Articles containing tales of the tidal wave of “annuity abuse” flood financial media. Apologists for this indefensible behavior continue to concoct excuses that defy even the most generous definition of reality.
Investment News just came out with an article detailing the all too familiar tale of a broker fleecing his clients with improper annuity sales. As mentioned here, the commission structure of these products creates a breeding ground for unethical behavior. Combine this with a weak suitability standard and you have the ingredients for a toxic financial time bomb.
The fallout from these explosions continues to decimate the retirement landscape of millions of retirees.
In this case, the broker was continuously signing up clients for high-fee variable annuity products. He would then do a 1035 exchange and purchase a new annuity shortly thereafter. This enabled him to continuously collect 8-12% upfront sales commissions and make tens of thousands of dollars on relatively small accounts. Nice, very nice.
This was done without informing the client and, on top of everything else, lying about the purported income benefits of these “investments.” This is not the worst part of this story. Many conflicted supporters of high upfront annuity commissions defend this practice with my nomination for the world’s lamest excuse.
From Investment News: “…While others argue that high compensation is justified because they are complex financial products and require additional paperwork, all of which contribute to more work and a longer sales process.”
Excuse me! So the argument is it takes a ton of paperwork (to keep from getting sued), and a long sales process (because no one knows, including the broker, how these products work), the broker should be rewarded with a fat commission check for creating this mess?
Maybe Bernie Madoff deserved a large financial reward for putting in the time that was necessary to orchestrate his colossal deception! After all, he did have to fly all around the world and print thousands of false statements. Time is money you know!
Nowhere do I see how this additional paperwork and long “sales process” benefits the client in any way, shape, or form. This cuts to the heart of the matter.
Anyone who is in opposition to the proposed Department of Labor’s fiduciary rule (designed to force advisors to look out for their clients’ best interests) clearly supports this type of convoluted thinking.
Complicated investment products that require a mountain of paper work and an extended sales process rarely end well for clients. In this case the high fees that the broker “earned” for his time and effort directly contributed to inferior investment results.
Until changes are made in the way financial advisors are compensated, this situation will only get worse. We continue to reward salespeople for all the work they do to generate commission checks for themselves regardless of their clients’ best interests.
If you think this is the best way to prepare clients for retirement then I have an annuity index product to sell you that guarantees you a 10% return with no risk. Don’t be surprised if you will need to exchange it in a couple of years when a “new and improved” version comes along.