Why I am Planning to Drop my Insurance and Brokerage Licenses
By John H. Robinson, Financial Planner (August 2024)
As the title of this article announces, within the next year, I am planning to drop my Series 7 General Securities license and my Life, Accident and Health insurance license. To understand the reasoning behind this decision and the impact it will have on my practice, it is important to explain the regulatory framework in which I operate.
[NOTE: For the purpose of this essay, the term “financial advisor” is being used as a general catch-all that includes insurance agents, brokerage reps, investment advisers, and financial planners.]
Who Regulates Financial Advisor Conduct?
The financial planning and investment world is governed by a byzantine maze of federal and state regulations that, at least in theory, are intended to maintain a fair and orderly marketplace and protect consumers. Without getting too deep into the weeds, there are four primary regulatory bodies that effectively serve as puppeteer to financial advisors, including me:
National Association of Insurance Commissioners (NAIC) – Insurance is regulated at the state level by individual state insurance commissioners. NAIC represents a consortium of the state commissioners and serves to standardize regulation across all 50 states. To offer insurance products, financial advisors must pass their respective state’s insurance licensing exams and keep up with continuing education requirements.
Financial Industry Regulatory Authority (FINRA) - Formerly known as the National Association of Securities Dealers (NASD), FINRA is the self-governing regulatory body created by the SEC to govern the brokerage industry. To recommend securities (e.g., stocks, bonds, mual funds, etc.) for purchase to consumers, a financial advisor must pass FINRA’s Series 7 and 63 state licensing exams. Upon passing they exams are referred to as “registered reps” or more colloquially as “brokers”. They must also keep up with continuing education requirements.
Securities Exchange Commission (SEC) – This agency regulates the delivery of investment advice under the Investment Advisers Act of 1940. Its regulatory reach includes all investment advisers who provide advice for a fee that includes guidance pertaining to securities. It encompasses Registered Investment Advisory firms (RIAs) and their investment adviser representatives (IAR), including financial planners. In order to act as an IAR or a financial planner, a financial advisor must pass the Series 66 exam and keep up with continuing education requirements.
Department of Labor – This agency regulates the delivery of investment advice to consumers who participate in retirement accounts (including 401(k)s, 403(b)s, pensions, IRAs, etc). While license-holders from any of the above-referenced agencies may provide advice to consumers who have retirement accounts, the DOL governs the standard of care they must provide.
The Regulatory Impact on Financial Advisor Standards of Conduct
Although each of the four aforementioned regulatory authorities has extensive, well defined rules of conduct, there is considerable variability in the minimum standard of care. For instance, while insurance agents have an obligation make recommendations that are appropriate for prospective policyholders’ risk management objectives, the NAIC standards do not require insurance companies or their agents to disclose the amount of fees and commissions they may make on product sales or even to disclose the existence of similar products with lower sales commissions.
Brokerage registered reps are held to a modestly higher standard of care that requires them to always act in their clients’ “best interests.” Although it does not necessarily require them to place their clients’ interests above their own, it more closely aligns registered reps’ interests with those of their clients. Also, unlike most insurance product sales which have opaque commission structures, commissions on brokerage product sales are usually transparent.
SEC-registered investment advisers, including financial planners, are held to a fiduciary standard that requires them to disclose all material facts and to always place the clients’ interests first. Similarly, the D.O.L. requires a fiduciary standard of care for most recommendations including the decision to move retirement accounts from one institution to another.
While some financial advisors hold a single license and are largely siloed under a single regulatory authority’s umbrella, the majority of financial advisors hold more than one type of license. For these “hybrid” advisors, the questions that beg asking how do consumers know which regulatory hat the advisor is wearing and which standard of care he/she is providing. For the record, I operate as a hybrid financial advisor.
How My Regulatory Journey Creted a Regulatory Jungle
When I began my career back in the Bronze Age (35 years ago), the financial services landscape was dominated by insurance companies and brokerage firms (also called “wirehouses”). At that time, financial guidance revolved around product sales. Many Series 7 licensed brokerage reps also obtained insurance licenses to enable them to sell products such as annuities, life insurance, and long term care insurance. Similarly, it was common for insurance agents to also obtain Series 6 licenses to allow them to sell mutual funds and variable life and annuity products. Although there were some Registered Investment Advisers offering portfolio management for a fee, their numbers were vastly fewer than today. Financial planning was years away from becoming mainstream. In fact, the Certified Financial Planning designation was founded as a way to give greater credibility to insurance agents seeking to compete more effectively against brokerage reps.
I entered the industry as a wirehouse brokerage rep. My first business card listed “Investment Broker” as my title. Soon after, I obtained my insurance license so that I could sell fixed annuity products. (At that time, a consumer could buy a 1-5 year fixed annuity contract from an A+-rated insurance company with a 10% annual interest rate!). My interest in becoming more than just a product salesman was spurred from hosting estate planning seminars with local attorneys as a way to gain an introduction to affluent consumers. It was furthered by the rise of long-term care insurance in the early 1990s, which raised my awareness of the need for consumers to plan for financial objectives beyond just saving for retirement and children’s college funds. As my client base grew to include small business owners, I recognized the need to become an expert in the different types of qualified retirement plans.
By the mid-1990s there was a nascent trend among financial advisors away from commission-based product sales toward fee-based (asset-based) compensation in investment management. In 1996, I obtained my Investment Advisers license (Series 65). Since financial planners whose practices include securities guidance are also governed under the Investment Advisers Act, it was at that time that my financial planning career officially began.
Over the next decade or so, my practice continued to evolve and I worked proactively to expand my knowledge base. Although commissions became a dwindling part of my total revenue, my business model remained largely investment centric as I continued to work under the wire house umbrella. In 2008, I left the independent channel of Wells Fargo to establish Financial Planning Hawaii. This change finally left me free to do real comprehensive financial planning in which investment guidance is just one of many critical elements. These days my realm of expertise includes tax panning, estate planning, asset registration and liability protection, insurance risk management, qualified retirement plans, social security planning, as well as portfolio management.
Two Reasons for Dropping My Securities and Insurance Licenses
The easiest and most “politically correct” explanation for dropping my Series 7 and insurance sales licenses is to eliminate the “two-hats” problem. Even though the financial planning agreements we provide to all clients specifically states that we are committed to being aq fiduciary at all times, maintaining the securities and insurance licenses creates an opening for criticism and doubt. Longtime readers of my content likely know that I an ethics zealot and have frequently called out the CFP Board of Standards for sermonizing about the need for a universal fiduciary accountability while misleading consumers about its self-defined faux fiduciary standard. Although no one has ever really called me out for this potential hypocrisy, the truth is that it bothers me. My approach to financial planning has evolved to the point where I now view product sales as antithetical to investment advice. The sales license is increasingly becoming an albatross around my neck. I will feel better when they are gone.
However, if I am being honest with myself, the larger reason why I am inclined to walk away from my brokerage and insurance licenses is that I have grown to absolutely loathe the continuing education requirements. Together, the CE requirement probably takes up 30-40 hours of my time each year. The content is mind-numbingly boring and, in my opinion, does absolutely nothing to make me better at my profession. As I am getting older, I increasingly value my time on Earth and have come to view CE as a week of my life each year that I will never get back.
How Will Dropping the Licenses Impact Our Clients?
At this time, are only a handful of clients left with whom we still have legacy brokerage account relationships at NFS. They are all loyal clients who have been with me since the beginning of my career, and I a feel a strong sense of friendship and loyalty to them too. While I will not be able to service their accounts without a brokerage license, I will likely make it attractive for them to migrate to our financial planning platform.
The stickier issue will be how to handle financial planning clients we service who own variable annuity contracts with unique living benefit riders that were purchased in the early 2000s. While I am not averse to walking away from the trail revenue that these contracts continue to generate the larger problem is that I will no longer be able to service these contracts without being licensed and appointed with the issuing insurance companies. The solution is that we will need to have our clients on the line each time we contact the insurance company for assistance. In theory this should be little more than a minor inconvenience for our clients. The problem is that the insurance call centers often have excruciatingly long hold times.
As you can see, while the concept of dropping my brokerage and insurance licenses seems noble enough, the devil lies in the details.
John H. Robinson is the owner/founder of Financial Planning Hawaii and Fee-Only Planning Hawaii. He is also a co-founder of fintech software maker Nest Egg Guru and the new personal finance website NestEggPF.com.
