As AIG Sells B/D Operation, CEO Blames Fiduciary Proposal
January 28, 2016 by Katherine Chiglinsky and Margaret Collins
(Bloomberg) — A federal proposal for stricter rules on retirement product sales helped spur American International Group’s decision to sell its broker-dealer operation, according to CEO Peter Hancock.
“It’s a business we are not the best owner of, particularly in the light of potential Department of Labor rules,” Hancock said Tuesday in a conference call. “With the new DoL rules, that was a big factor in thinking whether this was better owned by somebody independent of us.”
President Obama has said that new rules are needed so advisers put their clients’ best interests first for retirement accounts. The proposal could increase compliance costs for the industry.
Hancock announced plans Tuesday to sell AIG Advisor Group to investment funds affiliated with Donald Marron’s Lightyear Capital and to PSP Investments, a Canadian pension investment manager.
‘A LOT OF HYPERBOLE’
The insurer’s comments show that the industry believes the rule is going to move forward, according to Barbara Roper, director of investor protection for the Consumer Federation of America.
“There will be a lot of hyperbole from the firms on the effects of the rule and blaming the rule for things that they would have done otherwise,” Roper said. “That doesn’t mean they will stop fighting it. It just means those efforts move into a new phase.”
Hancock said the broker-dealer network earned about $40 million in 2014, yet consumed a “disproportionate amount” of AIG’s compliance cost. The sale was part of a larger plan the insurer announced to simplify operations and improve results, as the New York-based company faces pressure to break up from activist billionaire investor Carl Icahn.
The rule is “basically going to increase the risk and cost of distributing a number of retirement products, and so therefore it could have a chilling effect on sales and commissions,” said Randy Binner, an analyst at FBR Capital Markets. “Relative to everything else that’s going on at AIG — which is a lot — this is just a distraction they don’t need.”
CLIENTS’ BEST INTERESTS
The Labor Department proposal would require brokers handling retirement accounts to put their clients’ best interests first. Brokers are now required to offer investments that fit a client’s needs and risk tolerance at the time of sale, but are able to push their own company’s products. Under the proposed rule, brokers could earn sales commissions and other income if they sign a contract with investors to disclose fees and incentives that might influence recommendations.
“Being a stand-alone firm allows us to avoid the potential conflicts of interest of being owned by a product manufacturer,” said Valerie Brown, who was previously CEO of Cetera Financial Group and will become executive chairwoman of Advisor Group after the sale. “Independence is key.”
AIG Advisor Group had more than 5,200 independent advisers and more than 800 full-time employees, according to AIG. The unit is comprised of four broker-dealers: FSC Securities, Royal Alliance Associates, SagePoint Financial and Woodbury Financial Services.
Marron ran Paine Webber Group for more than two decades through 2000, when he struck a deal to sell the retail brokerage to UBS for more than $10 billion. At Lightyear, he built Cetera through acquisitions, including a deal in 2013 to buy two of insurer MetLife’s broker-dealer affiliates to add about $25 billion under management. Marron announced an agreement in 2014 to sell Cetera to RCS Capital, which is now headed toward a bankruptcy filing.
With reporting assistance by Sonali Basak.
