Probe by Elizabeth Warren into annuity incentives long overdue
Washington, D.C’s newest trend is naming a politically appointed “czar” to oversee and manage specific areas of attention. The next coronation might just be for Senator Elizabeth Warren as “Annuity Czar.”
We are all familiar with Senator Warren’s tenacity for consumer protection and efforts to protect the ever shrinking middle class, which is music to progressive ears and fingernails on a chalkboard to many conservatives. Regardless of what side of the political fence you are on, her recent focus on agent sales incentives in the wild west of annuities is a welcomed spotlight for hopeful change.
In 2003, the Financial Industry Regulatory Authority, or Finra, stopped the practice of rewards and incentives to securities licensed advisers. Their reasoning for this move is basic common sense, and Finra pointed out that potential conflicts of interest arise when “noncash compensation” has the potential to compromise the suitability of an adviser’s recommendation at the point of sale. I, and everyone else with a brain, totally agree.
Variable annuities are considered a security, so the 2003 ruling applies to that strategy. However, the fixed-annuity world hasn’t yet received the memo and argue that because their products fall under the category of “life insurance,” then securities law doesn’t apply. The primary product culprit that Senator Warren is focusing on is the newest over-hyped product of the day, indexed annuities. Her recent letters sent to a handful of specific carriers is just the first shot across the annuity bow and is a wake up call to an industry that seems to aggressively protect the status quo.
In addition, the argument will continue on whether an indexed annuity should be classified as a security, and this newest probe will knock that regulatory scab off once again.
Incentive sales madness
As Senator Warren pointed out in her findings, if an agent sells enough annuities (primarily indexed annuities), they can go on fabulous five-star vacations, cruises, receive cars and motorcycles, and even get a replica Super Bowl ring. Yes, this is all true but just scratches the surface of the totality of payments, atta-boys, and other giveaways that the consumer actually buying the annuity could only dream of receiving.
The primary culprits of this type of agent perks are the middlemen annuity distributors used by annuity carriers to promote and push their product offerings to agents. There are hundreds of these marketing organizations, and they are all trying to recruit agents to house their carrier contracts so the marketing organization can receive overrides from that agent’s ongoing annuity sales.
Annuity agent recruiting is a true blood sport, and would make a college football or basketball recruiter feel like they are not really trying, and green with envy with the no rules approach. Since all marketing organizations are pretty much offering the same annuity products to agents, it too often comes down to the giveaways and perks that sways an agent to choose who they run their business through. Most of these agent organizations end up being glorified travel agencies and agent head hunters. Sad but true.
Empty perk arguments
I have been writing about these unneeded agent perks for years, and am glad to see Senator Warren bring celebrity attention to this issue. It seems to me like an easy fix, and in line with what the securities industry implemented in 2003. I guess we will see how powerful Senator Warren really is when she butts heads with the all powerful insurance lobby. Should be fun to watch and I’m hopefully betting on her.
The ridiculous arguments I continually receive from the annuity industry is that all sales organizations offer perks and incentives. That might be true, but not all sales organizations are recommending financial products that affect people’s retirement.
Agents and advisers aren’t perfect, but removing any potential conflict of interest with a recommendation seems like the ultimate no-brainer. Annuities as a product category, and annuities as a specific strategy recommendation should be able to stand on their own merit.
Tip of the annuity iceberg
As Senator Warren digs deeper into the sometimes ugly world of annuity sales, the perks and incentives issue will probably just be the start of her crusade. What she is going to find is that the trips, cars, and rings are also typically attached to an unregulated and over-hyped sales message — especially when it involves indexed annuities.
The other realization will be that indexed annuities do have their place in some situations and can be good products if fully explained by the agent and understood by the client. The problem is that the incentives and unregulated sales message has put a cloud over a product that was designed in 1995 to compete with CD returns.
There are many good advisers, agents, and people in the annuity industry that are glad that Senator Warren is trying to clean things up to protect the annuity consumer. The needed changes she will influence will do nothing but help, and anyone who argues against that is just blind to the inherent industry problems.
Good luck Senator Warren, and thanks in advance for your efforts.
Originally published by MarketWatch 5.5.2015 – http://www.marketwatch.com/story/probe-by-elizabeth-warren-into-annuity-incentives-long-overdue-2015-05-05