Q13 – Can I sell insurance as an RIA?

Also available as podcast (Episode #13)

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Can I sell insurance as an RIA?

As your own Registered Investment Advisor (“RIA”), you are generally able to offer insurance solutions to your clients.  However, there are a number of caveats regarding what types of products you can offer (fixed vs variable), what specific additional affiliations and licenses you would be required to have, as well as how/when disclosures are required regarding offering insurance solutions as part of your service offering.

? See also my updated/expanded answer where I dive further into how to offer such products in a fee-only environment.

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Full Transcript:

Can I sell insurance products as an RIA? That is today’s question on the Transition To RIA video series. It is question #13.

Hi, I am Brad Wales with Transition To RIA. Today’s question is….can I sell insurance products as my own RIA? This is a great question. It’s a question I get fairly frequently and, unfortunately, this has the proverbial answer of: It depends. I’ll explain what that means. Now, the slightly longer answer is generally, yes, you can. But there are some caveats to be aware of and hence the dreaded “it depends”. Let’s go through them one-by-one here.

The first thing to keep in mind is that there are two types of insurance. There’s variable insurance and fixed insurance. So variable insurance is your variable annuities, your variable life insurance. The key with a variable insurance product is that you have to have an insurance license to be able to sell those products. But in the case of a variable product, in most all cases, requires a securities license as well. Generally, a Series 7.

As a pure RIA, you will no longer have a Series 7, you no longer have that securities license. Solely under the RIA umbrella, you cannot offer or sell variable insurance products. Now, an often misunderstood kind of component of the RIA-model is the thought that there is no option to have your Series 7. Again, technically under the RIA itself, you would not have a Series 7. However, there is a way, as the owner of an RIA to also have your Series 7, with what are frequently referred to as RIA-friendly broker-dealers.

Now, this is an entirely different and an important topic so I’ll do a whole separate video on that but just know for the sake of this video, it is possible to set up an RIA and do all of your fee-based business under that RIA. And over here, on the side, have your securities license, your Series 7 with a broker-dealer. Which among other things enables you or allows you to do commission products. Even commission securities products.

Part of that does then give you the ability, if you’re set up like that, to offer variable insurance products, so variable annuities. As long as you have that insurance license and you have your Series 7, most likely with again, these RIA-friendly broker-dealers. This is the type of thing I help advisors understand all the time. How exactly this works. Under that circumstance, you can offer these variable insurance products.

Now, the one sidebar I mentioned a second ago that without that broker-dealer, it is kind of a slow upstart, but there are a few slowly growing number of fee-based variable annuities where the product manufacturer of these solutions has enabled it so that you can sell it solely in that, with that insurance license and that does not have a securities element to it. And in the whole world of variable annuities I’d venture to say, and I’m not an expert on this. that maybe 1% to 2% of them right now are in that fee-based model or that fee-based structure. So it’s a very small number but I do see it growing and personally, I think it will continue to grow. In large part because the mass movement of advisors to the RIA-model is going to necessitate it so know that there are a few solutions out there.

But for the bulk of variable annuities out there, you generally will need this set up where you do have your Series 7 with a broker-dealer on the side. And then, you have your RIA and, of course, you have your insurance license. So that’s with respect to variable insurance.

And then, on fixed insurance, as long as you have your insurance license, you absolutely can provide those solutions to your clients. Because there is no variable component, you don’t need to worry about a Series 7, you don’t need to worry about a broker-dealer, or anything along those lines. Just know and that’s the easy part to answer is, fixed insurance, you absolutely can do that.

Whether it’s fixed annuities, life insurance, disability insurance, those sorts of solutions, that absolutely falls…again, you do need that insurance license, but you absolutely can provide that. Now the question is though, who do you work with to provide that?

Right now, if you’re with one of the large traditional brokerage firms and you do offer insurance products, you’re almost guaranteed to be offering those products through your firm’s insurance carrier, in-house insurance carrier. Probably, a wholly-owned subsidiary of your large firm that you’re affiliated with.

Similar, you’re going to need as your own RIA if you want to offer insurance solutions, you’re going to need to work with an insurance carrier as well. It won’t be kind of built into the firm that you’re working for now. And there’s different ways to go about connecting with those folks.

Some custodians have in-house insurance that you can connect to, to provide those solutions. And then, there’s a host of them out in the marketplace that you can work with directly as well. And that’s a good reminder of one of the benefits of the RIA-model is the optionality you have. Even if you’re with a particular custodian and even if that custodian does have an insurance solution, you’re by no means obligated to use that solution.

Now, it might be a good fit for you. It might be they might offer a great array of products and it might be a more efficient solution for you. But because you’re an RIA, you have the ability to go out to whatever source you’d like. You are not captive to any one source.

So just know, again, a couple steps depending on whether it’s variable or fixed, it depends on the kind of licenses you have to have, whether you have to have a broker-dealer affiliation. Or whether your sole insurance license will be good enough, depends on the solutions you want to provide. And then, know that you will need to work with an insurance agency or carrier, and there are a lot of choices, there. Now, that is a benefit, is that you do have that choice.

Two additional things I wanted to mention on this. Number one, if you offer insurance products to your clients, a couple things. You do need to disclose that in your ADV. Part 2 of the ADV actually has a segment called Outside Financial Activities. And you do need to disclose in there that, hey, in addition to providing the traditional advisory services of the RIA, I am also a licensed insurance individual and I offer insurance products as part of my suite of services as well.

That does have to be disclosed in the ADV Part 2, which is made available to your clients, regardless of if you’re actually using it (insurance products) with a particular client or not. If you want to have that affiliation with an insurance carrier, you do need to disclose it. And kind of related to that, one of the reasons to disclose this is that in the RIA world, you do have to disclose all conflicts of interest.

In a perfect world, you’d be able to eliminate all conflicts of interest. But the reality is that’s just not reasonable. It’s actually a frustration of mine. I’ll see on some RIA’s website and they’ll say, “We have no conflicts of interest.” And the reality is there’s just elements of the business, if you want to debate it I think you can argue are a conflict. But that’s not necessarily a bad thing.

As an example, to offer insurance products, oftentimes, that’s a big benefit to clients. And you can offer it to them there, in-house. Provide an easier solution for them. If they have questions about any part of their financial life including insurance, they can just come to you.

But as an example where that’s a conflict is if you are providing a financial plan to a client and charging a fee for that financial plan. And you point out to that client that, hey, maybe you need life insurance. That’s a common piece of advise, right, that advisors give to clients all the time. If you give that advice and, also, and by the way, mister or misses client, I can sell you that life insurance right here, in-house and it’s easier and here’s why.

Again, that might be a great solution for the client for a whole number of reasons. But you can understand where that conflict is. You are giving advice over here, which includes, “Hey, you should buy a product.” And then, by the way, “hey, I’ll sell you that product.” So that’s not to imply that you would suggest an insurance product when it’s not necessary. But there is that inherent conflict of interest.

Again, you don’t have to eliminate conflicts of interests but where they exist, you do need to disclose them. And so, again, that’s in part why it appears in the ADV. It’s to say to the client, “Let me lay out all the conflicts there for you. I’ll walk you through why I think you should not be concerned about these conflicts but it is important that you be aware of them so you can make a fully-informed decision.”

And then, the final thing and I think I’m going to do a whole different video on this because there’s a lot of debate about it. But there is the debate on calling yourself….so folks that transition to the RIA-model and you say….”Hey, I’m a fee-only advisor,” or a “fee-based advisor”. And sometimes those get intertwined. The challenge though is there’s some school of thought out there that says if you are a “fee-only” advisor that you should not be offering insurance products for a commission. Or at least, that you would receive a commission on.

Because at that point, are you “fee-only” anymore? And you might say…..well, yeah, but the advisory service is fee-only. The client pays me for all of the advisory services. And if they want to implement that insurance solution, yes, I do get a commission and, yes, I disclose it.

It’s not that it’s not above board but there is a debate on whether an advisor that’s in that situation should be able to call themselves “fee-only”? Because arguably at times they are not fee-only. They are receiving a commission for an insurance product. That debate will probably continue for some time but it’s something to be aware of.

The reason I point it out is if you only envision yourself doing very little insurance solutions for clients, maybe consider is it even worth including it in your suite of services? Is it worth having this potential conflict of interest and worth having to disclose it in the ADV? Or maybe it is a very meaningful thing and a lot of your clients do get a lot of value out of it and it is worth doing. So I’m not trying to suggest you should or shouldn’t do it. But it’s just worth considering all these things in mind and knowing can you use that “fee-only” verbiage if you are using it. Again, I think it’ll be a long time if ever, before that debate is fully settled but just something to be aware of that’s being talked about out there in the marketplace.

So bottom line, yes, you can offer insurance products as your own RIA. Again, it just matters what kind of products you want to offer that dictates what kind of licenses you have to hold, what kind of affiliations you have to have and how these things must be disclosed and where they must be disclosed. So a couple things to keep in mind there.

With that, like I said, my name is Brad Wales. I’m with Transition To RIA. What I do for advisors is I help advisors just like you to understand everything there is to know about why and how to transition to the RIA model. Today’s topic is just one example of that. If you wanted move to the RIA model, how would insurance work? That’s just one pillar of the conversation that I help advisors with, and would love to help you with that as well.

If you’re not already there, jump on over to TransitionToRIA.com. You can see lots of other videos I’ve made. I have whitepapers. And then, the easiest way to learn about all this stuff is just to reach out to me. At the very top is a contact link. You can instantly set up a day and time for us to have a conversation like this. To begin the dialogue. To really look at what is your current situation? Where are you in your career as an advisor? What affiliation model are you currently under? What type of firm are you currently with? How would your situation look in the RIA model? And you’ll really begin to understand what that looks like. I’d be more than happy to begin that dialogue with you and get that conversation going.

For now though, I hope you found value in today’s video and I’ll see you on the next one.

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