Why State Farm agents are getting out of the investment game
September 13, 2016 by Steve Daniels
A new federal rule aimed at ensuring that Americans get unbiased counsel from advisers on their retirement savings is prompting a dramatic reaction from State Farm.
The Bloomington-based insurance giant confirms that it has directed 12,000 of its agents around the country who are licensed to sell securities to no longer provide their clients with mutual funds, variable annuities and other investment products. (State Farm has 18,000 agents in total.) The ban goes into effect in April, when firms must comply with the U.S. Department of Labor’s fiduciary rule, issued this year.
State Farm’s army of agents, who mainly peddle the company’s auto and home insurance, have sold investment products since the early 2000s. As of the end of 2015, State Farm managed $11.3 billion in assets it oversees in proprietary mutual funds, up from $10.6 billion a year before.
Beginning in April, clients will have to turn to a “self-directed call center” rather than their agent for help with their retirement nest eggs, a State Farm spokeswoman says in an email. Asked to explain what was problematic about complying with the new rule, she writes: “We felt this decision struck the right balance between serving our customers and adhering to the DoL rule.” She declines to elaborate or provide access to an executive who could explain the company’s reasoning.
State Farm agents will continue to sell fixed annuities and life insurance.
“I completely understand the issue with the DoL rule,” says Chip Roame, managing partner at Tiburon Strategic Advisors, a Tiburon, Calif.-based consultant to the financial services industry. “It makes a side business for them much more problematic.” The rule could, for example, force insurers like State Farm to change how they compensate their agents from commissions for investment-product sales to fees paid by their clients for the advice, he says.
The move has implications for archrival Allstate, whose agents also sell investment products. The Northbrook-based insurer hasn’t said what it intends to do in response to the new rule, and a spokeswoman didn’t respond to requests for comment.
In past years, Allstate CEO Tom Wilson, who once ran the company’s financial unit, had big ambitions to transform Allstate’s agents from merely insurance salespeople to retirement advisers for America’s middle class. Those ambitions collided with the financial crisis, and Allstate reacted by selling off much of its life insurance holdings and scaling back its plans. But it still sets annual production expectations for its agents to sell the financial products of other firms, on which Allstate gets a cut.
As of April, company requirements that smack of sales quotas are unlikely to be allowed, experts say.
Under the new rule, registered representatives selling securities are considered “fiduciaries” and thus must provide investment advice and products that are clearly in their customers’ best interest. Previously such reps, including State Farm and Allstate agents, had to meet a lighter standard that barred them from selling products that were “unsuitable” for their clients.
Allstate is somewhat different from State Farm in that it has 1,000 people dedicated to offering financial advice and selling financial products. Its 10,400 agents often refer their clients to an Allstate “exclusive financial specialist.” Agents also sell only outside firms’ mutual funds; State Farm agents only sell State Farm-managed funds.
As of the end of 2015, Allstate agencies had $13 billion of outside firms’ mutual funds and variable annuities under their supervision. Allstate customers poured $1.9 billion of new money into these products last year, according to a Securities and Exchange Commission filing.
There are reasons for Allstate not to follow State Farm’s lead, one analyst says. Allstate has spent the past few years marketing its agents as “trusted advisers” and puts great emphasis on customer loyalty. “The more products you purchase through a particular company, the more likely you are to stay with that company,” says the analyst, Paul Newsome at Sandler O’Neill in Chicago.
The sale of outside firms’ financial products isn’t a big financial decision for Allstate, Newsome says, now that Allstate has stopped offering its own variable annuities and mutual funds. But following State Farm and barring agents from providing retirement advice to customers might undermine Allstate’s “trusted adviser” goals for its agents. While the term is somewhat vague, “it ultimately means someone who is not just a narrow product seller, who provides advice and utility beyond selling just one or two products,” he says.
While Allstate grapples with how to respond to the federal rule, the executive in charge of its financial services unit has exited the company. Bill Kavanaugh, president of Allstate Financial since 2012, recently left to become chief operating officer of Glenview-based Wespath Benefits and Investments, an affiliate of the United Methodist Church managing $20 billion in pension and endowment assets. He started his new job Sept. 1.
Allstate hasn’t named a replacement.
