NAIFA Launches an Attack on “Unreasonable” Legislation

The National Association of Insurance and Financial Advisors–New York State (NAIFA–NYS) has launched an all-out attack on an initiative introduced in the leg- islature that would institute what it sees as unreasonable requirements upon providers of Financial counsel.

NAIFA which represents the interests of tens of thousands of agents, their associates, and their clients who are consumers throughout New York, states its dedication to ensuring that only the most competent, qualified and ethical insurance and financial service prac- titioners serve the public interest by providing beneficial products, service, guidance, and information to the consumer on issues that affect their financial security and protection.

New York City Comptroller Scott M. Stringer framed a proposal to enact a state law requiring that financial advisors disclose whether they put their own financial interests above those of their clients. The Comptroller also released a report examining the history of the fiduciary standard, expressing his support for enacting the fiduciary standard nationwide and detailing his pioneering state proposal.

“Billions of dollars in savings are lost each year because of hidden fees and conflicted financial advice,” Comptroller Stringer said.  “We need a uniform, national fiduciary stan- dard, but we can’t wait to give New Yorkers the common sense reforms they need to make informed investment choices. This new law will ensure that New Yorkers know whether the investment advice they receive is in their best interest.”

Most New Yorkers assume that their financial advisors provide objective advice that is to their benefit. However, under current law, most financial advisors are not required to provide advice that is in the client’s best interest—a legal standard of care known as the fiduciary standard, according to Stringer. Instead, many brokers, financial planners, and retirement advisors, he claims, are allowed “to operate under a more permissive ethical code known as the suitability standard, which allows advisors to push investments that yield high fees or commissions, provided those investments are suitable for their clients,” his communication stated.

Stringer is proposing a measure that would require all advisors operating under the suitability standard to state at the outset of any financial relationship:

I am not a fiduciary. Therefore, I am not required to act in your best interests, and am allowed to recommend invest ments that may earn higher fees for me or my firm, even if those investments may not have the best combination of fees, risks, and expected returns for you.

“This pledge will ensure transparency and accountability in relationships between investors and their advisors in New York State and provide needed protections to millions of New Yorkers. Hard-working New Yorkers should not be penalized by a system that doesn’t adequately address potential conflicts of interests and financial mismanagement,” Stringer said.

The Comptroller’s report follows two recent actions at the federal level that signaled movement toward stricter standards for financial advice. President Obama recently called for the Department of Labor to issue a new rule requiring all retirement advisors to abide by the fiduciary standard. Securities and Exchange Commission Chairwoman Mary Jo White commented that her per- sonal view was that a “uniform standard” for financial advisors was needed.

New York President Lawrence Holzberg responded that, while NAIFA- NYS shares the sponsor’s intent of protect- ing consumers, “We believe the approach of the bill is misguided and that the dis- closure statement required by the legisla- tion will have a chilling effect on an insur- ance agent or financial advisor’s ability to properly service a client’s needs.”

Holzberg said: “Our members are trusted financial advisors who assist their clients in making important decisions on issues ranging from asset management, growth of net worth, employee benefits, retirement and elder planning, life, health, long term care and disability insurance planning, college funding, and business succession and legacy planning. This guid- ance includes the consideration of the pur- chase of insurance, annuities, mutual funds and other financial products.  A6933 would require that brokers and financial advisors who are not subject to a fiduciary standard of conduct make disclosures about their level of obligation to clients that are biased against anyone who is not a fiduciary and that are neither fair to the advisor nor balanced in nature. The bill would require a broker who is not subject to a fiduciary duty, to be required to make such a statement as the one reported above prior to engaging a client. NAIFA holds that in all likelihood, a client of the broker would end their meeting at once, poten- tially leaving many middle-market New Yorkers underserved and without access to needed products and services.

NYS supports appropriate, balanced disclosures. The one-sided disclosure required by A6933, however, does not come close to telling the complete story and amounts to little more than saying “fiduciary good, all others bad.”

According to NAIFA New York, the disclosure statement implies that if an agent sells an annuity, for example, then he cannot possibly be acting in a client’s best interest. An annuity, which would fall under this proposed legislation, is not a pure investment, but an insurance product with an investment feature and a very important part of an investor’s portfolio. Many times a client’s interests are best served by the insurance benefits that annu- ities offer.

In NAIFA’s view, an appropriate dis- closure would “paint a more complete pic- ture of the standard of care landscape:

– to include a discussion of the protec- tions provided by FINRA’s suitability standard, and the robust rules-based regulatory regime applicable to the broker-dealers and registered repre- sentatives covered under that stan- dard;

– to discuss the frequency and types of examinations that broker-dealers are subject to by FINRA (as well as the frequency and types of examinations that registered representatives are subject to by both FINRA and the reps’ broker-dealer); and

– to compare and contrast these factors with the regulatory regime and fre- quency of examinations applicable to investment advisors who are current- ly subject to a fiduciary duty.

Mr. Holzberg concluded, “Only by pro- viding consumers with this type of thor- ough and balanced disclosure will con- sumers be given the information they need to make an informed decision about what type of advice is best for their own situa- tion. It should also be noted that New York State Department of Financial Service’s Regulation 194 – Producer Compensation Transparency, adopted in 2010, mandates commission disclosure.

“In addition, in New York, as in all states, fees and commissions on insurance products are regulated and approved by the Department of Financial Services.”