How Some RIAs Sell Life Insurance Through A BGA Without A B/D

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#OfficeHours with @MichaelKitces Video Transcript

Welcome, everyone! Welcome to Office Hours with Michael Kitces!

So with the DoL Fiduciary Rule taking effect, a lot of broker-dealers are changing right now. Everything from compliance policies to payouts to reps. In some cases, it's really driven directly by DoL Fiduciary itself, which limits certain types of payouts and compensation that could be deemed an incentive to not act in the client's best interest. In other cases, the truth is it's just the change the broker-dealer wanted to make anyways and is doing it under the guise of the DoL Fiduciary.

But regardless of the cause, I'm hearing from a lot of advisors lately who are working at broker-dealers and are considering whether to shift and become and RIA instead, with the caveat that they don't want to lose their ability to implement insurance and annuity products for certain clients who may need it. I want to talk about that for today's "Office Hours," and respond to a particular question that came in from...we'll say her name is "Patti." So Patti asked:

"Dear Michael, I formed a hybrid RIA, but I'm finding the BD part to be expensive. While I did it to keep my Series 7 active, I was mostly interested in being able to still sell insurance and annuities. Can an RIA still sell those solutions without being a hybrid? Depending on who I ask, I keep getting conflicting answers."

Great question, Patti. Unfortunately, this is an area where I find there is a lot of confusion out there, which isn't helped by the fact that most advisors ask their broker-dealer for guidance and their broker-dealer, frankly, doesn't want to lose them because it's profitable to keep them. And, as a result, broker-dealers don't always give the clearest guidance. So let me try to help set the record straight.

When You Need A Series 7 License [Time - 1:50]

The starting point for this is the Series 7. The Series 7 exam is called the General Securities Representative Examination because it's meant to assess your competency to be a "General Securities Representative." Now, in this context, security is a financial asset that's sold or traded in financial markets. And so, having a general securities license means you're licensed to sell virtually any type of security. That would include stocks and bonds, ETFs and mutual funds that hold stocks and bonds, and even variable annuities or variable life insurance which hold stocks and bonds.

But the key here is that a Series 7 exam is all about being able to sell securities investments (stocks, bonds, vehicles that hold stocks and bonds [including mutual funds], variable life, and variable annuity contracts). And so, if you want to get paid a commission on those products, you need a Series 7 license, or at least a Series 6, which covers all the "packaged" investment products like mutual funds, variable annuities, and variable life. Technically, the Series 7 just expands on that by allowing all the other "general" types of securities; individual stocks and bonds, options and derivatives, etc.

In addition to the Series 6 or Series 7 license, you need a broker-dealer to actually facilitate as the broker for those product sales. Because technically, the company brokers the transaction and you are the registered representative of the company. That's why when the client buys a stock or a bond, the commission is paid to the broker-dealer which then shares a portion of their income with you because you're the representative.

Similarly, that's why when you sell a mutual fund, the commission is paid to the broker-dealer. It's literally called a Gross Dealer Concession, or GDC. And then the broker-dealer pays out a portion of that to you as their representative. That's the compensation for delivering the company's brokerage services to the client. So, if you want to sell securities products, you need a Series 6 or a Series 7 license.

Now, this is different than getting paid an Assets Under Management (AUM) fee to provide ongoing investment advice or discretionary management of an account. That requires becoming a Registered Investment Advisor, or an RIA, so that you can actually get paid an advisory fee. That's the separation; if we're going to get paid a commission, we need a securities license with a broker-dealer. If we're going to get paid an advisory fee, we operate as an investment advisor and register as an RIA. And the Series licenses are specifically about getting paid a commission or receiving a 12B-1 fee, which itself is a form of a commission.

When You Need A Life Insurance License [Time - 4:23]

By contrast, when you sell insurance products, you need a life insurance license from the state. Typically, that's a life and health insurance license which permits you to get paid to sell life insurance, disability insurance, long-term care insurance, and, as the name implies, health insurance. Annuity products generally also fall under a life and health insurance license.

In addition, you have to get appointed with an insurance company if you're actually going to sell and get paid to sell that particular company's products. In some cases, there's an overlap, because products like variable annuities are both an annuity and a securities product (because it's a variable annuity where the client's money will be invested in the underlying stocks and bonds through an annuity contract). And as a result, selling variable annuities or variable life insurance require both a life and health insurance license for the insurance or annuity wrapper and completing at least a Series 6 exam or the broader Series 7 license to get paid a commission for the fact that it's a security product.

But the key point here is that's a requirement only for selling variable insurance and annuity products. If you want to implement term insurance, whole life insurance, or universal life that is not variable – either a standard UL policy or an indexed universal life policy – then you need a life and health license, but not a Series 6 or a Series 7 unless you don't actually need a broker-dealer either.

Similarly, if you just want to sell long-term care insurance or disability insurance, then you need a life and health insurance license, but no Series exam and no broker-dealer relationship. And even in the context of annuities, you can sell a fixed annuity, indexed annuity, or a lifetime immediate annuity with only a life and health license and no Series exam or broker-dealer relationship. It's just the variable annuity and the variable life that actually requires the Series license and the broker-dealer.

Selling Life Insurance Under An RIA Through A BGA  [Time - 6:07]

The key question for Patti in all of this is whether she wants to sell fixed insurance annuities under her RIA or variable insurance annuities under her RIA? If the goal is to sell fixed products, a health insurance license is necessary, but a broker-dealer relationship is not. Patti would only need the broker-dealer relationship if she wanted to sell variable products, or at least have a desire to keep trails and maybe remain broker of record for existing variable insurance or annuity products.

It's also worth noting that Patti would really just need the Series licenses and a broker-dealer relationship to get paid a commission on a variable product. With the rise of new fee-based variable annuities under DoL Fiduciary, Patti could even recommend variable annuities with only an insurance license and no broker-dealer. Because technically, you don't need a BD relationship to recommend an annuity, you need it to get the commission. But if you're going to recommend the variable annuity and charge a separate advisory fee for the advice, you can do that, once again, with the standard RIA and a standalone life and health insurance license.

For many, the practical question is how exactly do you get appointed with and work with an insurance company when you're an RIA? And the answer to that is what's called a Brokerage General Agency (BGA). In practice, you can think of a BGA as similar to a broker-dealer. It's a couple networks with multiple products and provides support and assistance to those affiliated with them to sell the products. Except, while a broker-dealer is built to do securities products, a BGA is built to do insurance products.

So if Patti decides that she doesn't want or need to do variable insurance or variable annuities but still wants to be able to sell fixed annuities and non-variable insurance – so term, whole life, UL, disability, long-term care insurance, etc. – then she doesn't need a broker-dealer, but she does need a BGA relationship.

The good news is that there are a lot of BGAs out there. A few work nationally, many work regionally, and some simply operate locally for insurance agents in the area. If you're searching for one, you may need to ask around to a lot of BGAs in your area to find one that's willing to work with you as an RIA. Because, the reality is, many BGAs are used to working with career insurance agents who sell a high volume of insurance and may not necessarily want to work with an RIA that will only occasionally place insurance products with them. But there are definitely BGAs out there that will work with RIAs.

In fact, a few I know like working with RIAs because by the time we evaluate the client's situation, do the financial planning, and make a recommendation, there's a very high likelihood that the client follows through and buys the insurance, which is a good deal if you're a BGA in the business of getting insurance sold. And a lot of RIAs work with people who, shall we say, have above-average net worth and affluence, and consequently tend to buy above-average-sized insurance and annuity policies.

In terms of choosing a BGA, most will ultimately compete on service – their ability to know the available products, help you navigate the marketplace, assist you with all the licensing and appointments, help you actually implement the policy, and make sure you get paid.

Beyond that, the reality is that larger BGAs that do a higher volume of insurance business may also potentially be able to pay slightly better commission payouts as well, but I find there's not a ton of variability from one BGA to the next. Though, there can be some, because insurance is still a volume business and brokers – including Brokerage General Agencies – that put through a higher volume can get better deals.

But it's important to know that every BGA is going to get the same product for your client. It's not as though one BGA gets a long-term care policy or term insurance policy at a discount to the others. The consumer rates, the premiums, are standardized by the insurance company and filed with the state insurance department. Therefore larger BGAs with a higher volume might be able to negotiate better payouts on what you sell, but they're generally not going to get cheaper pricing on the policies themselves. That's not a lot of reason to shop amongst BGAs in most cases.

Disclosing An BGA Insurance Relationship On Form ADV Part 2 [Time - 10:06]

For advisors who are switching to an RIA and want to keep doing fixed insurance and annuity business (but are at least ready to let go of variable products and the investment commissions and walk away from old 12B-1 trails), the path is to form an RIA and then establish a relationship with a BGA (Brokerage General Agency).

It's important to remember that if you do go this route, you still need to disclose the BGA relationship as an outside business activity and another source of compensation in your RIA's Form ADV Part 2. This is absolutely a conflict of interest the SEC expects you to disclose. And, in addition, it's worth noting having an insurance relationship with your RIA means you are not allowed to call yourself "fee-only." Even if you create a separate company for your RIA to contract with the BGA to receive insurance commissions. If you, as the CFP certificant, will ultimately participate in the commissions through a company you own when you deliver the services to clients, then you're receiving both fee and commission compensation and you have to disclose it.

I find this gets mixed up all the time. There was an incident a couple of years ago where CNBC named their top fee-only financial advisors, and nine out of ten got insurance commissions. They were an RIA, but they had insurance commissions. And this was a whole issue that arose with Jeff and Kim Camarda and the CFP Board. The Camardas had a "fee-only RIA" as standalone, and then a separate insurance company that they also owned that was receiving commissions from their clients. And the CFP Board publicly admonished them because, as CFPs, they were still receiving commissions. It was through a related party, but they were getting the compensation.

The Camardas fought the ruling, but ultimately, the judge held the decision for the CFP Board. And the latest proposed updates to the CFP Board's Standards of Conduct would go even further in making it crystal clear that paying commissions to a related party entity in connection with your financial advice to clients, is still a commission to the CFP and it means you are not fee-only.

You can decide whether having the fee-only label is even useful to you or not. I've actually written more than once; I don't think it's actually a great marketing term. Being a fiduciary is very important. Marketing as fee-only, not necessarily. But I do want to warn you if you decide to participate in insurance commissions as an RIA, you are not fee-only anymore, so don't market yourself that way. Even if your RIA only gets fees, commissions those clients pay that come to you directly or indirectly via your related entity is still a commission.

Obviously, a lot of RIAs just choose to outsource this altogether and let a third party firm implement the insurance and get the commission for the work they do to implement the policy. You don't have to participate in the commission at all. I know a lot of advisors who have a background in insurance feel like it's natural to do. But recognize, in financial planning, we regularly give tax guidance to clients, but we still refer preparing the tax return to the CPA. We talk about estate planning strategies with clients, but we still refer out the estate planning documents to an attorney. We may review automobile and homeowner insurance policies, but we still refer out the implementation to a P&C agent.

In the same manner, you can advise regarding insurance as part of your comprehensive plan and still refer out the implementation. There's nothing sacred about implementing the insurance and, frankly, introducing the conflicts of interest that it entails. Especially when you look at all the other stuff we don't implement but simply advise on, and then hand off to dedicated professionals that do that for a living.

As we wrap up, getting back to Patti's original question about whether she still needs to be a hybrid RIA with an expensive broker-dealer relationship just to implement insurance and annuities with the clients, the answer is "It depends." Because it depends on whether she wants to do variable life insurance and variable annuities, which do require a broker-dealer relationship, or whether she's only looking to do fixed annuities and fixed forms of insurance like term, whole life, UL, disability, and long-term care insurance. Because, for the latter, you don't actually need a broker-dealer. You just need a Brokerage General Agency (BGA) relationship. And even if you want to do variable annuities, if you use a fee-based product with no commissions and just charge a separate advisory fee, that's still okay with just an RIA and a BGA relationship and no broker-dealer.

And while you do have to disclose it in your RIA's Form ADV Part 2, it's worth noting the BGA relationship really is separate. A hybrid broker-dealer is the broker-dealer often wants to do oversight on the RIA. With a BGA, they will not require compliance oversight of your RIA the way that a lot of broker-dealers do if you hybridize with them. The BGA is just going to live in their insurance realm, because that's what they do.

It's worth knowing as well that there are some RIAs even that split the difference. They'll form a BGA relationship to still do fixed insurance and annuity business, but refer out the variable insurance annuity business (particularly if they don't do a lot of variable business as it's just easier to occasionally refer out than to introduce the hassle of a broker-dealer relationship if it's going to be a very small portion of their business pie).

Although, again, with the rise of fee-based annuities that don't pay commissions since the DoL Fiduciary Rule, I suspect we're going to see more and more RIAs that just decide to do this with the BGA relationship, and terminate their hybrid broker-dealer relationships, since that BD is going to be less and less necessary in the future as more and more products go fee-based and fixed insurance doesn't require the BD anyways.

I hope that helps as some food for thought about how to navigate the craziness of all of our various, overlapping financial advisor licenses. This is "Office Hours With Michael Kitces." We're normally 1:00 East Coast time on Tuesdays, although I had a conflict this week, so we had to record here on Wednesday instead. Thanks for joining us, everyone, and have a great day!

So what do you think? Have you considered selling insurance through a BGA? Do you think more advisors will drop their hybrid structure and move to a BGA relationship after DoL Fiduciary? Please share your thoughts in the comments below!