There is not always a bright-line test for determining when an individual's activities cross the line from insurance producer to investment adviser, or when suitability crosses over to fiduciary responsibilities. Instead, we have a set of principles under which activities are considered fiduciary in nature, requiring licensing as an investment adviser.
The gray area is where disputes happen. Take, for example, an investor who alleges an insurance producer is a fiduciary. The strength of that allegation can come from any number of claims. Maybe it is wording on promotional brochures or a website, or contractual language, or based on a verbal exchange. If the investor came to understand that an insurance producer has a fiduciary relationship with him or her, the producer may have risk.
An important fact in litigation of this nature is whether the client's reliance on the insurance producer is legally enforceable. For insurance producers who have never been investment advisers, or licensed to sell securities, they may not know if, and when, they have crossed the line. They might not even know what it means to do anything other than sell their core product, such as annuities.
Knowing the difference between a broker-dealer and an investment adviser, or an insurance producer and an investment adviser , is confusing enough for advisers licensed to sell securities. For insurance producers focused on selling annuities , it is even more difficult to understand the distinctions.
Yet, disputes in this area commonly drive consequential outcomes. If you are an investment adviser, and therefore owe a fiduciary duty to your investors as a matter of statute, and you breach that duty, your client—the investor—could be entitled to out-of-pocket losses plus attorney's fees. Similar activity could be the grounds for negligence claims, or strict liability if you have sold securities you are not licensed to sell.
The risk all stems from a facts and circumstances test giving rise to a fiduciary relationship . When an investment goes bad, who knew and said what can be hard to decipher and defend on the backend without proactive assertions of your role on the front end. At a minimum, this includes refraining from using the word "fiduciary" if you are not a licensed investment adviser in verbal, written and online communication and promotions. Make sure any website, promotional materials, and contracts clearly set out your role accurately.
When in discussions with a client, particularly a new client, be clear about whether you have a fiduciary duty to that client. If you restrict your sales activities to annuities, clarify for clients that you are not a fiduciary and what that means.
And, be mindful of when insurance activities cross the line into advisory activities. As long as an insurance producer, who is not licensed to sell securities, does not make any recommendations on whether to liquidate any securities.
But interpretation is fickle. Clear action, backed by written communication, is your best defense from disputes claiming fiduciary responsibilities to your clients when none are present. Consult your legal adviser when you are unsure whether new activities will cross the line into advisory services you are not licensed to engage in.
Originally Published by Jones & Keller, January 2021
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.