HOW THE FINANCIAL PLANNING INDUSTRY WORKS^©

Overview Of The Financial Planning Industry Sales Network

Note: Keep in mind that virtually all securities reps and life/annuity agents are independent contractors and commission based sales people. They are not employees of their respective organizations.

Most BDs which have roughly 1,000 reps or more either own a life insurance company or the BD is owned by a life insurance company. The life insurance business and the securities business must be handled separately for legal purposes. For example, the life insurance company and the BD must be maintained as separate companies. Each individual sales person must separately maintain their life insurance licenses and their securities licenses. Securities sales must be handled through the BD and life insurance sales must be handled through the life insurance company. But where one company owns the other, the sales operation of the two companies will often be run under one roof, as one company, on an office by office basis. For example, if you go into a Lincoln Financial Services office in any city (Lincoln has multiple offices in larger cities), the sales people in that one office will have both securities and life licenses, will sell both securities and life insurance/annuities, but will do so representing the two companies of Lincoln, a life/annuity company and a BD.

Smaller BDs also have branch offices, which may consist of as few as one or two people in a given office. The BD home office will contract with one or more life insurance companies whose life/annuity products the securities reps can sell, but neither the BD nor the life insurance company owns the other. The reps must have their life/annuity license on top of their securities licenses if they wish to sell life/annuity products and the life/annuity sales must flow through the life company. But the reps’ main source of sales organization comes through their BD.

Most major life insurance companies, probably the top 100 or so, have their own sales office network, and these offices are called “general agencies”. The person in charge of the general agency is called the “general agent”. In addition to the individual agents being independent, commission based contractors, the general agent is also commission based. The general agencies are located in most of the top 100 cities of the U.S., with multiple offices in larger cities. These life insurance companies usually own their own BD, not vice versa, so the main source of sales organization comes through the life insurance company. But the BD compliance department has independent control of securities sales for purposes of complying with securities rules and regulations. Some examples of these types of companies are: Prudential, Metropolitan, Lincoln, and Massachusetts Mutual.

There are sales organizations which are exclusively engaged in life/annuity sales. The sales agents in these organizations either do not have securities licensing, or they are connected to a smaller BD as a separate activity from their life/annuity sales organization. The thing that the agents have in common is that they all sell under the same life/annuity organization, whereas they individually are affiliated with different BDs, if they sell securities at all. These life/annuity organizations are almost always organized by individual general agencies, though they can be quite large. While many of the general agencies have only 30 or 40 sales agents, the larger ones have thousands of agents.

While this is all very confusing, it can be better understood like this. The sales organizations or networks are either dominated by the life insurance side of the industry or by the BD side, depending upon which type of company (life or BD) puts the network together. The type of organization or network that a sales person belongs to will depend on that person’s product preferences and/or sales orientation. Some of the sales people are life/annuity oriented, some are securities oriented, and some are balanced between the two. Then there is the Registered Investment Advisor who has a fee based planning approach to securities. A sales person is naturally going to seek the sales network type and organization that suits his or her style (captive or non-captive, etc.), product preferences and sales orientation.

Why is this so confusing and complicated?
In a word, regulation. Both sides of the financial planning industry, life insurance/annuities and securities, are heavily regulated. The insurance/annuity side is regulated primarily by the states, and the securities side is heavily regulated by both the states (state securities commissions) and the federal government (SEC, primarily through the NASD). One major regulatory complication is the prevention of a true merger between life insurance and securities, though that burden was lessened by the 1998 Gramm-Leach-Bliley Act. Prior to that Act, no financial planning company could own a company in the other side of the industry. In other words, a life insurance/annuity company could not own a broker dealer nor be in the securities business, and vice versa. With the 1998 Act, either side of the industry can own a company in the other side. This means that a broker dealer can now own a life insurance company and vice versa. But even though one type of company can own the other, they still must keep their activities and regulations separated. The licensing, sales training and supervision, delivery of policies or securities, the regulatory supervision, etc. all must be kept separate. One company may own both an insurance company and a broker dealer, and all the sales people may sell for both of those companies, but there must still be a clear distinction between the operations of the two sides of the business. This required separation, along with hundreds of other regulatory issues, causes a lot of complexity.

One example of the industry complexity is the split in securities regulation between (1), registered reps who are working under broker dealers who are under the NASD which is under the SEC, and (2), registered investment advisors working directly under one of their two regulators when they are doing RIA activities, and then working under a BD or a life insurance company when doing those activities.

Another example of this complexity can be seen in the sale of life insurance and annuity products that begin with the word “variable”. That is, variable life insurance and variable annuities. These products contain conventional contract provisions with guaranteed payouts, but they also contain mutual funds, which are securities, with “variable” returns. So in one offering the life insurance/annuity side of the industry combines both sides of the financial planning industry, that is, both guaranteed policies and non-guaranteed, and therefore “variable”, securities. For a sales person to sell one of these hybrid products requires both securities licensing and life/annuity licensing. For one product, that is two, completely different licenses, regulated by separate governmental authorities, and supervised by two kinds of companies acting separately. In some cases the insurance/annuity component of the product is sold and regulated by a life insurance company which has no connection to a broker dealer. But, a broker dealer is necessary to regulate the mutual fund component of the product. In these cases the sales person can choose any broker dealer they want to work under for the sale of the securities component of the variable policy, which is created by a life insurance company.

The same, pre-1998 separation and prohibitions applied to banks as well. Banks could not own a life insurance company or a broker dealer, nor be in those businesses, and vice versa. Since the 1998 Act, banks may own insurance companies and/or broker dealers, but the financial planning activities of those owned companies must be kept separate from the banks’ primary business. A full discussion of the banking industry was left out of this article though because the banking industry’s primary business is not financial planning.

^®Certified Estate Advisor and CEA are registered service marks of NAFEP.TM Certified Financial Planner Board of Standards Inc. owns the marks CFP®, CERTIFIED FINANCIAL PLANNER™.


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