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Investor and Adviser Groups Voice Opposition to Weakened Fiduciary Standard

Friday, June 14, 2013

A broad-based coalition of organizations urged the Security and Exchange Commission on June 7th to establish a uniform fiduciary standard for broker-dealers and investment advisers that is at least as strong as the existing standard for investment advisers and asserted vigorous opposition to any rule that would weaken investor protections. The group comprises like-minded organizations advocating for the extension of a client-first fiduciary standard to broker-dealers.

The organizations signing the letter are: AARP, American Institute of Certified Public Accountants, Certified Financial Planner Board of Standards, Consumer Federation of America, Financial Planning Association, Fund Democracy, Investment Adviser Association, National Association of Personal Financial Advisors and the North American Securities Administrators Association.

Currently brokers are held only to a rules-based suitability standard. The fiduciary standard of care is widely viewed as more stringent than the suitability standard. “The suitability standard focuses on sales conduct. It requires the representative to sell the most appropriate product for the client [from among those products that the representative is licensed to sell and without disclosing any sales limitations]. The fiduciary standard requires the representative to act solely in the interest of the client without regard to the financial or other interest of the broker, dealer, or advisor providing the advice.”[1]

But if “client’s best interest” has a different meaning, then how do you know which brokers really mean it? And if you are a broker, then how do you prove to clients and advisors that you really DO mean it? Agents/brokers who are or may be perceived by clients as life insurance experts who are serving the best interests of the client would be well served to provide independent research that supports such recommendations. Similarly, independent advisors who owe a fiduciary duty to the client would also be well served to suggest/insist that product recommendations/proposals include independent research as to the suitability of the recommended product to the client’s situation relative to peer group product alternatives.

The difference between a “suitable” low premium product and what is “best” for the client could be reflected in the cash values of the life product. With permanent life insurance, suitability depends on a number of factors, and the lowest premium may not always offer the best value. Premiums instead represent the funding plan necessary to cover expected cost of insurance charges (COIs), fixed administration expenses (FAEs), cash-value-based “wrap fees” (e.g., VUL M&Es) and premium loads over the expected duration of the policy contract. In other words, planned premium payments are always a function of the following formula: Premiums = COIs + E(expenses) – i%(interest). The suitability of a permanent life insurance product is also influenced by the degree of cash value liquidity throughout the life of the policy. All other factors being equal, the higher the liquid cash value after deduction of cost of insurance charges and policy expenses (including contingent surrender charges), the more suitable the policy. As such, measuring cash value liquidity for the life insurance products are based on the following formula: Premiums - COIs - E + i% = Cash Value. Research has shown, keeping costs low is the best predictor of investor success. The desirability of permanent life insurance products depends principally upon the following five (5) factors:

  • Financial Strength and Claims-Paying Ability
  • Cost Competitiveness
  • Pricing Stability
  • Cash Value Liquidity
  • Historical Performance of invested assets underlying policy cash values

All 5 factors contribute to the appropriateness of permanent life insurance policies, and no single factor is sufficient to determine overall suitability. Veralytic research reports measure all 5 factors for any policy holding against benchmark averages for peer-group products and uncover the “real” costs of life insurance policies.

Veralytic is simply the fastest, easiest, and most comprehensive and cost-effective way to independently verify to clients and their advisors whether or not the pricing and performance of existing or proposed life insurance is in their best interest. Only Veralytic is accepted for independent client representation, endorsed by the New York Bankers Association (NYBA) and compliant with industry regulations and established case law.

Use the Veralytic Reports to determine the appropriateness of pricing, the reasonableness of performance expectations for invested assets underlying policy cash values, and overall suitability for your (client’s) policies based on the 5 factors of suitability. Click here and get up to 3 Veralytic research reports under our NO-Risk trial subscription.

[1] National Underwriter, “Are You a Fiduciary” Linda Koco. Oct. 5, 2009

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