Insurer-Owned Broker-Dealers: Using Data to Stay Compliant and Manage Risks


Insurer-Owned Broker-Dealers: Using Data to Stay Compliant and Manage RisksAs both the importance and availability of data continue to rise, broker-dealers must look for new ways to use their own data along with third-party data to glean actionable insights for operational, customer engagement, and compliance activities. Rapidly changing regulations and ever-greater expectations from producers are necessitating proactive change.

My colleague Mitch Wein and I recently hosted a meeting of Aite-Novarica’s Broker-Dealer Research Group, where a key area of concern related to addressing an array of end-of-life issues for clients and their beneficiaries.

Insurer-owned broker-dealers face a variety of challenges, many of which can be resolved by leveraging resources already available to them, either through their parent company or via public records. However, it is important for broker-dealers to recognize when the economies of scale dictate that a specialized, third-party vendor might be better suited for a task.

Leveraging Public Records

As part of a heavily regulated industry, insurer-owned broker-dealers are required to maintain certain standards of Know Your Customer compliance and periodically communicate specific information to their clients. It is inevitable that some clients will pass, and sending letters to deceased clients poses an unnecessary risk for bad PR—or worse.

While unlikely, it is possible that an advisor might not report a client as deceased for personal economic gain, leading to a very uncomfortable conversation between the broker-dealer and regulators. These same issues exist for parent-company insurers, who have their own compliance concerns related to managing data and conforming to escheat laws.

Broker-dealers should follow a policy of “trust, but verify” when it comes to client status. Fortunately, the federal government provides unique identifiers for every individual client and offers a publicly accessible database in the form of the Social Security Administration’s public file of death information. On the insurance side, companies—especially those offering guaranteed lifetime income checks—have been using records like these for many years to stay up to date and in compliance. Insurer-owned broker-dealers should be able to easily leverage their relatively sophisticated methods.

In cases where clients have simply moved, the USPS provides information for forwarding addresses. That information is only available for a limited time, however, which highlights the importance of thinking about maintaining records as a process, rather than a one-time event. When records have not been well maintained and data quality has declined, one-time efforts to clean them using credit services are available but can be very costly. Those high prices serve as even more motivation for companies to continuously maintain their records and avoid having to pay that price a second time.

Outsourcing for Efficiency

Where data and compliance intersect—SEC regulations for retaining information about Designated Third Parties, for example—broker-dealers must decide if they are going to build and maintain a system of record or pursue a vendor’s solution

Especially for back-end systems that do nothing to differentiate one broker-dealer from another, vendors are often able to provide a service more reliably and cheaply than one built in-house. Companies must face the reality that an ad hoc solution, and the subsequent maintenance required to stay up to date with changing regulations, may be more expensive than a vendor’s solution which can be maintained by a dedicated team leveraging economies of scale.

Aite-Novarica’s Broker-Dealer Research Group is a moderated forum open to insurer-owned broker-dealers which meets quarterly. We are looking forward to our next session on July 28, 2022. For more information, please reach out to me at [email protected].