As an employee of a BGA and a Broker Dealer, I have been intently following the controversy surrounding Regulation 151A.  For those unfamiliar with the issue, 151A would bring the sales of Fixed Indexed Annuities under the supervision of FINRA and the SEC. I, like many professionals coming from an insurance background, believe that Fixed Index Annuities are insurance products and beyond the scope of FINRA’s and the SEC’s authority. 

The implementation of 151A will mark the end of the status quo for agents and BGAs.  Beginning January 12th 2011, Fixed Index Annuities will be registered products.  Agents will be required to have a series 6 or 7 and be associated with a broker dealer in order to sell indexed annuities.  BGAs will have to either register as broker dealers or affiliate with a broker dealer in order to receive compensation for their wholesale services.  All parties involved must be licensed and affiliate with a broker dealer, or exit the business.

Over the past few years, many agents have chosen to drop their securities licenses in order to avoid broker dealer haircuts and compliance departments.  Many agents selling indexed annuities have never been securities licensed at all.  Those same agents will have to be licensed and affiliate with a broker dealer or stop selling indexed annuities. 

To whom will your agents turn? Will you have the infrastructure set up to deal with them in the new regulatory climate? Is there a broker dealer out there to whom you are willing to entrust your agents?  Which broker dealers will allow your agents to continue to work with you? Which broker dealers will require that your agents start placing their business with the broker dealer’s own insurance agency?

As BGAs and FMOs, we must resist the urge to wish our problems away.  We need to form a plan.  We need to be leaders.  The reality is that there are a limited number of options.  First, you can choose to walk away from the indexed annuity business and choose to focus on marketing other products.   Second, you can choose to start your own broker dealer.  If you are interested in going that route, I would be glad to offer you my advice but you better get started soon.  The third option is to create a strategic alliance and affiliate with a “wholesale friendly” broker dealer.

I believe that choosing a strategic alliance will be the best option for the majority of BGAs and FMOs.  For most, this option brings up more questions than answers. How will I be paid? Will I only be able to work with agents of one broker dealer? In anticipation of these events we decided to create a “wholesale” broker dealer, Centerre Capital, to cater specifically to BGAs and FMOs in this situation.

No matter which broker dealer you choose, the dynamics of getting paid will be the same.  Both the BGA and the agent will get paid for the transaction.  The difference is that each party will have to be associated with a broker dealer.  The broker dealer of each party will then pay out a percentage of the payment received from the carrier and keep a portion of the payment themselves for services rendered.

It is important to understand that in this arrangement, the two parties need not be associated with the same broker dealer.  Compensation paid for indexed annuities will be paid from the insurance carrier to the broker dealer of the respective parties.  The BGA can still get paid for “wholesaling” the fixed indexed annuities to their agents.  The wholesale override normally paid to the BGA will go to the Broker Dealer of the BGA.   Assuming that the agent’s broker dealer does not mandate otherwise, the agent will still be able to work with whichever BGA or FMO that he or she chooses.  For the agent, the transaction would work just like any variable annuity or mutual fund trade.  The broker dealer of the agent would continue to provide supervision and pay the agent. 

If you do not plan to drastically change your businesses or start your own broker dealer, you should be actively searching for the right broker dealer.  Considerations go beyond compensation.  Does the broker dealer understand insurance? Do they understand your business model? Does it seem like a cultural fit? Choosing your broker dealer will be one of the most important business decisions that you ever make.  Make sure you choose wisely.