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Finra complaint highlights epidemic of abused trust

All brokers and advisers still are subject to principles of human decency, in addition to compliance rules

Apr 3, 2014 @ 1:03 pm

By Darla Mercado

IRA, individual retirement account, rollover, fiduciary, DOL, SEC
+ Zoom

Though brokers and advisers may find themselves scowling over regulators' decision to crank up the heat on rollover activity, a recent Finra complaint against a pair of brokers shows that the attention is far from unwarranted.

The “plan fiduciary versus non-fiduciary” discussion is a favorite here at InvestmentNews and in the financial advisory community. It's an even bigger deal now that the Financial Industry Regulatory Authority Inc., the Securities and Exchange Commission and the Labor Department have IRA rollover activity in their crosshairs.

But that's a nuance that's often missed by clients and prospects, especially the masses of employees who are saving for retirement and whose only contact with a financial professional might be around enrollment time.

To those workers, that financial professional, regardless of how he is paid, is expected to be trustworthy and knowledgeable.

“You [the broker or adviser] were tacitly endorsed by the employer and you can exert influence over time,” said Jason C. Roberts, chief executive at the Pension Resource Institute. “You develop this position of trust and influence.”

Just to recap, last week Finra's enforcement department filed a complaint against two ex-brokers who were registered with MetLife Securities. The representatives, Patrick W. Chapin and Christopher B. Birli, allegedly concentrated on working with employees at the State University of New York, namely those who participated in the university system's retirement plan, according to Finra.

Between July 2004 and December 2011, the men allegedly recommended that 45 of their SUNY clients swap out of existing MetLife variable annuities, held within the SUNY retirement accounts, for new retail MetLife variable annuities that were held within MetLife IRAs outside of the retirement plan, according to the complaint. Workers who were either retiring from SUNY or were no longer employed with the university system were the alleged targets, Finra said.

MetLife generally barred the direct exchange of its retirement plan annuity product for its retail VA, but the men allegedly went around this by creating a two-step process. According to Finra, the men suggested that the workers surrender their retail MetLife VAs, use the money to buy a TIAA-CREF product that was also in the SUNY retirement program, wait for at least 90 days and then sell out of the TIAA-CREF product and use the proceeds to buy the MetLife retail annuity in a MetLife IRA.

The annuity swaps were a hit.

Over the seven-year period, a total of $21 million was moved from the MetLife retirement plan product into the TIAA-CREF plan product and then into the MetLife retail annuities, according to Finra. Meanwhile, the men allegedly reaped commissions of 7.15% for transferring the money into the retail annuities, the regulator noted. Had they sought an exception with MetLife to allow an internal exchange of the retirement plan annuity product for a retail VA, they would've made only gross dealer concessions of about 2%, Finra said.

It was a raw deal for a number of the clients: 22 of them lost death benefits, according to Finra.

A call to Mr. Birli was not immediately returned. Mr. Chapin did not immediately respond to a message left with a woman who said she was his tenant.

Many might be inclined to question the capacity in which the men had interacted with these SUNY employees: Were they fiduciaries to the retirement plan? Did they merely sell the institutional product to the university system? How did they get ahold of these participants?

Indeed, the complaint notes that prior to joining MetLife, Mr. Chapin had a “substantial book of business” while he was at Aetna Investment Services. That book was made primarily of SUNY workers who held life insurance policies and variable annuities through the SUNY retirement program, and most of it — more than 200 clients — was subsequently transferred to MetLife when he joined the firm in 2001.

Fiduciaries or not, though, financial advisers and brokers are already held to a standard in the eyes of their clients, particularly if those clients start out as workers within a retirement plan that the adviser or broker serves.

“Over time, brokers end up in a position of trust,” said Marcia Wagner, an attorney with The Wagner Law Group. “Even if you are not subject to [the Employee Retirement Income Security Act of 1974], you're subject to being a decent human being.”

An ordinary worker is unlikely to ask his retirement plan broker or adviser whether he's acting in the best interest of the employees. At the very least, the financial professional's proximity to the plan — his availability to answer participants' questions on savings, provide information on employee benefits and the fact that he may visit quarterly or annually — place him as a trusted figurehead in the eyes of the participants.

Even in a case where a nonfiduciary relationship may lead to an appropriate rollover opportunity, the client doesn't enter that transaction with the idea that the adviser or broker who's been tending to the plan may suddenly become an adversary. And I'm sure in most cases, the trust that that client has in his broker or adviser is validated.

There's a time and a place for the fiduciary versus nonfiduciary argument. In much the same way, there's also a time and a place for the regulatory turf war over IRA rollovers. Amid all that, it's important that brokers and advisers respect one basic rule when interacting with clients: Don't be an abusive jerk.

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