On April 28, Sen. Elizabeth Warren, D-Mass., sent a letter to 15 of the country’s largest annuity providers asking for data on their sales practices. In a report issued Tuesday, Warren said the responses from the firms “reveal a widespread practice of offering agents kickbacks in exchange for promoting certain annuities” and other products, and that “such kickbacks are effectively concealed from customers.” She said 13 of the 15 responded that they did provide “kickbacks directly to agents, indirectly through third party payments, or both.”
Warren defines ‘kickbacks’ as including not the commissions from the sales of those products, but “lavish cruises, luxury car leases, and other perks to annuity sales agents to promote their products.” Her conclusion, as published in the report Villas, Castles and Vacations: How Perks and Giveaways Create Conflicts of Interest in the Annuity Industry: “Kickbacks may benefit the agent and the company, but they do so at the expense of their customers.”
All 15 companies who received Warren’s letter responded, though the report notes none “provided complete answers to the questions.”
Industry groups were quick to criticize Warren’s research. Carl Wilkerson, vice president and chief counsel, Securities & Litigation, for the American Council of Life Insurers (ACLI) said in a prepared statement that ACLI was “disappointed” with Warren’s report, which “misrepresents the comprehensive regulatory framework that governs conduct in the sale of insurance products and protects consumers’ interests. Life insurers comply with laws that regulate permitted noncash compensation practices and support their full enforcement.”
The Insured Retirement Institute (IRI), which advocates for the annuity industry, also voiced its disappointment, saying in a statement that the report “lacks a full understanding of the current laws and regulations overseeing the distribution of annuities.” Moreover, IRI said “the current regulatory framework requires these products to benefit the consumer and meet his or her needs,” and that “it is because of this extensive regulatory structure that annuities are considered to be one of the most regulated financial products available to today’s consumer.”
Warren cites a White House document that such noncash compensation “costs Americans an estimated $17 billion every year,” which instead goes to “unscrupulous advisors who are more interested in collecting fees and prizes for themselves than helping families build real security.” The February 2015 document she references, The Effects of Conflicted Retirement Advice on Retirement Savings, was used by the Obama administration to support the Department of Labor’s ongoing rulemaking that would redefine fiduciary under ERISA. In her report, Warren reiterates her support for that rule, which she says would “protect consumers from these types of abuses,” and would “put an end to these conflicts of interest.”
Some industry groups, such as the Securities Industry and Financial Markets Association, have criticized the White House report on its calculations and conclusions since that report was first leaked in the spring.
In an appearance Wednesday in Washington at a Politico Morning Money breakfast (sponsored by Wells Fargo), Warren defended the steps she took in questioning a study used by Brookings Institution researcher Robert Litan in congressional testimony on the proposed DOL fiduciary rule; Litan eventually resigned from Brookings.
When asked by Politico moderator Ben White whether her questioning of Litan’s research could have a “chilling effect” on researchers whose findings she didn’t like, Warren was unapologetic.
“Remember the facts about what happened here,” she said. “There’s been a lot of independent research showing that a broker, an investment advisor, can advise a client for something that’s really good for the investment advisor, like helps them win a fancy vacation, but isn’t so good for the client.”
Referencing the same White House report, she said “a lot of research shows that’s costing clients a lot of money. Our best estimate is that it costs us $17 billion.” Then, referring to Litan’s testimony on a study he conducted with a colleague at Economics Inc., “here comes one study from Dr. Litan that’s way out in a totally different direction,” concluding that “if you got rid of that [DOL] rule there would be less advice. What happened was that academics said ‘There’s a problem with that study’” but opponents of the rule “jump on it, saying ‘It’s a great study.’” Referring to Litan’s disclosure of the research’s sponsor, she said “on the bottom” of the testimony “it says, supported by a company that stands to profit if the rule proposed by Labor doesn’t get passed.”
The Capital Group, owner of American Funds, is the company that sponsored Litan’s study on which he based his testimony. “He got $38,000” for conducting the research, Warren said, and “the for-profit he was working for got $78,000.” The disclosure did not include the information, she said, that the research was backed by “a sole funder,” and that “the funder had multiple opportunities to weigh in on the content of the report.”
Warren said “this was an outlier study, criticized in the academic world. I asked questions … and it brought out the truth.”
Capital Group said nothing untoward had happened. “It is typical for organizations to sponsor academic studies,” a spokesman said. “In this case, Dr. Litan and [co-author Hal] Singer were retained to provide their objective professional analysis, and no preconditions or predetermined conclusions were imposed. They were paid for their work, as any professionals should be; they clearly disclosed the source of this compensation, and as they have stated, their conclusions are their own.”
As for regulation of annuities, Warren’s report admits that while “FINRA Rule 2320 bars some forms of noncash compensation for variable annuities and other securities, it does not cover fixed annuities.” Rather, Warren charges that fixed annuities are “regulated by a patchwork of state laws that vary in how and whether they limit noncash compensation. In addition, she says FINRA Rule 2320 “still allows noncash compensation so long as it is based on the total production of the agent with respect to all variable contract securities distributed by the member and the noncash compensation is equally weighted across variable annuity contracts.”
Even in cases where companies do not choose to provide or are barred by FINRA rules from providing noncash compensation awards directly to agents, the report says, “they frequently provide cash or noncash incentives to the third-party marketing organizations that then pass these awards on to the agents.” Ten of the 15 companies reported making such payments, the report says.
The report admits that annuities can be “a valuable product for some consumers in some circumstances, offering guaranteed payouts over time.” But it also charges that they are “complex instruments that involve difficult calculations, non-standard terms, hefty surrender fees, and abundant legalese that often obscure their full costs and risks. These features make it difficult for customers to comparison shop, often placing them at the mercy of a sales agent.”
— Check out Why Ken Fisher Hates Annuities on ThinkAdvisor.