both the Broker/Dealer and the Payout Grid — This option is becoming increasingly hard to find. Frequently, I’ll be consulting with advisors who have been content staying with the same General Agent for years, getting marketing support and growing their businesses. These advisors are loyal, and are reluctant to give up long-standing relationships. So unless the GA is networked with an advisor’s Broker/Dealer, he or she is in a tough spot. Inevitably, these advisors will need to seek out a Broker/Dealer that has the advisor’s GA in its network–or look for a B/D that lets advisors go outside its network. Six months ago, numerous B/Ds I was working with were allowing advisors to run EIA paperwork through outside agencies, but now only a handful are holding out, not wanting to be involved with EIA or any other fixed-insurance business. To summarize: the number of broker/dealers under this option are increasingly limited, and B/Ds may want an override from whichever GA you’ve chosen.

If I were to speculate about the outcome the EIA debate, I’d guess the insurance industry will fight this battle to the point that EIA’s remain an insurance product.  I say that because discontent is growing over NASD actions involving EIAs. Organizations such as the FSI (Financial Services Industry) and the FIA (Financial Industry Association) are standing up to the NASD, making their views known, and building considerable clout in Washington. At the same time, broker/dealer executives and compliance department heads have been making believers out of the financial services industry when it comes to over-the-top regulations. In the end, we’ll hopefully see the NASD treat EIA’s like fixed insurance products, and return some rationality to the oversight process.

Over the next couple of years, look for the regulation and compliance pendulum to swing back into balance. Until then, Equity-Indexed Annuities will remain a controversial topic, and Broker/Dealers will have to decide how best to handle this 500-pound gorilla.