Partnering with a Life Settlement Broker Becomes Essential for Producers Who Fall Under New Fiduciary Rules

Ten years following the economic crisis, we’re seeing the legacy of how the nation’s greatest recession permanently altered the U. S. economy and financial system.

In addition to installing new guardrails around the banking sector, the financial services system has generally implemented a series of new consumer-focused laws and regulations that are dramatically reshaping the way financial and insurance professionals conduct business. A notable example is the recent action taken by the State of New York (Reg. 187) requiring insurance producers to act in their clients’ best interests.

The phrase “fiduciary responsibility to the client” is now the focus of efforts by a variety of governmental entities and professional organizations that oversee the way financial professionals interact with consumers.  As a result, practitioners are adapting to an evolving landscape of consumer-first compliance initiatives that require them to place their clients’ best interests ahead of their own.

In light of the regulatory action recently taken by the State of New York that for the first time extends fiduciary responsibility to insurance producers, it’s important to examine what this means for agents and brokers who interact with senior clients over the age of 65 with unwanted life insurance policies.

This article explores how life settlements can help agents demonstrate compliance with new and evolving fiduciary standards by offering their clients the optimum solution for unwanted policies. More importantly, this article illustrates the importance of partnering with a life settlement broker who is required by law to have a fiduciary duty to policy sellers.  

New York Extends “Fiduciary Responsibility” to Insurance Producers

Many life insurance professionals are taking note of the new rule implemented recently in the state of New York ─ known as Reg. 187 ─ that requires insurance agents and brokers (referred to as “producers” in the rule) to act in their clients’ best interests when recommending insurance and investment products. The rule took effect in August 2019 for annuity sales, and will apply to life insurance sales beginning in February 2020.

In crafting the rule, the New York Department of Financial Services took the position that the new rule is based on the principle that agents and brokers making recommendations about complex insurance transactions are more informed about market intricacies and potential impacts, and thus should be obligated to provide guidance in the best interests of the customer when making a recommendation.
The action taken by the State of New York is expected to serve as a model for similar fiduciary standards under consideration in other states.

Other Fiduciary and “Best Interests” Initiatives

SEC’s “Regulation Best Interest”

The “Regulation (BI) Best Interest Rule” is part of the Securities and Exchange Commission’s (SEC) new advice-standards package. It requires brokers to act in their clients’ best interests but falls short of a fiduciary duty. Approved in June 2019, the SEC rule requires broker-dealers to recommend financial products to their customers only if it is in their best interests. The rule also requires them to clearly identify any potential conflicts of interest and financial incentives the broker-dealer may have with those products. However, unlike the recent action taken by the State of New York, SEC’s new rule does not apply to life insurance agents because insurance producers fall under the licensing requirements of individual states.

CFP® Board Strengthens Fiduciary Requirements for Certificants

In 2018, the CFP® Board took action to strengthen the investment advice standard which requires all 85,000 CFP®s to adhere to fiduciary duty at all times when giving advice to clients. The CFP® Board originally intended to begin enforcing its new code of ethics and standards of conduct in October 2019 but has put off enforcing its revised rules until June 30, 2020. That date closely aligns with the compliance deadline for the SEC’s new advice standards that falls short of a fiduciary standard.

Many Fiduciary Training Programs Now Involve Life Settlements

Insurance and financial services firms that offer fixed and variable life insurance and annuity products have recently launched producer training programs to help ensure compliance with the new rules governing the client’s best interests.

Many product training programs specifically address life settlements and the producer’s responsibility when it comes to helping a client sell a policy. For example, one brokerage firm advises producers to “perform sufficient due diligence” and to make adequate disclosures in order to assure that the life settlement transaction is the best interests of the client.

Partnering with a Trusted Life Settlement Broker Essential to Your Best Interests as Well as Your Client’s

According to insurance regulations in most state regulations, life settlement brokers “owe a fiduciary duty to the policy seller to act according to the seller’s instructions and in the best interests of the seller.” Partnering with a trusted life settlement broker helps producers fulfill their fiduciary responsibility to their clients.

This diagram (infographic) produced by Asset Life Settlements illustrates the three stages of the life settlement process. As you will note, the primary function of the settlement broker is to submit the seller’s policy to multiple funding sources (providers) in order to create a bidding competition in pursuit of the highest offer. The number of potential buyers who bid on the policy varies from state to state. In a typical transaction, this could involve 11 or more potential buyers (providers) and generate on average two to four bids. When a life settlement broker shops the policy with the goal of achieving the highest bid, the broker is demonstrating a fiduciary duty to the policy seller.

Compliance Training and Education Programs are Essential

Training is essential in order to comply with the new fiduciary standards. That’s why Asset Life Settlements publishes a series of articles each month to educate and inform advisors and their clients on how life settlements can be used in the best interests of the client to optimize the value of their unwanted insurance asset.

As part of your due diligence efforts, we encourage you to read our recent blog article with a check list of what you should be looking for when choosing a secondary market partner. In addition to the items illustrated on the check list, Asset Life Settlements also takes the time to provide training via one-on-one coaching and published materials.

Contact us at 1-855-768-9085 to discuss the partnering process and the value we deliver.