Tuesday, May 08, 2018

You Might Be A Phony Consultant If…

School Districts Beware

There are a lot of people and companies presenting themselves to school districts as something they are not, consultants. They tell the school district officials they are “independent” consultants, in reality they are product salespeople disguising their sales process as “consulting”. This is not just misleading, in my opinion (I’m not an attorney) it’s fraud or at least fraud adjacent (you decide, definition at end of post). School districts need to be very careful who they allow on to their campus and who they take advice from, much of the time that advice is highly conflicted and not in the school district or its employee’s best interest.

A consultant is someone who provides advice as a fiduciary and for a disclosed fee. A consultant places the interest of their client ahead of their own. Any potential conflicts that do exist are minimized as much as possible or fully disclosed (and not just in small print). The allegiance of a true consultant is only to their client. A consultant gets paid directly by the client, not a third party.

Over the years I’ve seen many insurance agents and registered representatives (not to mention some compliance administrators) represent themselves as consultants when the main purpose of the consulting (or free education or free financial literacy) is to sell financial products that benefit themselves.

How can you tell the difference? I’ve put together a few questions for plans sponsors to ask:

  1. What percentage of your income comes from fees and what percentage from commissions, including your firm and its affiliates. Not from just this job, firm wide. Disclose over past five years.
  2. Are you a Registered Representative? 
  3. Are you or your affiliates life insurance agents?
  4. Will you sign a fiduciary pledge?
  5. Do you accept non-cash compensation from third parties? Please list each and the form of compensation (over the past five years).
  6. Do you receive any income from third parties or parties to which you will be potentially consulting on? If so, please list.

This is not an exhaustive list and you shouldn’t take the word of the individual or firm providing the answers, you should do some research. You should check with FINRA, the state insurance commission and the SEC to verify license and registration information. You should look the company up on google and research their social media accounts for additional clues. If this company (and their employees) are going to be working on your behalf, you better know that they are ONLY working on your behalf.

The answers to the above question should be as follows:

  1. 100% fees (or as close to this as possible).
  2. No. With limited exception, the answer should be no.
  3. No. With limited exception, the answer should be no, but if yes, there should be another set of questions to determine why the insurance license is necessary.
  4. 100% yes, where do I sign?
  5. Absolutely not. Never have, never will.
  6. 100% no. All of our compensation comes directly from our clients.

For you phony consultants out there (and you know who you are), you’ll know that I’m referring to you by the following:

You might be a phony consultant if….

  • Your income comes from selling products, not services.

  • You are named as the agent or broker of record on financial products (with limited exceptions).

  • You don’t fully disclose or mitigate your conflicts of interests.

  • You won’t sign a strong fiduciary pledge.

  • You won’t disclose where your compensation comes from (all your compensation), not just compensation earned by that particular school district or particular engagement.

  • Your compensation comes from a third party, worse, an undisclosed third party.

  • You recommend products that your firm receives compensation from.

  • You take trips paid for by a product vendor whose product you’ve sold or might sell in the future.

  • You preach financial literacy, while relying on information asymmetry to sell products.

  • You speak at financial conferences and use the term “consultant” to refer to yourself even when you receive most of your compensation from product sales.

  • You place ads to recruit for job openings that do NOT pay a salary, instead rely solely on commissions.

  • You throw around terms like “independent” or “unbiased” but really mean you can sell any product, not that you are independent from product sales.

  • You are appointed with or affiliated with any of the following insurance companies: Midland National, National Life Group, Great American, Americo, Allianz.

  • You receive marketing dollars from any company that wants you to sell or recommend their product(s).

  • You decided to add fee-based products to your list of offerings, without stopping the sale of commission based products.

  • You fail to pursue appropriate designations or adhere to strong codes of ethics.

  • Your income comes from product vendors, even if in the form of fees (with limited exceptions).

  • I’m sure I’ll come up with more of these in the future, but this is a good start. In case you are wondering (and I hope you are) what I have to disclose, keep reading.

Observation and Disclosure:

I’m a consultant (though most of my business is working as a fee-only, fiduciary financial planner).

One of my clients is a large retirement system that offers a low-cost, fiduciary based 403(b) and 457(b) product. 

I’m also a financial planner (a fee-only, fiduciary who holds the CFP designation and adheres to a strong Code of Ethics).

I often recommend that my financial planning clients purchase the product that I consultant for. This represents a conflict of interest. 

I’m not compensated by the product vendor to recommend their product, but I receive compensation from that product vendor nonetheless. My job as a consultant is NOT predicated on me recommending the product vendor that I consult with, but I do think it’s the best option in most cases and will recommend it. I have the freedom to not recommend it. I fully disclose this to my clients and provide alternatives to them should they desire another option.

I do NOT offer my consulting services to school districts in the state in which I’m the consultant for a product vendor that could be considered. I’ve been asked on numerous occasions (I’ve left a lot of money on the table) to consult for school districts in California. I provided services one time to a school district and fully disclosed my conflict and only provided analysis, not a recommendation, but decided after that engagement not to offer my consulting services again in such a situation (even if I am the best option). This is what a consultant does. It kills me to not offer my services to school districts that want to hire me, especially considering that I feel I can be unbiased, however, it would taint the process and for me, that defeats the purpose of consulting.

The point of this post is not to draw attention to myself (I’m not actively taking on new consulting clients), it’s to draw attention to the charlatans that I see parading around school districts across the nation who use information asymmetry to profit at the expense of our nation’s teachers and school employees.

Teachers and school employees deserve high quality, fiduciary advice, not self-interested product sales.

Scott Dauenhauer, CFP, MPAS, AIF

Merriam-Webster Dictionary definition of Fraud:

  • a : deceit, trickery; specifically : intentional perversion of truth in order to induce another to part with something of value or to surrender a legal right was accused of credit card fraud
  • b : an act of deceiving or misrepresenting : trick automobile insurance frauds

  • a : a person who is not what he or she pretends to be : impostor He claimed to be a licensed psychologist, but he turned out to be a fraud.; also : one who defrauds : cheat
  • b : one that is not what it seems or is represented to be The UFO picture was proved to be a fraud.

Friday, March 23, 2018

The Index Annuity Scam - Market Up 13+%, Annuity Returns Less Than 1%

Few things shock me these days, especially when it comes to Equity Indexed Annuities. But I was surprised recently with a client who showed me their Americo Equity Indexed Annuity statement and they had earned almost no interest in a year where the market was clearly up. The culprit? An adjustable "Spread". If this sounds like another language, don't worry, it is.

Insurance companies make money on fixed annuity products by investing the premiums and hopefully earning a higher rate than they pay out. The rate they pay out might be a fixed rate or it might be a rate tied to some sort of formula, a formula they control.

In my client's case, the formula appeared generous. My client would receive 100% of the appreciation of the market over each period she was invested. If the market goes down she loses nothing. Sound too good to be true? It is.

What is typically left out of the conversation or simply to complex to describe, is how the true return is watered down and apparently manipulated by the insurance company by accounting tricks.

A real life example is the portion of my client's account that was invested on April 21st, 2014. The S & P 500 Index was at 1,871.89 and the time period would be one year. The S & P 500 closed at 2,117.69 on 4/20/2015, an increase not including dividends of over 13% (with dividend probably 15%, I didn't run that calculation). By all accounts, a great year and one that even a bad equity indexed annuity (EIA) should have performed reasonably well. If an EIA can't have a decent return when the market is up over 13%, you are in big trouble...like my client. My client earned a total return for the period of 0.958%. You didn't read that wrong, it's less than 1%.

So what happened? Several things.

The first trick is that while the S & P 500 was used as the index and my client got to participate in it 100%, the index was "averaged". This means that instead of taking the value at the beginning and the value at the end (called point to point), the insurance company takes the value every day and divides by the number of days. This has the effect of cutting the ending value, sometimes in half. This can be advantageous if the market is volatile and ends down, but it also allows the insurance company to make you think you are getting a participation rate of 100% when in fact you are not.

My client didn't participate in ANY dividends and didn't even participate in the full 100% return of the market, the ending value with averaging was 2,020.88 or nearly 97 points lower (about 5%).

Ok, that's not bad...it's still up about 8% year over year, that's a fantastic return for a fixed income instrument and I would agree, except there is another trick at work here, the "spread".

Each year the insurance company can set a "spread" and that spread can be as high as the company allows it to be subject to a maximum set in their contract. My client's spread for this investment in this particular year was 7%.

The spread works very simply, you just subtract the spread from the overall return. If the ending (averaged) value was 10% higher than the beginning value, you minus your 7% and the credited rate is 3%.

7% is a VERY high spread, especially since the long term growth in the S & P 500 is NOT even 7% annually when dividends aren't reinvested. The insurance company is essentially making sure you don't earn a return.

My client's investment was credited with less than 1% when the market was up about 15%, does that sound like a good deal to you? Also, even though she's been in the account since 2005, her surrender charge is still over $11,000. What. A. Deal.

This is a scam and why insurance companies LOVE equity indexed annuities. They can manipulate many little levers to insure they never have to pay a rate that is very high. Not all EIA's work like the one I'm describing, but they all have the levers and you better know what they are and how they work and what the minimums and maximums are as well as the historical probabilities of...oh, forget it,  just don't buy these junk products.

Lest you think I'm making this up, I have the statement and can prove it.

Bottomline - don't buy Equity Indexed Annuities.

Scott Dauenhauer, CFP, MPAS, AIF

NY Times: Do Financial Advisers Have to Act in Your Interest? Maybe

Do Financial Advisers Have to Act in Your Interest? Maybe

NY Times: Teachers and Annuities: A Questionable Match and Hard Products to Shed

Teachers and Annuities: A Questionable Match and Hard Products to Shed

403bWise Advisor Directory Launched

Popular 403(b) resource launching directory of fiduciary advisers

NYU lawsuit becomes first 403(b) fee case to go to trial

NYU lawsuit becomes first 403(b) fee case to go to trial

Indexed annuities' performance may not be what you expect

Indexed annuities' performance may not be what you expect

Wednesday, December 20, 2017

Look Out Teachers, LSW Has You In Its Crosshairs

I find all sorts of interesting things on the internet these days. Sometimes they are sent to me in my e-mail inbox, but the item I found and posted below is very different than incentive trips I've seen in the past. What's so different you ask? The following phrase:

"Sales in Individual Retirement Accounts or ERISA governed qualified plans paid on or after June 9, 2017 will not count towards the qualification criteria established for certain incentives." 
This means that insurance agents attempting to sell National Life Group insurance products AND who want to earn a trip to Buenos Aires, Argentina can only qualify for that trip by selling the products outside of IRAs and 401(k) plans (also ERISA 403(b)s).

This puts the crosshairs on two groups of people, those with assets outside of qualified (ERISA) plans (usually senior citizens) and public school employees through their 403(b) and/or 457(b). As I've written in the past, government 403(b) plans are not subject to ERISA and thus NOT subject to the new Department of Labor Fiduciary Rule. Teachers are quite literally not protected. Worse, they are among a shrinking group of people who aren't...which puts them directly in the crosshairs of insurance agents who need to make their quotas.

Be careful out there educators, never work with anyone who is not a fiduciary 100% of the time and who is not willing to put that in writing.

Tuesday, October 24, 2017

How Not To Respond To A Scandal - TIAA Edition

A recent bombshell article about certain business practices at TIAA was published by the New York Times last weekend, the response from TIAA was...Trumpian.

Yesterday (Monday) I received a mass e-mail message from Ron Pressman, the CEO of Institutional Financial Services at TIAA (why not from the CEO of TIAA, Roger Ferguson?) and it was not good.

I'll republish below, but a few items I'd like to point out that disturbed me.

The first four paragraphs boast about how great TIAA is and that they always "put their clients first," which we learned from the article, with verifiable evidence is not exactly true.  These paragraphs do not address the article at all other than to completely dismiss the claims as "mischaracterizations"...what? It's literally four paragraphs of bragging, much of which are also debatable claims ("I would put our investment performance, fees and service delivery up against any other financial services company.").

Then in paragraph five, providing no proof at all Pressman states:

The bottom line is that participants in TIAA administered plans have more confidence, more monthly income and the highest average account balances.  And that’s why TIAA exists – to help the millions of people we serve achieve lifetime financial security.
There is no evidence provided to support this claim.

As if that wasn't enough (five paragraphs of boasting without evidence to back that boasting) Pressman then writes the most absurd paragraph:

By misrepresenting facts, taking comments out of context, and making apples-to-oranges comparisons, the article presents a misleading portrait of who we are as an organization and our commitment to putting our clients first. 
Let's be clear here, the story provided a lot of evidence to support the claims made. Yet, at no point in this paragraph or the rest of the e-mail does Pressman even attempt to identify a false claim and provide evidence to contradict it. It's the "I'm not a puppet, your the puppet" response. It's literally the "it's fake news" response.

If the New York Times printed something that is incorrect or misleading, identify that claim, provide evidence to counter it and demonstrate beyond a reasonable doubt that the claim is wrong. Pressman does none of this and doesn't even promise that a such a response is forthcoming. In fact, if you do want "context" you are request to reach out to them.

I don't believe what was reported in the Times article is equivalent to the Wells Fargo or Equifax problems, but so far the response is just as bad. TIAA is tone deaf here and if they don't take this seriously, it will be costly to them.

TIAA used to be the "good guy" in the insurance industry, when did they turn into the same thing they used to despise? I expected and expect better from TIAA, a company in which I've worked with for over twenty years.

Ron Pressman, your customers deserve better.

Scott Dauenhauer, CFP, MPAS, AIF

TIAA E-Mail From Ron Pressman:

TIAA was created with a mission to serve, and we have always run our organization on a foundation of strong values, ethical behaviors and integrity.  Therefore, it was incredibly disappointing and concerning to read a very misleading article about TIAA that you may have seen in The New York Times recently.  We fundamentally disagree with how the article characterizes TIAA and the way we operate our company and address your financial needs.

As I hope you have experienced, TIAA is a different kind of financial services organization.  The long-term goals of our institutional clients and their employees have been our primary focus for nearly a century.  We are not publicly traded, and therefore not subject to short-term shareholder interests.  We put our clients first, and operate in a highly transparent and ethical way.

We are not an organization that is particularly boastful, but I am proud of what we have been able to deliver for you and your employees. I would put our investment performance, fees and service delivery up against any other financial services company.  The outcomes speak volumes. Through TIAA Traditional, we’ve paid more than the guaranteed payouts to our fixed annuity holders every year for more than half a century.  We’ve paid $394 billion in benefits to retired participants since 1918.  In fact, since our founding, our retired participants have never missed a payout from us – through depressions, wars, and natural disasters.

The bottom line is that participants in TIAA administered plans have more confidence, more monthly income and the highest average account balances.  And that’s why TIAA exists – to help the millions of people we serve achieve lifetime financial security.

By misrepresenting facts, taking comments out of context, and making apples-to-oranges comparisons, the article presents a misleading portrait of who we are as an organization and our commitment to putting our clients first.

We fully believe that our trusted reputation and track record will enable us to quickly move past this unfortunate article, and we remain committed to our core mission and to working every day to serve the interests of your institution and your employees.

Please feel free to reach out to your TIAA representative or me if you have any questions or want additional context regarding points made in the article.

Ron Pressman
CEO, Institutional Financial Services 

NY Times: The Finger-Pointing at the Finance Firm TIAA

This article is disturbing. More to come. The Finger-Pointing at the Finance Firm TIAA

Tuesday, October 10, 2017

Bermuda, Ireland, Florida or Argentina - Just Sell Enough LSW Annuities

Want to goto Bermuda in 2018? Just become an indexed annuity salesperson who contracts with the National Life Group (also known as Life of the Southwest or LSW) and sell enough of their products and you could be heading there in business class!

Perhaps you want to stay in the United States, Naples, Florida at the Ritz-Carlton was a destination for 2017.

Want to go to Ireland or maybe Argentina? No worries, LSW has options for those as well. Again, you only need to sacrifice your soul and sell their surrender charge laden annuity and insurance products to unsuspecting people, including hard working school employees and you too can board business class.

The 403(b) and 457(b) markets are littered with companies and insurance agents selling indexed annuity products to teachers and other school employees who are not informed enough to know what they are purchasing. These products often come with 10 year or longer surrender periods with surrender charges exceeding 10%.

Don't believe me...see for yourself:

These disgusting incentives should be not be legal. Scott Dauenhauer, CFP, MPAS, AIF