U.S. Senator Elizabeth Warren, a consumer advocate and prominent critic of Wall Street, has taken aim at a new target: the biggest sellers of annuities and the cruises, international travel, iPads, cash and stock options she says they're using to entice brokers to sell their annuity products. She is particularly worried about near retirees and baby boomers who are especially vulnerable to poor investment decisions.

Warren is planning to send letters today to the 15 largest annuity providers which include Allianz SE's U.S. life division, Security Benefit Life Insurance, Jackson Life, AIG, New York Life Insurance, Prudential Financial, Aegon NV's Transamerica, Axa, Metlife, Nationwide Mutual Insurance and Pacific Life Insurance. She wants to know whether perks they provide encourage brokers to put personal interests ahead of the retirement goals of clients.

Senator Warren's letter states:

I am concerned that these incentives present a conflict of interest for agents and financial advisers that could result in these agents providing inadequate advice about annuities to investors and selling products that may not meet the retirement investment needs of their buyers

Fiduciary Standard vs Suitability

Warren is focusing on annuity perks and kickbacks to build support for proposed Labor Department regulations that require brokers to act in their retirement clients' best interest, a standard known as a fiduciary duty. Current standards only require brokers to use a less-stringent suitability standard that requires investment fit a clients' needs and risk tolerance.

The current standards allow brokers and annuity salespeople to put their own interests like winning a Mediterranean cruise ahead of their client's interests and goals. Is this who you want to handle your hard earned investment dollars? I doubt it. Brokers are not legally required to place client's interests ahead of their own, to disclose conflicts of interest or details of fees.

According to Registered Rep's Advisor Corner: Understanding the Differences between RIAs and Brokers, Suitability and Fiduciary:

Think of it this way. If you walk into a Ford dealership, the Ford salesman is going to do everything he can to sell you a Ford. And a Ford vehicle will likely “suit” your needs. But you could also choose to hire someone to help you determine exactly which vehicle would really be best for you, among the many brands and models out there. Although this person would receive a fee for services rendered, he or she would be indifferent as to what car you buy because that form of payment has taken the conflict out of the relationship.
Another metaphor can be found in the medical profession. Today we pay our doctor to evaluate our condition and to prescribe any necessary treatments. What if there were another model where we didn't have to pay the doctor for that evaluation, but instead the doctor was paid by the pharmaceutical company for prescribing medications, or the surgeon for prescribing surgery? I might be glad that I no longer have to pay the doctor, but unsure about how the potential conflicts might impact my overall health care.

Annuity perks come under scrutiny again

With baby boomers looking for income in a zero rate environment, the annuity business has been booming. On the positive side, they often offer regular income payments for life. But some have been criticized for high fees, complicated structures and deceptive sales tactics.

While Senator Warren is bringing sales perks to the forefront, this isn't a new issue either. Insurance companies have come under fire repeatedly over the last couple of decades. In 2007, Allianz came under fire for selling index annuities. Court filings by the plaintiffs in a class action lawsuit described “a sales culture in overdrive, with agents given extra-large commissions and perks ranging from Rolex watches to boats.”

Warren is looking for more clarity on annuity perks and has asked insurance companies to provide a full list of all incentives by May 11th. In her letters, Warren says,

“The widespread offers of incentives like luxury cruises and other vacations, cash and stock options, and a range of other rewards — from iPads to Mercedes Benz leases — appears to present a clear and obvious conflict of interest for brokers and agents that sell annuities… I am troubled by this industry incentive system. Annuity agents that are more interested in earning perks than in acting in their clients' best interest can place Americans' savings and retirement security at risk.”

Investors deserve more transparency and the fiduciary standard from everyone in the investment industry, not just a sub segment. We will update you in the coming months on this developing story.

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