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SEC Rule 151A about Indexd Annuities not such a big problem for annuity agents

Published on December 28, 2008 in equity indexed annuities by Bob Richards

The big deal being made out of equity index annuities being classified as securities by SEC Rule 151A is a big deal for the issuers, not for agents.  Individual agents have two ways to accommodate this change.

1. Your first option to deal with rule 151A is to go get a securities license and get affiliated with a broker dealer (BD).  This is not such a big. deal.  If you cannot pass the series 6 or 7 exam, you should not be in the business.  Any intelligent 6th grader can pass this FINRA exam.  There is no thinking involved on this exam.  It’s just a bunch of rules that you memorize and then regurgitate on a multiple choice exam.  MULTIPLE CHOICE—means that they GIVE YOU THE ANSWER.  You just need to pick the right one.  If you want to get this out of the way quickly, then you take a cram course that lasts Monday to Friday and then (if the testing center near you is open Saturday), you take your exam on Saturday when all of the rules are fresh in your head.  There you are done in six days.  Just do a Google search on “series 7 exam cram course.

2. Your second choice to deal with SEC rule 151A is to get an RIA certificate.  In almost every state ( you will apply for a State RIA certificate, not with the SEC), you need to have passed the series 7 license to get an RIA certificate.  So you need to do step one listed above.  Some good news here: most people think that in order to take the series 7 exam, you need to have a relationship with a broker dealer and be sponsored.  This is not true. You can contact you local Prometric testing center (they administer the FINRA exams) and tell them you are taking the exam to be an RIA.  You then won’t need a BD sponsor.   So you can just pass the series 7 exam and then get your RIA certificate.  What good will an RIA certificate be to you?  It will allows you to sell EIAswithout a BD affiliation and without complying with all of the BD rules.   By 2011, when EIAs become securities, most of the EIA issuers will offer an RIA version of the EIA.  Rather than an up-front commission, you will get 1% annually.  In the long run, you will earn more, as 1% on an EIA that grows in value for ten years will be more than the 8% you get up-front now.  If you are addicted to the upfront commission (i.e. you livesale to sale) then you simply change your mix of business to sell traditional fixed annuities with your 4% to 6% up-front commission as you build your own “annuity” from the 1% annual trailers you will get from fee-based EIAs.

Even though index annuities won’t technically be securities until 2011, there is a lot you can do with your RIA certificate right away.

a. You can sell variable annuities.  There are at least a dozen variable annuities on the market that have similar features to EIAs(guarantee of principal) and also offer riders with guarantee minimum income benefits (just doa Google search on no-load variable annuity).  These do not pay an RIA up-front commission.  You typically get 1% annually. (Note—as an RIA, you can also set your own fee schedule.  Say you buy a Vanguard Variable Annuity for your client and Vanguard has no RIA fees built in.  You can always charge your client 2% annually to manage the sub accounts in the annuity.  Of course, your clients will see the 2% fee because RIAs must disclose all fees and it will show on their brokerage statement).

b. You can offer fee based money management accounts and do what every Merrill Lynch broker has been doing for the last ten years.  You’ve been missing your clients’ big money to the Merrill Lynch guy.  People don’t put their big money in annuities.  They put their big money into stocks, bonds, mutual funds.  That’s’ why the average stock broker earns a LOT MORE than the average life agent.  The average stock broker controls a lot more money than you do.  The average guy at Merrill Lynch or any brokerage house knows next to nothing about stocks and bonds (you’ll find this out when you see what they ask on the series 7 exam).  All that stockbrokers do is develop client relationships and then hand the money off to mutual fund managers or third party money managers (separate account managers) and get 1% annually.  You could start doing this right away as you too know how to develop relationships and trust.  If you’re a decent marketer (or choose to become one), you could raise $100 million in 3 years and enjoy a million dollar income just from money management fees.  This IS as easy as it sounds.  It’s exactly what they do at Merrill Lynch.  It’s all about relationships and trust—you don’t need to know anything about selecting investments as someone else does that for you.  (see more about operating as a registered investment advisor).  Of course, if you want to continue to get your 8% upfront commission for EIAsor variable annuities, you can always join a BD in 2011 and put up with their ridiculous and arbitrary rules.

So the problem of EIAs being securities under SEC Rule 151A is not for the agent as you have choices.  The problem is more for the EIA issuers (who will adjust their distribution model to go through BDs and offer a 1% annual fee-based EIA for RIAs) and mostly for the independent marketing organizations.

21 thoughts on “SEC Rule 151A about Indexd Annuities not such a big problem for annuity agents

  1. Steve says:

    Series 7 easy? Yeah right....dumb ass

  2. Bob Richards says:

    Steve,
    In the world of tests, the series 7 only asks that you regurgitate learned information. There is no thinking involved. In other words, one only needs to memorize, not think. That unfortunately is why there are so many incompetent financial advisors. The hurdle to sell investments and insurance in the US is SO LOW. The CFP exam is an example of an exam that requires thinking to work through the problems and case studies.

  3. Ian says:

    Advisors fail to say NO to prospects who fall outside their ideal target niche... According to top IRA educator Mike Reese of Centennial Wealth Advisory, one of the biggest sing mistakes you can make is taking a client with the wrong demographics, which will lead to you shirking on service.
    I pulled some great reminders (like this ) from http://www.EOins.com
    Practice due diligence. Set the example.

  4. Scott Hoff says:

    I think the test is challenging enough. I also think that the CFP is a great accreditation.

    Brokers looking to get licensed might consider a Broker Dealer with a background in life insurance.

    Marketers of fixed annuities might consider establishing a relationship with a wholesale broker dealer

  5. Jonathan says:

    As you suggest it pays to do your research and not listen to mainstream discussion about SEC Rule 151A. There are always opportunities to get around problems that are presented. Your analysis was very thorough

  6. Josh says:

    All kind of professions who needs licenses undergone examinations and asked to pass requirements. To be a good RIA and Broker Dealer, you must start at the bottom like taking licensed exams.

  7. zoe says:

    There is no thinking involved on the series 6 or 7 exam.Most people think that in order to take the series 7 exam, you need to have a relationship with a broker dealer and be sponsored. This is not true. You can contact you local Prometric testing center and tell them you are taking the exam to be an RIA. You then won’t need a BD sponsor. I think the test is not so trouble.

  8. Ted says:

    It’s all about relationships and trust—you don’t need to know anything about selecting investments as someone else does that for you. All that stockbrokers do is develop client relationships and then hand the money off to mutual fund managers or third party money managers.

  9. Pressure says:

    All kind of professions who needs licenses undergone examinations and asked to pass requirements. To be a good RIA and Broker Dealer, you must start at the bottom like taking licensed exams.

  10. andamios says:

    These annuities can be purchased from an insurance company, and similar to other types of annuities, the terms and conditions associated with payouts will depend on what is stated in the original annuity contract.

  11. The CFP is a great accreditation to have it does help to give authority. But I think the test is not challenging enough. Annuities leave most clients cold.

  12. Mark says:

    That unfortunately is why there are so many incompetent financial advisors. The hurdle to sell investments and insurance in the US is SO LOW.

  13. brittany says:

    This is clearly an attempt to stop the losses by securities brokers, caused by clients moving monies to index annuities. They see more of this coming as baby boomers retire and choose less risky options and more losses in commissions. I would like to see other securities products, have as few claims of fraud, suitability and non-compliance as insurance products. insurance is a far safer and secure place for monies... maybe not anymore. It's nice to have the government ruin your competition for you.

  14. Baby Gates says:

    I think the CFP is a great test,but the only fall back is I wish it was a little more challenging. Thank you for your time.

  15. Turismo says:

    I think the test is challenging enough. I also think that the CFP is a great accreditation.

  16. John [email protected] management services says:

    I definitely have to agree with all the responses to this blog post. The CFP is a good tool but definitely needs a bit of revision to make it a bit more challenging.

  17. Totally agree on the Series 6 and 7. Just cram it in and puke it back out. Really anyone should be able to pass it.

    K2 Skis

  18. Workplace time management is an absolute essential skill to master if you are to ever enjoy true accomplishment on your job. Nothing is more frustrating than being busy all day long, but hardly making any progress.
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  19. Michelle says:

    It is important to properly employ time management principles in the workplace, so that you ca reduce stress and maximize efficiency. Most people think that in order to take the series 7 exam, you need to have a relationship with a broker dealer and be sponsored. Thank you.

  20. Linda says:

    CFP is a great test. Not all to challeging though.

  21. mj financial partners...

    [...]SEC rule 151a | Annuity Leads[...]...

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