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.
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rule, unveiled last April and delayed pending a 60-day review ordered by the Trump Administration, is ultimately repealed or watered down.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.
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.
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.
