Well this must be embarrassing. The US Chamber of Commerce launched a campaign to “inform” the public to the problem of providing advice in the best interest of clients. You’d think that acting on your client’s behalf would not be controversial, but you’d be wrong. There is a lot of money to be made in the financial services industry by doing the wrong thing (though there is more to be made by doing the right thing). Continue reading Chamber Fails At Astroturfing Fiduciary Rule
Most consumers don’t know that there are two primary regulators for financial advisors. Further, most don’t know that one of those bodies is not governmental, but a self-regulatory body.
Advisors who charge fees are generally regulated by the Securities and Exchange Commission, a government regulator, but “Advisors” who earn a living by selling products (receive commissions in exchange for selling mutual funds and variable annuities) are regulated by an entity known as FINRA, the Financial Industry Regulatory Authority, which is a self-regulatory body.
Today I received an e-mail from a large variable annuity distributing insurance company that reminded me of a trick these companies use to get more money into their products. The trick has been around for decades and is completely legal, just misleading.
Here is how it works, as explained by the insurance company:
This allows clients to earn 6% on money in our DCA Bucket. (Fees are not assessed on money in the DCA bucket)
Each month we transfer 1/6th of the money into the investments that you select.
The client only sees the fat 6% yield. In their mind if they put $100,000 into this product they will earn 6%. But they will not, not even close. Instead of earning $6,000 on their investment (6% of $100,000) they will only earn $1,779.
The way the trickery works is the interest rate is applied to smaller and smaller balance, the insurance company only pays an annualized 6% rate on the full deposit for one month (the first).
Most people don’t understand annualized rates, they see 6% and think they will earn 6%, but in reality they are set to earn .5% on the balance in the account, a balance that is getting smaller by 1/6th every month.
At the end of 6 months their money has been fully transferred into a variable annuity sub-account where they are likely paying 3% in annual fees. I created a spreadsheet below to demonstrate how it works.
It’s clear that no one is earning 6% or what a regular person would perceive as 6%. They aren’t even earning 6% on their balance for six months (which would be $3,000). At the end of the 6 months they’ve accumulated about $1,779 in earnings (and this assumes compounding interest), but since the money they transferred to sub-accounts is paying 3% in fees, those earnings are reduced by about $623. The net interest earned is $1,156, a far cry from $6,000.
Now, getting over a thousand dollars in interest on your cash is nice in an age of zero interest rates, but the point is that this “feature” is used in order to get you into an expensive product under false pretenses.
Scott Dauenhauer, CFP, MPAS, AIF
Broker-Dealers do not have client interests in mind, it’s just not possible given where they are their income. This articles details some of those profit centers and how they use them (hint: very little transparency).
Recall my piece from awhile back: ASPPA Disclosure. As well as Michael Kitces piece – The Public Deserves A Choice, But It’s Not Fiduciary Vs Suitability. If you think the brokerage world has your best interest at heart…think again.
Supporters of the DOL’s efforts scoffed at Reilly’s note.
“This is as Orwellian as it gets,” says Barbara Roper, director of investor protection with the Consumer Federation of America in Washington, D.C. “They will serve their clients best by defeating a regulation that would require them to do what’s best for their clients?”
“If it is not in the best interests of customers, it’s not advice, it’s a sales pitch,” Roper continues. “That’s what they are fighting for here, to portray themselves as advisors while they are being regulated as salespeople.”
Scott Dauenhauer CFP, MPAS, AIF
Ever wonder why that “financial planner” is recommending the product they are recommending? It could be the compensation or the extra bonuses that are offered to incentive them to sell a certain company’s product.Given these incentive plans, is the product being sold really in your best interest? I’ll let you decide.
Here is a recent advert that showed up in my e-mail:
Here is a link to a website with the same advertisement:
Wondering which insurance company must be sold to secure that $1,000 Visa card (and trip qualification to Italy)? Here is the small print…enlarged:
*Available only on all Allianz Life Pro+® and Allianz Life Pro+ SurvivorSM Fixed Index Universal Life Insurance Policy Applications. Offer ends 12/31/14. Exclusions may apply; contact your Annuity Store Marketer at 800-825-6094 for complete details.
Policy #P54350 & #P61843 are issued by Allianz Life Insurance Company of North America.
Guarantees are backed by the financial strength and claims-paying ability of Allianz Life Insurance Company of North America.
Product availability and features may vary by state. New York production is not included.
Registered representative participation is subject to Broker/Dealer approval.
The Annuity Store reserves the right to alter or discontinue this promotion at any time. Agent must be in good standing. All federal, state and other tax liabilities arising from the award are the sole responsibility of the agent. VISA is not a participant in, or sponsor of, this promotion.
TAS226-38610 For financial professional use only – not for use with the public.
Notice that the marketing company doesn’t want you to know about this – marking the e-mail “For Financial professional use only – not for use with the public.” It seems to me the public SHOULD know about the incentives driving the product recommendations being made.
This practice should not be allowed.
Scott Dauenhauer, CFP, MPAS, AIF