Beware investment product fraught with conflict

There's a good chance that someday you'll receive an invitation in the mail, or receive a phone call inviting you to a "free lunch" seminar from someone in the financial services industry.

And, after you've sat through what is often a slick presentation by a very well-trained salesperson, you're then rewarded with lunch or dinner. This is then typically followed up with numerous attempts to set up an individual appointment either in your home or at their office, with the ultimate objective of selling you an annuity. If you're 50, you've probably already had this experience.

Annuities, products issued by insurance companies, can be highly inflexible, extremely complex long-term contracts that use various means and methods to provide growth. They also can be very lucrative not only for insurance companies, but also for the agents who sell them. And it turns out that often high commissions aren't the only form of compensation these salespeople receive.

U.S. Sen. Elizabeth Warren (D-Mass.) has spearheaded a major study of noncash-compensation practices at annuity companies, and the recent results show an industry rife with conflicts of interest that significantly reward vendors and salespeople, all to the detriment of investors. Sure, there may be some applicable laws on the books relative to salespeople's compensation. But according to this scathing study, the industry has been using loopholes to get around these laws. The study cites research finding that the exploitation of these loopholes costs Americans about $17 billion a year because of consumers being saddled with inferior products, high fees and significant commissions.

The study—titled "Villas, Castles and Vacations: How Perks and Giveaways Create Conflicts of Interest in the Annuity Industry"—found rampant abuses that annuity companies freely admitted.
Among the findings:

• Kickbacks are unfortunately quite common. Thirteen of 15 annuity companies surveyed admitted to offering kickbacks directly to agents or indirectly through third-party gift payments, or both, in exchange for promoting certain annuity or insurance products.
• These kickbacks are effectively concealed from consumers. "When companies can offer kickbacks to agents for recommending high-cost financial products, and when those kickbacks are hidden from the customers," the study says "the likelihood that consumers will be duped into buying bad products increases sharply."
• The most common kickbacks, known as "incentives," include all-expense-paid trips to lavish destinations such as Aruba, the Bahamas and other resorts destinations. Annuity companies also admitted to giving away dinners at expensive restaurants, golf outings, tickets to sporting events, sports memorabilia, theater tickets and gift cards.
• Even companies that don't provide noncash compensation awards directly to sales agents frequently provide products and services to third-party marketing organizations that then pass these awards on to agents directly. "Ten of the 15 companies (examined) indicated that they provide such indirect payments," the study says. Such kickbacks include expensive vacations, iPads and jewelry, among other gifts. One expert even described these marketing organizations as "the primary culprits of this type of agency perks."

Not surprisingly, the study found that existing regulations are inadequate to protect consumers because they don't require enough transparent, understandable disclosure about noncash compensation and how these kickbacks can harm consumers.

Though regulations have existed for decades attempting to restrict such practices, loopholes have allowed vendors to dive through, enabling non-cash compensation that's unfortunately still "perfectly legal," the study concludes.

Ultimately, since you can't depend on current laws to protect you, you'll have to look out for yourself. So when you get that phone call, or lunch seminar invitation, beware. Or if your current adviser brings up annuities, ask abundant questions and get your answers in writing, including how much commission the adviser will be paid, to determine if an annuity is even right for you. And, ideally, sit down with a financial adviser who doesn't earn sales commissions to get an objective second opinion before turning over your hard-earned dollars.

The report of the study can be found by logging on to Warren's Senate website, www.warren.senate.gov, and entering "annuities" in the search box on the homepage.

 

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This content is based upon information believed to be accurate by ISI Financial Group, Inc. However, it should not be relied upon for legal or accounting purposes. You should always use the custodian's brokerage statements as an accurate reflection of your portfolio. Past performance is not indicative of future performance. Investments involve risk, including the possible loss of principal. Always seek professional advice before making any financial or legal decisions.