Although “insurance agent” and “insurance broker” sound like similar job titles with similar duties and responsibilities, there are important differences between the two roles. Insurance agents are agents of the insurance company; they perform specified duties on the company’s behalf. Insurance brokers, on the other hand, are agents of the insurance buyer. Brokers owe these buyers the duty to represent them in good faith.

This distinction is important because states like New York regulate the payment of compensation for the sale of insurance products. Insurance agents are not always allowed to use the same methods of compensation that insurance brokers can use. This difference is highlighted by a recent insurance circular letter issued by the New York State Department of Financial Services.

The letter addresses the issue of insurance agents who provide investment advice to clients in connection with the sale of deferred variable annuities. The agents in question are charging fees to the clients but are not receiving commissions from the insurance company. Can the agent charge the client for these services?

According to the department, the answer is no. The letter explains that under the applicable statute, agents can sell annuities in the Empire State only if they are receiving their compensation exclusively from the insurer. They may not charge a service fee to the client for the solicitation, negotiation or sale of an annuity contract.

What if the insurance agent is a registered investment advisor? Can the agent charge the client for investment advice they give in connection with the sale of the annuity without charging for the sale itself? The department takes the position that this is not allowed. According to the department, the agent would not be selling the annuity without any compensation whatsoever. The fees paid by the client are the compensation for the sale of the annuity.

In contrast to the powers of insurance agents, insurance brokers are allowed to charge a fee to the client for the sale of an annuity. The department reminds insurance brokers that there are still some limitations on their power to charge fees to clients for annuities. The fees must be reasonable. Also, brokers must not charge like clients differing amounts for the same services.

What about an investment advisor who is registered both as an insurance agent and as an insurance broker? The department says that these advisors must take care that their role is clearly spelled out in the agreement with each insurer for each insurance policy or annuity contract they sell. The advisor may not arbitrarily decide whether he or she is acting as an agent or a broker depending on the client and the insurance product the advisor is selling.

This circular letter highlights the importance of complying with rules on the powers of insurance agents and insurance brokers. Agents should accept compensation for annuities only from the insurer, even if the agent is also a registered investment advisor. Brokers can charge fees to clients for annuities, and they must adhere to the rules on the amount that can be charged. And investment advisors who are both agents and brokers must operate under, and adhere to, an agreement that clearly defines the role of the advisor. Attention to these kinds of details of legal compliance can help insurance professionals and companies reach their goals.


This post was written by Joe Passe, compliance attorney with Thomson Reuters.


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