The Rise of Fee-Based Annuities and Potential Licensing Issues for Independent Investment Advisers

In recent years, as they have seen the exponential growth of independent investment advisers, insurance issuers have sought creative ways to place their products in the space. Hence the creation of the fee-based variable annuity–a product that was at one time only an arrow in the quiver of the commission brokerage industry.

Now that these products are commission-free, investment advisers can be compensated out of the contracts themselves for providing advice on the contracts and their underlying investments. In fact, the IRS recently made these products more alluring in 2019 when it issued private letter rulings that allowed compensation from the contract without incurring income for the investor.

Investment advisers often overlook the potential regulatory and legal issues that come with recommending these products and providing advice on them. I recently looked into this issue in New York and was a bit surprised at what I found.

NY Insurance Law § 2102(b)(3) states: “[u]nless licensed as an insurance agent, insurance broker or insurance consultant with respect to the relevant kinds of insurance, no person, firm, association or corporation shall receive any money, fee, commission or thing of value for examining, appraising, reviewing or evaluating any insurance policy, annuity or pension contract, plan or program or shall make recommendations or give advice with regard to any of the above.”.

NY Insurance Law § 2107 states that the superintendent may issue an insurance consultant’s license to any person, firm, association or corporation who or which has complied with the requirements of this chapter with respect to either: life insurance, meaning all of those kinds of insurance authorized in paragraphs one, two and three of subsection (a) of section one thousand one hundred thirteen of this chapter; or general insurance, meaning all of those kinds of insurance authorized in paragraphs four through twenty-three of such subsection, as specified in such license.

NY Insurance Law § 1113(a)(2) includes annuities, which suggests that a consultant’s license would be required to receive a fee in exchange for providing recommendations or advice regarding an annuity.

The law itself is unclear on whether an investment adviser would be required to be licensed as an insurance consultant for providing exclusively investment advice regarding the underlying investments in the insurance contract. The conservative approach would seem to err towards licensing.

However, there may be ways to avoid licensing altogether. If the investment adviser structures its services in such a way to avoid rendering any insurance advice on the annuity, it would be hard for the New York Department of Financial Services to allege that licensing would be required. For example, the investment adviser would need to be certain that it isn’t providing any of the services enumerated in NY Insurance Law § 2102(b)(3). This would required implementing safeguards to be certain the the business or its representatives are not examining, appraising, reviewing or evaluating the insurance contract. Also, once a contract is purchased, the investment adviser would need to create further safeguards to avoid providing advice regarding insurance elements of the contract.

For investment advisers who don’t hold an insurance license, it appears that there are a couple of options to further avoid licensing. Based on a press release, Nationwide Advisory Solutions provides a licensed insurance agent service at no cost “to help [investment advisers] enhance their client relationship and eliminate the unnecessary expense of any third party”. In addition, it appears that a cottage industry is popping up to address this very issue. On its website, Allianz references DPL Financial Partners and RetireOne as potential vendors to avoid licensing issues.

To my knowledge, the NY DFS has not brought any enforcement actions against independent investment advisers for acting as unlicensed consultants. Each state’s insurance law will differ, and you shouldn’t make any decision based on New York law or this post. Nonetheless, it seems like a practice that firms should be thinking about critically before jumping into the deep end of offering or interfacing with fee-based variable annuities (and other insurance products).