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The Warren report on annuity sales incentives: Does it overreach?

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A blistering report from U.S. Senator Elizabeth (D-Mass.) that takes certain life insurance and annuity providers to task over performance incentives they offer producers has mostly been met by silence from companies identified in the document.

Contacted by LifeHealthPro to respond to Senator Warren’s central charge — that all-expense-paid trips and other sales incentives create conflicts of interests in the delivery of retirement investment advice — all but one of the 24 companies listed in the report declined to comment. Nonetheless, some industry stakeholders believe the report overreaches in failing to acknowledge the value of these incentives; and in assuming that they cannot be structured so as to assure that agents and advisors act in their clients’ best interest.

Related: DOL proposes 60-day fiduciary rule delay

Hanging in the balance

But it’s this elevated standard of care that the Warren report fears will be gutted if the Department of Labor’s fiduciary rule, unveiled last April and delayed pending a 60-day review ordered by the Trump Administration, is ultimately repealed or watered down. Without a robust standard, the report contends, insurance and annuity providers will continue to offer performance incentives that influence product recommendation — to the detriment of retirement savers.

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“The financial industry and its army of lobbyists are salivating at the chance to delay this rule, the first step in their plan to make sure it never sees the light of day,” the Warren report warns. “They are fighting it tooth and nail — and they have 17 billion reasons to do so.”

“So President Trump faces a simple choice: He can stand with the banks and financial advisors who put their own interests ahead of their clients; or he can stand with the millions of middle class Americans trying to build a little economic security for their retirement and put a stop to these conflicts and abuses once and for all,” the report adds.

To advance her argument, Senator Warren wrote to Acting Secretary of Labor Edward Hugler on February 7, noting therein that 21 of 30 insurance and financial providers from whom she had elicited responses opposed a delay in the rule’s implementation. In addition to these companies (Prudential Financial, LPL Financial, TIAA and Lincoln Financial among them), Betterment, XY Planning Network and Personal Capital also opposed a further delay, the last of these firms expressing “unwavering support for the DOL rule.”

The list of “kick-backs and conflicts of interest” the DOL rule would curb if it goes into effect is an eye-catching one. Researching providers’ tactics, Warren’s office staff flagged the widespread use of “lavish vacations and prizes awards agents.” Among these are trips to Playa Del Carmen in Mexico, the Ritz-Carlton Half Moon Bay resort, the “One & Only Palmilla” resort in Los Cabos, and “dozens of other luxurious locales.”

Senator Warren’s February 2017 report (“Villas, Castles, and Vacations: Americans’ New Protections from Financial Adviser Kickbacks, High Fees, & Commissions are at Risk”) is an update to a 2015 edition. The prospect of winning a prize or a trip to an exotic destination, both versions charge, too often tempt producers to recommend products that redound to their personal benefit.

Related: 10 ways to prepare for the fiduciary rule

Some annuity providers boast higher than average commissions that increase the surrender charge period on their products. (photo: Thinkstock)

Lucrative payouts

The practice is notably widespread in respect to annuity sales — and not only because of the non-cash incentives on offer. Some annuity providers boast higher than average commission that increase the surrender charge period on their products.

Fixed-indexed annuities carrying a 10-year surrender charge, for example, typically pay commissions of 6 to 8 percent.  Extend the surrender charge period to 15 years or more, and you’re looking at a double-digit commission rate. The interest crediting rate paid on the annuity also increases, but that may be little consolation for clients needing retirement income (penalty-free) sooner rather than later.

Related: Fixed annuity sales hit record $117.4 billion in 2016

To be sure, heightened product suitability standards governing the sale of annuities have largely addressed this issue. In 2012 FINRA (under Rule 2111) expanded requirements as to product information the producer must secure and examine before recommending a product. Also to adhere to is the National Association of Insurance Commissioner’s 2010 Suitability in Annuity Transaction Model Regulation, which mandates certain supervisory, monitoring and reporting requirements for annuity sales.

These rules have, however, had little impact in restraining the use of paid-for trips, cash bonuses and other performance incentives that annuity providers offer producers to peddle their products. Only with the release of the fiduciary rule did the industry need to sit up and take notice: Absent a repeal or weakening of the rule, annuity providers will have to phase out such awards so as to eliminate potential conflicts of interest.

Lest there be any confusion on this point, the prohibited activities and financial incentives covers the gamut. Cash bonuses, prizes, sales contests, sales quotas, luxury cruises and all-expense paid trips to tropical resorts — these and other sales-inducing techniques will have to be relegated to the dustbin.

With that end in view, Senator Warren is determined to see the rule implemented. Hence her scathing report.

“The rule requires all advisers giving retirement advice to put their customers’ interests first: no more kickbacks, fancy vacations, sky-high fees, or products that net the adviser a handsome commission, but hurt investors,” the report states. “Middle-class families will finally be able to trust that their financial advisors are working for their customers, not their own bottom line.

“That is, unless the giant financial companies who benefit from this corrupt status quo —and their armies of lawyers and lobbyists —successfully persuade President Trump and Republicans in Congress to halt this commonsense protection,” the report adds.

Financial conflicts of interest, Warren’s office estimates, cost retirement savers $17 billion annually. Perks and giveaways to producers are, in their telling, a big part of the problem.

After opening her investigation in 2015, Senator Warren sent inquiries to the 15 largest annuity companies in the U.S. to learn about their performance incentives. Their finding: An “alarming” 13 of the 15 companies provided kickbacks to producers in exchange for sales to retirees. In addition to the aforementioned, the kickbacks included golf outings, iPads and other electronics, expensive dinners, theatre or professional sports tickets, and sports memorabilia.

The report adds that the annuity providers “failed to adequately inform consumers” about the sales incentives. What little the companies divulged was buried in “vaguely phrased disclosures hundreds of pages into their prospectuses.”

Related: Voya exec: DOL rule or no rule, it’s time to upgrade your game


IMO sales incentives are, says Insurance Network America President and COO Lauri Beck, beneficial to the extent that they encourage producers to “make one more appointment” or cold call to reach their sales goal. (Photo: Thinkstock)

Setting the record straight

The report has evidently put players in distribution on the defensive — or at least disinclined to address its allegations. LifeHealthPro contacted about two-thirds of the 24 companies listed on page 3 of the revised 2017 report as providing incentives for annuity or insurance sales, only one of which agreed to comment: Insurance Network America.

Related: IMOs to DOL: Fiduciary rule class exemption sets too high a bar

Lauri Beck, president and chief operating officer of the Idaho-based insurance agency, “completely disagrees” with the charge that performance incentives negatively impact retirement investors. Such incentives are, in her view, beneficial to the extent they encourage producers to “make one more appointment” or cold call to reach their sales goal.

“I have never known of a single situation where one of our customers sold an unsuitable product to one of his/her customers just so that they made the trip,” she says. “We have always trained our team to look out for the best interest of the end consumer in any discussion or possible product recommendation — whether it be for health insurance, a dental plan, life insurance or an annuity.”

Such training is often a focus of the trips Senator Warren so harshly criticizes. The implication of the report — that annuity and insurance providers are simply availing producers of get-away packages to have fun and downtime in attractive vacation spots — assumes that they carry no educational value. In fact, many vendor-sponsored conferences have professional development in mind: sharing sales techniques, product information, industry trends and, yes, best practices for better serving clients. If wining and dining and recreational activities need to be thrown into the mix to encourage producers to sit for one or two days of quality training and edification, the reasoning goes, so be it.

“Trip sponsor wants the undivided attention of the best agents and advisors to teach them about new products and best practices so they can be properly positioned in the financial space,” says Timothy Morbach. A consultant for The Settlement Services Group, LLC, Morbach advises clients on purchasing annuities in structured settlements established to satisfy personal injury claims (which is different from retirement planning, the focus of the proposed DOL fiduciary rule). ”Absent a thorough review of the terms, conditions and context of each trip, it would be unfair for anybody to attack them,” he adds, noting that “disclosure and informed consent must be central to compensation or sales incentive business models.”

Such disclosure and informed content, Morbach continues, must also keep the client’s interests front-and-center. “[This] is what I have attempted to do with regards to settlement planning,” he says, adding that agents and advisors engaged in retirement planning might do well to heed one other rule he applies to such trips: to not attend them unless he or his employer pays for them.

Some IMOs, mindful of the unfavorable publicity that such trips can generate, are scaling back the packages or imposing restrictions to ensure they’re beyond reproach. For example, AmeriLife, an IMO that applied to become a registered investment advisor (RIA) in response to the DOL rule, only passes along to advisors offers initiated by a partnering insurer.

As to whether such packages might engender conflicts of interest, Amerilife CEO Scott Perry believes that need not be the case so long as the sponsoring organization imposes processes and controls to ensure that product recommendations are up to snuff.

“Rewards and performance-based incentives can be delivered in a way that doesn’t influence the advisor to not do what’s in the best interest of the client,” says Perry. “There are ways to structure sales incentives so they don’t sway advisors one way or another on product recommendations.”

Continue on to see the list of companies offering performance incentives that were highlighted in Sen. Warren’s report.

the list of companies offering performance incentives that were highlighted in Sen. Elizabeth Warren's report.

Source: “Villas, Castles, and Vacations: 2017 Edition” prepared by the Office of Senator Elizabeth Warren. (Click on image to enlarge.)

See also:

DOL posts indexed annuity fiduciary rule exemption draft

M&A activity among insurance agencies hits 8-year high

Not ready to become a DOL-compliant FI? Go partner with one

DOL rule faces certain death under President-elect Trump


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