Annuities are often sold by inexperienced salespeople, supervised by conflicted branch managers. This deadly combination is poisoning the investment well for far too many investors.
Last week’s announcement of the Department of Labor’s fiduciary rule was a win for investors. Unfortunately, there is a gaping hole in this legislation that a zombie herd from the Walking Dead could stumble through.
This new “best interest” standard does not cover 403(b) and 457 retirement accounts found in non-profit organizations. It also does not cover taxable, and custodial accounts (which are often used for college savings).
Advisors will also be able to continue to sell commissioned products in retirement accounts if a Best Interest Contract Exemption (BICE) is signed by the client and the advisor’s firm. The Department of Labor has made it clear that high commission products, like variable annuities, are not appropriate for retirement accounts based on their “reasonable compensation” edict.
This is why the client and agent must sign this form. The client will now have recourse in a court of law and the broker will have to think twice before gouging the client.
Amazingly, predatory brokers selling conflicted, high-fee proprietary annuities will still be freely allowed to hock inappropriate products in the trillion dollar 403(b) market — with no disclosures!
An Army of Darkness (i.e., thousands of annuity salesmen) has invaded this retirement battlefield. A very well-placed source in the industry clued me in on the tactics and organizational structure of a large insurance company that sells these very expensive, and imprudent, investments.
Organizations that specialize in selling these ill-suited retirement products have created a culture in opposition to their clients’ best interests.
Management is compensated in a way that breeds bad behavior. The highest compensation goes to managers whose sales force sells insurance products that are proprietary.
This means they are double dipping by selling their own investment product over a competitor’s products, even though the latter might be a better choice for the client.
The manager will still make a sizable commission if his salespeople push a competitor’s variable annuity, just not as much as the proprietary/firm’s version.
The payout decreases substantially if the broker sets up a managed account with plain vanilla mutual funds, which would truly be in a client’s best interest.
Incentives matter. Brokers sell the most expensive and return-destroying investments to potential clients because their compensation structure steers them down this conflicted road.
Why do so many ridiculously expensive annuity products end up in 403(b) and 457 retirement accounts? The answer is that’s how big insurance companies pay their managers and salespeople.
Just when you thought the story could not get worse, it does. My source also informs me: “The largest and most significant overrides are on agents in months 1-36.” Brokers who have less than three years’ experience will provide the most compensation for management.
This creates a massive incentive to turn-over the sales force in order to keep revenue rising.
In the words of my source, “You are hiring total dip-shits to handle individuals’ livelihoods.”
Having inexperienced advisors handle client’s life savings is never good policy. This is especially true when so little of their training is devoted to financial planning.
Regrettably, this is a major piece of the business plan of many large insurers that specialize in selling people overpriced annuities in their retirement accounts!
My source has told me the need to hire new salespeople has become such an overriding part of the organizational structure, that she once heard an executive say: “We need people who can literally fog a mirror.”
In other words: Damn the qualifications and full speed ahead; that is how the most payouts are collected!
Here is how the game works in the annuity sales market. The maximum commissions and payouts that accrue to the organization are based on the following criteria:
- Selling the most expensive annuity product created by the organization itself;
- Making sure that the product is sold by your least experienced salesperson;
- Moving clients in and out of proprietary annuity products, sold by rookies, in order to maximize new upfront commissions and surrender fees (“Churn, Baby, Churn!”);
- Encouraging your neophytes to sell your competitors’ expensive annuities, and still collect a sizable chunk of dough; and
- Not putting clients into Registered Investment Advisor type structures. Because, though this arrangement would most likely benefit 99% of potential clients, it will produce chump change in commission payouts.
My source sums up this situation better than I could ever dream of:”Want to talk about conflicts of interest? How the f*%k can anyone put a client first under that comp structure? You can’t. This is honestly the point when I said, ‘Holy s@%t, this ain’t right!'”
My source also has given me perspective on how many young naive advisors were roped into this inherently conflicted structure.
This type of system exists in most large insurers. This leads to high insurance company profits off of millions of Americans’ retirement funds. The best interests of these investors are not being considered.
Greed is the motivation for what gets sold to clients. I am very grateful to my source for her service in providing me this information.
While there was some celebrating recently over legislative reform on how retirement accounts are handled, the work on this subject is far from over.
Annuity investors in not-for-profit organizations and taxable accounts are awaiting the arrival of a financial cavalry in order to save the day. This could be in the form of being included in the provisions of the new fiduciary rule.
If not, the Army of Darkness will continue its unimpeded destructive march through the retirement accounts of millions of trusting victims.