InvestmentNews INsider

The INsiderblog

InvestmentNews reporters offer their take on intriguing or controversial articles from around the web.

Time may have come to eliminate sales incentives in the annuities business

As the financial services industry moves toward a fiduciary standard, prizes for top insurance sellers smack of conflict

May 7, 2015 @ 10:48 am

By Darla Mercado

Even as fiduciary duty becomes a common phrase in the parlance of financial advisers, insurance agents are still offered gold watches and other incentives for annuity sales.

Sen. Elizabeth Warren, D-Mass., brought the issue of incentives in exchange for annuity sales to the fore in late April, when she sent letters to senior executives at the largest sellers of fixed, indexed and variable annuities. In those letters, she pointed out the industry's use of incentives to reward agents for selling annuities. For the most part, it's the field marketing organization (annuity distributors that work with independent agents) that are offering cruises, gold watches, and iPads.

Though Ms. Warren's findings were enough to make headlines at major media outlets, it's hardly news to those of us who've been covering the industry for years. I myself have been on the insurance beat for close to nine years, since I was fresh out of graduate school.

The real question on the minds of industry veterans is: At a time when advisers are facing pressure to be fiduciaries, why is it still OK to offer jewelry, trinkets and cruises as rewards for high sales of some of the most complex financial products on the market?

A HISTORY LESSON

Annuity researcher and industry veteran Jack Marrion, president of Advantage Compendium Ltd., notes that the incentives have been around many years. “You had an agency force and you'd take them for a training trip, and they'd play golf,” he said. “Have some of these trips become extravagant? Oh yeah, but that's the culture for training.”

The consensus among experts in the life insurance industry is that it was initially captive agents who represented only one insurer who received prizes and trips. Such incentives were thought to engender loyalty and reward sales.

Over time, the practice migrated to the world of independent insurance agents, who can sell the products of multiple carriers, offered by the field marketing organizations in a bid to drive competition among the agents.

As far back as 1998, the Financial Industry Regulatory Authority Inc. set limitations on the extent to which registered reps and their firms could receive noncash gifts, eventually coming out with rules in 2003 that prohibit firms and reps from accepting or making payments of any noncash compensation — subject to certain exceptions.

Generally, these gifts can't be worth more than $100 and can't be preconditioned on hitting a sales target. Occasional meals, tickets to games or to a show at a theater are permitted, provided they are “neither so frequent nor so extensive as to raise any question of propriety,” according to Finra.

Payment from issuers in connection with training and educational meetings are also an exception, but subject to conditions including location. In addition, the attendance can't be based on meeting sales targets..

STATE REGULATION OF COMPENSATION

Annuity critic Stan Haithcock points to a shortage of staffing and resources at state insurance departments as a reason why old incentive practices continue to flourish. “The overhypers are running national ads, and nobody regulates national ads,” he said.

Insurance regulators, meanwhile, haven't isolated the issue of noncash compensation. Instead, they tackled it when they developed regulations on suitability and disclosure.

“Regulators have taken a hard look at consumer protections surrounding our products and specifically annuities in recent years,” noted Jack Dolan, a spokesman for the American Council of Life Insurers. “This has resulted in strong laws and regulations relating to suitability, disclosure and senior credentialing.”

He added that regulators looked at producer compensation disclosure in the early 2000s, which led to a strengthening of the model law governing producer activities.

Even in the most proactive states, however, the end goal is to discourage unsuitable sales and churning, not necessarily to put a stop to receiving prizes.

“There's nothing wrong with getting some kind of incentive — baseball caps, dinners out and trips — it's not unusual to win a prize for a high volume of sales,” said Belinda Miller, general counsel at the Florida Office of Insurance Regulation. “What's wrong is when you talk people into buying stuff they shouldn't buy. That's why it's apropos to look at this in the context of moving people from one annuity to a different annuity.”

“It can even be a regular commission that encourages people to move from one product to another that isn't suitable,” she added.

New York, meanwhile, placed limits on compensation to agents. They can collect compensation &mdashd; cash and noncash — up to 7% of each annuity premium received. The general agent supervising the agent making the sale can get an additional 1.5% of each premium received, according to Ron Klug, a spokesman for the New York Department of Financial Services.

Trips and other incentives are permitted, but the percentage of premium limits must be lowered to reflect the value of those programs.

STRINGENT RULES ELSEWHERE?

Now that Ms. Warren has brought to public attention the general tackiness of these noncash annuity sales incentives, it may be only a matter of time before lawmakers look for ways to tighten up on agents' bonus trips and gold watches.

Perhaps other regulators might be interested, too — at least to the extent reps handle these products as an outside business activity and receive gifts for doing so.

“A portion of these products, such as fixed-indexed annuities, aren't securities regulated by Finra,” said Joan E. Boros, an attorney at Stradley Ronon. “The outside business activities of broker-dealer reps is always of interest to Finra.”

Either way, it just might be time to put a stop to the vacations and trinkets.

“This should always be disclosed,” Mr. Marrion said. “It wouldn't break my heart if they went away. You don't want incentives that can provide a conflict of interest.”

0
Comments

What do you think?

View comments

Recommended for you

Upcoming Event

Nov 19

Conference

New York Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in six cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Featured video

INTV

Financial therapy fills the gap between money and emotions

Most clients have complicated relationships with their finances, according to Rick Kahler, founder of Kahler Financial Group, and financial advisers can help.

Latest news & opinion

Finra suspends former star LPL rep who borrowed client cash

Regulator says James E. 'Jeb' Bashaw borrowed $200,000 from a client in 2013 without telling LPL.

Higher tax bills following reform surprise clients

Lower withholding and the loss of state and local deductions throw many for loop.

Centerbridge said to be in talks to buy Advisor Group

Advisor Group's independent broker-dealer network in the U.S. has more than 7,000 advisers.

The drawback of Richard Thaler's 401(k)-Social Security idea? Social Security itself

Observers think Congress would need to address Social Security's funding levels and offer enhanced protections for the concept to work

Social Security funding outlook improves slightly

Retirement reserves extended one year; disability fund by 20 years

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print