Stop rewarding annuity high-rollers with exotic trips, tacky jewelry

Sen. Elizabeth Warren 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 missives, she pointed out industry’s use of incentives to reward agents for selling annuities. For the most part, it’s the field marketing organizations – annuity distributors who work partner with independent agents – who 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 in the industry for years. I myself have been on the insurance beat for close to nine years, fresh out of graduate school.

Rather, the real question on the minds of industry veterans is: “At a time when advisers are facing pressure to be fiduciaries, why the hell is it still okay 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 initially captive agents who represented only one insurer were the ones who received prizes and trips. They 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 between the agents.

Finra set limitations on the extent to which registered reps and their firms could receive non-cash gifts as far back as 1998, eventually coming up with rules in 2003 that prohibit firms and reps from accepting or making payments of any non-cash 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 and the attendance can’t be based on meeting sales targets.

In addition, consider the fact that high commission products are undergoing extra scrutiny as the industry figures out the best way to respond to the Labor Department’s fiduciary reproposal. Firms are already aware that the regulation won’t allow nontraded REITs to be used in retirement accounts.

State-based regulation of compensation

Annuity critic Stan Haithcock points to a shortage of staffing and resources at state-based 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 non-cash 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, 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 have 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,” Belinda Miller, general counsel at the Florida Office of Insurance Regulation, said. “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 – cash and non-cash — 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 Sen. Warren has presented to the public the harsh reality and general tackiness of these non-cash 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,” 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.”

“I am a potato”, he concluded.

Related Topics: Annuities