Today continues a series, to appear roughly once per month, on the main ways that the financial system rips off the average worker and investor. This is based upon my nearly decade-long tenure in the financial services industry.
Fields of Green; External Wholesaling
There is, of course, a partner to the Internal Wholesaler in all this moral compromise. A much better paid partner, in fact. That would be the Field or External Wholesaler. This is the captain of the team. This individual is the one who meets one on one with the financial advisors and cultivates the relationship. They are also the keeper of the “marketing support” budget and the one who decides how and when to dole out the goodies.
So, what qualifies one to be an External Wholesaler? I am tempted to say that it is a lot like the Brady Bunch episode where Greg is picked to be the next “Johnny Bravo” because he fit the suit. In many cases this is true. These are mostly white males who often could get gigs modeling for GQ. Many of them, in fact, are empty suits.
On the other hand, many are intelligent, articulate and very bright people. What they are, if they are any good, are exceptional salespeople. Don’t get me wrong, there is nothing wrong with being a good salesperson. It is not an easy thing to sell something, especially when starting from scratch with a true “cold call”. As an individual that has spent a good chunk of his career in sales and sales management, I can say that some of the best, most polished salespeople exist in this industry.
The problem is, as was outlined previously, that there is so much moral compromise that has occurred that these talented salespeople have become, mostly unknowingly, a part of the larger problem. The same dynamic that occurs with advisors is at work in field wholesalers. Most are a part of the 70% that are well-intentioned but ignorant of the rip-off that is happening. The other 30% are just dirtbags that don’t care about whether they are a part of ripping off a client or not (see below). There is not a 5% who are aware of the problem as there is in the advisor group, because if they truly understood the problem, they would not come anywhere near the wholesaling segment.
Right Place, Right Time
Mostly, what these people are, is extraordinarily lucky. Most advisors don’t know about this niche and would be appalled to learn how much money is being made by these people, as was discussed previously.
This is a considerably easier sales role than that faced by the financial advisor. Advisors must go retail, sometimes literally door to door, to find prospects. When approaching someone, they don’t know if that person has assets to invest, invests on their own, or through work, or already has an advisor. On top of that, most people run from insurance and financial salespeople. It is often a brutal numbers game.
Field Wholesalers, by contrast are in a “business to business” role, they know exactly who can sell their products and they come calling with a bag of goodies, like free lunches and tchotchkes. The list of advisors who can sell the company’s products is a mile long and available via the company intranet and data systems. There is even data on past production as well as good estimates as to overall production within the industry. All of this makes targeting good, valuable prospects that much easier. It is like fishing with dynamite.
Let’s be clear, the amount of money made by wholesalers can dwarf that of most advisors. It was not uncommon to see Field Wholesalers regularly make 400-500K per year, with a few stars making over $1million per year. The suits may often be empty of brains, but the pockets are full of money…clients’ money that comes at the expense of performance that is.
Stories from the Killing Floor: The Wholesaler’s Hall of Shame
The following stories are true. Either I was the wholesaler involved in the interaction with an advisor or I was listening in on another wholesaler’s call or I was told directly by another wholesaler about the incident. I am not using real names of either advisors or their firms to spare them from additional shame over and above being so vile or ignorant.
The first anecdote occurred before I was out of training. I was listening in to an experienced wholesaler’s calls one morning during the training period and happened upon a truly frightfully moronic advisor. The time was early 2007 and most of the action took place in deferred variable annuities. The market was near a peak and the variable products that insurance companies were selling had rich features that were attractive to advisors because they were easy to sell to clients; remember advisors don’t care what fees clients pay-only the commission they receive.
So, a call comes in from a woman on the East Coast, with a stereotypically East Coast attitude; arrogant and rushed. After the normal pleasantries while the wholesaler pulls up her information in the database, she gets around to the point of her call. She wants information about some of our products. Great says the wholesaler, sensing a potential sale as it is always a welcome development when an advisor calls in as opposed to seeking them out via outbound calls. He asks a few questions about the case she is working on; client age; assets we are working with; financial goals, etc. The advisor then asks about our “variable fixed annuities”. The wholesaler follows up with a question: “which one are you interested in?” The advisor responded: “Your variable fixed annuities”, with a somewhat more impatient tone. The wholesaler repeated his question: “which one”? This went around a few more times before the wholesaler, to his incredulousness and to my horror, realized that the advisor did not understand the difference between a variable annuity and a fixed annuity. After reading the above descriptions of these products the untrained reader of this series of essays knows the difference between a variable and a fixed annuity. Even though I was new to the position I was stunned by this woman’s ignorance. Even with her East Coast attitude she was not intentionally trying to screw anyone and granted she did call in to the annuity carrier to get information before presenting a solution to her client, so we can count her among the ignorant 70%. Yet all the same the fact that she has not internalized such a basic piece of knowledge as the difference between fixed and variable annuities means that she should put her product brochure down and step slowly away from the industry. All I could think was that this ignoramus was responsible for someone’s retirement! The experienced wholesaler did not seem particularly surprised. In fact, he was nonchalant about the whole exchange. Just another day on the killing floor as I would soon learn.
Next up is a story from a colleague and his field partner regarding an esoteric investment called a Floating Rate Bond. The essence of this type of investment is that it is a bond and like all bonds it has an interest rate. Bonds that have a set interest rate are risky when general rates rise because no one wants to hang onto a lower interest rate bond when higher interest rates are available. So, the market value of existing bonds in a rising rate environment goes down. Floating rate bonds are a bit different. The interest rate on these types of bonds gets reset, usually every 90 days. This means that if rates rise the rates on these bonds will rise as well and so preserve their market value. The other thing about these bonds is that they are secured by the real assets of companies such as plant and equipment. These bonds are based on loans that lenders, banks and other institutions loan to companies. This is important because it means that these lenders have first priority regarding repayment should the company get into trouble. They are what is known as senior in the capital structure as these lenders always get paid back first.
There is nothing inherently wrong with these bonds as an investment and they can have a place in a diversified portfolio. They can be an effective hedge against rising interest rates and the fact that they get paid back first is an attractive feature. What they are not, however, is risk free. First, the fact that they reset every 90 days did mean that there could be a period in which they lost value before the rates reset. There was also the risk of default should the economy tank. They are often below investment grade which means a greater chance of default, which is why you get a higher return. The other thing about these bonds as an asset class is that in 2006 and 2007 this was a fairly new asset class. These loans were just beginning to be packaged up into bonds and sold to investors. Therefore, they were not clearly understood by either investors or advisors. Also, since they were relatively new on the market the universe of these bonds was relatively small and therefore not very liquid, which meant that it could be difficult to get your bonds sold in case of a serious downturn.
The real scumbaggery in this tale is how these bonds were sold. Wholesalers, like my colleague and his field partner would go around to advisors with the following pitch: these bonds and the funds made up of them were “senior preferred, a CD alternative”. This was a particularly effective pitch as they worked in the bank channel. The advisors they called on saw a typically older, more conservative clientele, so repeating what the wholesaling team said resonated well and generated lots of sales. The problem is of course that it was a total fabrication. Yes, they were “senior preferred” as discussed above but that was framed that way to an unsophisticated client base to make it sound more secure than it was. Also, to claim it was a CD alternative was beyond the pale. CDs are fixed rate products secured with government FDIC insurance and in no way resemble a below investment grade bond.
The shit hit the fan in 2007 and 2008 when the general market collapsed, and the economy went into the tank. Clients wanted out of these bond funds and a fire sale ensued. The problem was that not being very liquid it was difficult to unload them at any price. The upshot is that while there were many lawsuits, a lot of older, conservative clients lost a lot of money in an investment they had no business being in. Some advisors had complaints filed against their record, but most were unfazed and there was no repercussion in the wholesaling end of the business. My colleague went onto to become one of the most highly regarded Internal Wholesalers in the department and his field partner was promoted to a manager position. We would often make jokes using the line “its senior preferred, a CD alternative” while doing our best Rodney Dangerfield impersonation. Nothing like breaking up the monotony of a workday on the back of someone else’s misery.
This same “acclaimed” wholesaler also was central to my next tale. In 2009, after the financial meltdown many insurance companies began to pull back on the benefits they were offering through their deferred variable annuities as they were expensive and risky. Many companies, my employer included, moved to increase the sales of fixed annuities as these were of lower risk to the carriers as well as attractive to many investors who had just lost a lot of money in their portfolios. Now a lot of advisors didn’t like to sell these as they felt it was “beneath them”, as if anything could be beneath a financial advisor. Mostly they did not want to sell them because the commission was typically low, as these were low margin products for the insurance companies. Our company was relatively new to offering fixed annuities, so they wanted to offer a better than average commission to entice sales. This was especially important as they needed to move quickly away from risky variable annuity products.
My colleague would make his calls to his advisors in a large metropolitan area and know that he was going to receive pushback from these arrogant pricks. Now he was shrewd enough not to obviously treat them like the commission whores they were but to be subtler about it. He would back his way into the commission discussion by saying something like: “just so you know there is no commission chargeback after one year, so the 5% commission is safe after that period.” Now a 5% commission for a product like this is huge. The conversation would instantly change from “I don’t sell products like that, to send me 10 kits” (A kit is the packet of sales information and paperwork necessary to complete a sale). It’s true salesmanship when you can whore out the advisors you talk to without them even knowing it!
Next month we will dive further into the moral sewer and visit the wholesaler Hall of Shame.
Praise Be to God
