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

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.”