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.
No Longer Real Human Beings
The next set of stories is going to take up deep into the moral sewer. First up is a tale of how broker dealers view their clients. I from time to time was tasked with doing some new advisor training for a broker dealer that was headquartered in Omaha. This entailed explaining the main features of our basic products and offering a sales idea or two. What the broker dealer most wanted was for the new advisors to be given a free dinner, which my employer was happy to do to gain access to new advisors before other carriers and fund companies did.
On the appointed day I showed up about 15 minutes early and was directed to the classroom where the training was going on. I sat quietly in the back as the previous training module was wrapping up. On this day that module was about sales requirements and goal setting. The instructor was going through what was expected of these people as sales reps. She was breaking it down: If you need to hit such and such a revenue goal and the average ticket was so big then you would have to make X number of sales per week. If therefore it took X number of conversations per week to get X number of sales, then you would have to have that number of conversations to hit your goals. In the end she said you would have to sit across from (here she pointed to a figure on the whiteboard I could not see) this many dollars per day to achieve your sales target. It has always stayed with me that this manager was no longer talking about people, as in actual human beings, but was conceiving of these people as nothing more than dollars. This is tremendously revealing as it underscores how deep the moral rot had gotten in this industry.
It’s All About the Commission
This next tale reveals the true mendacity of many advisors. I had an advisor I was working with in the bank channel. He was in fact employed by the same bank whose trainer reduced people to mere numbers. He called in to discuss the features of a fixed annuity product that he had recently sold to a client. He specifically wanted to know about the commission chargeback features. Commissions are regularly charged back if the contract is surrendered within a year. Different companies have different rules. The company I worked for had strict rules and usually charged back the entire commission if the contract was surrendered within a year.
It is important to understand how this product worked to see just how big a scumbag this advisor was. Almost every annuity has what is called a “free withdrawal” amount. This is an amount of money that the client can withdraw without incurring a surrender penalty. It is industry standard that this free withdrawal amount is 10% of the contract value. If your yearly withdrawal amount is below that 10% number, there will be no surrender charge or penalty. Any amount over that free withdrawal amount will be assessed a surrender charge (usually a declining percentage of the contract value as the contract ages).
This product had a client-friendly feature to it that came into play in this situation. If a client completely surrendered the product, they would not be assessed a penalty. It was marketed as a “return of premium guarantee”. If, however, the client took less than 100% of the contract but more than 10% they would be charged a penalty. We would tell advisors to tell their clients to avoid withdrawals between 11% and 99% of the contract value-or as I would say “tell your clients to do their walking all at once or not at all.”
The problem for advisors is that if a client surrendered the entire contract, they would be faced with a commission chargeback. In this situation the advisor asked what the commission chargeback policy was. I informed him that if the client surrendered the contract the advisor would have all the commission charged back on the next pay cycle. The advisor then asked if there was a commission chargeback for a 25% withdrawal. I knew immediately where this dirtball was going with his questions. I told him (honestly) that a 25% withdrawal by the client would not trigger a commission chargeback but that it would trigger a surrender penalty to the client. A penalty that could be avoided if the client surrendered the entire contract. This made sense as the product was sold recently enough that if the client needed that much money so quickly then it was probably not a good idea to have assets tied up in an illiquid product such as an annuity. The advisor probably knew this but did not care as it would hinder his payday. The advisor quickly brushed past my statements about a course of action that would not adversely affect the client and then said a hurried goodbye to formulate a pitch that would screw the client out of money for no good reason. Remember the title of this post!
This story is only part of a larger pattern regarding early withdrawals and surrender charges. On more than one occasion I had advisors ask what the ramifications of a large withdrawal would be upon their commissions. This was usually a planned withdrawal within days or weeks of the product being purchased. On one occasion I had an advisor ask about putting 200K into an annuity then what would the consequences be of a 25K withdrawal. I naively suggested that the advisor just write the sale for 185K and not to have the client penalized or at risk because of the withdrawal. I was ignored of course. Knowing that all of this was wrong did not stop me from spending years more in this racket.
Churning, Ever Churning
The next tale reflects another recurring pattern in advisory skullduggery. I had an advisor located in Arizona. Prime hunting ground for those without a conscience. This advisor was older himself and openly talked about retiring in a few years. In the meanwhile, I think he figured on having himself a little financial payday party before he left the industry. He began to engage in the age-old advisor practice of “churning”. Churning is simply engaging in excessive trades to generate commissions without benefiting the client. Over the course of 6 months this human waste moved most of the clients he had at my company into products at other companies even though every trade resulted in a surrender charge that was paid for by the client. Each step of the way I gave this prick the verbiage and the intellectual ammunition to “justify” the trades in question. I was giving this guy reasons to move assets away from my company by picking apart the flaws in our products in a way that made them look weaker relative to a competitor’s offerings (in truth they were overall about the same). Why would I do this? Because he was bringing us enough new business that there was no reason not to help him in this way. We had already been paid on the contracts he was now moving out, so there was no financial incentive to us directly to try and keep the assets under our management. Our financial incentives were aligned with his, we wanted to get paid and if that meant helping him justify ways to screw his clients then we would just turn a blind eye to it.
This story does have a somewhat happy ending. This bozo was so brazen in his actions that even his back office got suspicious and instigated an investigation. I was one of the people they contacted, and I explained truthfully that there appeared to be little justification to the trades he was making, and I gave them honest accounts of what the products did compared to the products he moved them into. The advisor was forced to pay restitution to the clients who had paid surrender penalties, so they were at least made whole. In the end I did the legally correct thing and told the truth when it absolutely mattered. If I had done the right thing, I would have dropped a dime on this prick and turned him in myself. The human capacity for rationalization is boundless.
Endless Justifications
This story was repeated in a variety of ways. One of the chief benefits an Internal Wholesaler can offer an advisor is justification of a trade, any trade. I used to pride myself on my ability to give any advisor the ammunition to win over his back office regardless of the specifics of the case. I would even coach my teammates on such techniques. I called it my “get a pen and paper” spiel.
This scenario occurred more times than I can recount. It usually began with an advisor calling somewhat panicked because the back office was about to reject a trade as unsuitable. Never mind if it was in fact unsuitable, the advisor and the wholesaling team had money on the line! I would calmly inquire as to the specific objection of the back office. Since we mostly sold annuities with an income guarantee rider the objection typically centered on whether this was appropriate. Let’s be clear, sometimes it was a decent solution. There were usually better solutions that paid the client more at lower cost but there were times when what we were selling produced a good result for the client (not that this concerned us much).
The back office would often object to either the cost of the rider producing the guaranteed income, or they would be concerned with a client tying up too great a percentage of their assets in a relatively illiquid annuity.
In either case I would tell the advisor to get a pen and paper. I would then launch into the precise verbiage that the advisor would need to convince the back office that this was a good solution for the client. The key is to rearrange the client objectives to match the product being offered. If the client needs guaranteed income in retirement (who doesn’t?) then that was to be emphasized. That left the issue of cost. Why would the client choose this option rather than one that yielded as much or more money at a lower cost? The answer was that the client may want to have a lump sum available for some emergency or other need that would necessitate a deferred variable annuity with an income benefit rider at a higher cost rather than an immediate annuity where you could not get your money back. Keep in mind this only really mattered if the client was leaving no emergency money in their account. Convincing the client to go along with this was easy. They were usually so befuddled by the array of choices and the jargon set before them that scaring them into not wanting to “give up control of their money” was simple.
By giving the advisor the right verbiage to repeat to the back office and getting the client to go along you could take any situation and turn it inside out and upside down and voila you have yourself a justifiable sale. The ability to take a malleable client and rearrange the storyline to fit the sales needs of the moment was not really that difficult but it was and is a critical component of the day-to-day life of a wholesaler. It is also, as we will see next month, why current reforms are destined to fail.
There is of course a whole panoply of minor variations on these stories. As a Wholesaler I helped hundreds of advisors do dicey things to their clients. Like giving them the arguments to put a lifetime income benefit on an expensive variable annuity with a 3-year surrender schedule (if a client truly wants lifetime income from such a product a less expensive annuity with a longer surrender schedule would be best, but it pays less in commission.) Or ignoring the fact that a rep has a trail of complaints on their record that would shame a con man. Or perhaps continuing to deal with advisors who only ask what the commission is on your products, never bothering to ask how they work. It was all in a day’s work as an Internal Wholesaler and if the advisor sold the client, then I got paid as well.
There was even a situation whereby a broker/dealer prohibited the acceptance of freebies and goodies from wholesalers, but this did not stop the advisor from receiving them. My external partner was hosting an event at a major league ballpark in a clubhouse and pursuant to that we invited the top reps from one of our top broker dealer partners. The invites went out via e-mail and soon after this advisor e-mailed back that he would not be attending. Immediately after I received that email the advisor called me directly and said he would, of course, be at the event. The official company policy was to not take such incentives from wholesalers, which is why he wanted his reply on the record in email form. Just another day dodging the compliance officer.
The problem only magnified itself after I took a promotion and became a manager. I was now helping others to screw clients not just doing it myself. Of course, I would refrain from being obvious about it, but the stories told should give the reader an indication that everyone involved knew what was going on.
The end came when I could no longer live with the cognitive dissonance of a professed set of faith beliefs regarding how one should treat other human beings and the life I was living. So, I just quit. I mean I had a near panic attack at the prospect of going to yet another “sales” conference (underwritten by fund companies, of course) and I went into my boss’ office and turned in my resignation. I was lucky. I have a spouse who earns enough that I had options. There are good people still in that industry who know better yet are trapped.
Next month we will explore a way out of this moral and economic disaster area.
Praise Be to God
