Lesson Plans for Back to School

School is starting again, have you learned your lessons yet?  Let’s first reflect back to last year when we received “A Shot Across the Bow” and FINRA recorded one of its top 10 largest arbitration awards ever, and last summer’s giant financial regulation bill and have the insurers learned their lesson from 2008-2009?  

Lesson One: “A Shot Across the Bow” - a ruling by the Indiana Court of Appeals, In Re Stuart Cochran Irrevocable Trust, sent a shot-across-the-bow warning to trustees trying to navigate the changing  irrevocable life insurance trust (ILIT) environment. In ruling for the trustee, the court provided valuable guidance as to how courts may apply the Uniform Prudent Investor Act (UPIA) to cases involving ILITs. The court examined the prudence of an exchange of trust-owned life insurance (TOLI) holdings in accordance with the principals of the Indiana Prudent Investor Act. In so doing, it clarified the steps trustees should take to fulfill their fiduciary responsibilities and manage TOLI more effectively. If trustees follow a “prudent process” that incorporates information from “an outside, independent entity with no policy to sell or any other financial stake in the outcome,” then courts shouldn’t second-guess a trustee’s decision regarding an ILIT’s holding. Trustees of ILITs had previously lacked guidance on how the courts would apply the UPIA to TOLI. Consequently, these trustees struggled to manage TOLI holdings with confidence while fulfilling their administrative duties. By following a prudent process prescribed by the UPIA, heeding the guidance provided by the court in Cochran and supplementing it with relevant parallel authority, ILIT trustees can better serve their clients, reduce litigation risk and potentially generate new fees and revenues. Click HereHer to read complete e-newsletter issue.

Lesson Two: FINRA has been recording arbitration awards for 21 years and this new case is among the top 10 largest amount ever awarded, according to the NY Times.  As such, while the frequency of breach of fiduciary duty arbitration cases/awards are clearly on the rise, this case may also indicate that the amount of the breach of fiduciary duty awards is also on the rise.  This would certainly be consistent with the general increase in the standard of care to which financial advisors in general and including life insurance agents/brokers are being held. Click Here to read the complete e-newsletter issue.

Lesson Three: Dodd-Frank Wall Street Reform and Consumer Protection Act, establishes a “fiduciary duty for brokers and dealers”.  This fiduciary duty “shall be to act in the best interest of the customer without regard to the financial or other interest of the broker, dealer, or investment adviser providing the advice. In accordance with such rules, any material conflicts of interest shall be disclosed and may be consented to by the customer. Such rules shall provide that such standard of conduct shall be no less stringent than the standard applicable to investment advisers under section 206(1) and (2) of this Act.”[1][2] Fiduciary standards do NOT require that the results actually prove to be in the best interest of a client, and instead only require that advisors have a “prudent process” that they perform certain duties. As discussed above, “A Shot Across the Bow”,  the Uniform Prudent Investor Act (UPIA) provides an “instruction manual” for such a “prudent process” and provides legally-accepted guidance as it relates to life insurance.

Lesson Four: “There has been a gradual re-risking of portfolios since 2010” says David Paul, Principal of ALIRT Insurance Research. Joel Levine, senior VP and insurance analyst at Moody’s Investors Services, concurred. “We’re aware that there are some companies that have dabbled in beaten up [residential mortgage-backed securities], trying to buy securities at a nice discount,” he said. Unlike 2008-2009, many insurers now are sitting on relatively healthy reserves of excess capital and will keep a portion of the money on their balance sheets, said Andrew Kligerman, a managing director at UBS Securities LLC. “We think the insurers learned their lesson since 2008,” Mr. Paul said. Click Here to read full article.

All these lessons show a clear path towards a higher standard of care.  You should insist that product recommendations/proposals include independent research as to the suitability of the recommended product to the client’s situation relative to peer group product alternatives. 

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