Thursday, July 25, 2019

Yet Another Hidden Annuity Compensation Conflict

The conflicts in annuity compensation seem endless. This is why I generally tell people to avoid them. I've got another conflict to add to the growing list, deferred compensation.

Insurance companies want loyalty and they design their compensation systems to reward it. I recently came across F and G Annuity and Life's deferred compensation scheme and thought it was a good demonstration of hidden conflicts in the recommendation that might be coming from your annuity agent.

Agents that aren't captive (meaning they can sell any insurance companies products) sometimes end up as independent, but captive. Confused? Let me explain.

Imagine you have two products you can sell. One rewards you with bigger commissions, amazing trips and other perks, but only if you sell enough products from that company during a specific time frame. If the agent anticipates making $2 million a year in premium sales, the perks available to that agent by selecting only one company to distribute can be significant versus if that agent sold products from two (or more) insurance companies. It's possible that the agent could miss qualifying for big perks at both companies even though they sell more in premium than agents who did receive the perks (but kept all their business in one place).

Back to F and G Annuity and Life.

F and G Life has a deferred compensation program for agents who use distribute their products, it's called the Power Producer Program. This program rewards loyalty. It rewards the agents who concentrate their sales with F and G and it presents a significant conflict of interest when the agent is choosing which product to sell to a customer. Should they sell the product that doesn't qualify them for contributions into a deferred compensation program (for the agents retirement) or one that does?

This is a conflict that the NAIC should eliminate (among many, many others). There should not be an incentive to sell one product type over another.

Here is the outline of the Power Producer Program as explained in an F and G brochure:

Each year we set a Power Producer qualification level. Producers earn credits throughout the calendar year and can combine both their annuity and life sales. The 2019 qualification level to earn one credit is 1.75 million points. $1 of FIA premium is equal to 1 point and $1 of life premium, up to target, is equal to 15 points. The Power Producer credit is determined each year, but each credit is typically worth between $3,000-5,000.
The deposit amounts are cumulative and below is an example. By qualifying for just one credit a year, from 2013-2018, F&G would have contributed $80,000 on your behalf to a non-qualified deferred compensation plan.
The current qualification period is January 1 - December 31, 2019. 
Insurance is an important part of your financial plan and insurance regulation in the United States has failed the consumer. While I don't expect you'll receive an honest answer, always ask how your agent will be compensated and if selling the product they want you to buy qualifies them for trips, commissions, other perks and deferred compensation.

Here is an image from the brochure and a link to it.

F & G Life Power Producer Program

Wednesday, June 05, 2019

Where Your LSW Agent Might Be Traveling After Selling You An Annuity

Have you been sold an indexed annuity from an agent appointed with Life Insurance of the Southwest (National Life Group)? You may have inadvertently contributed to their vacation plans.

For some reason, it's still legal for insurance companies to reward their producers with amazing trips to places all over the world if they sell enough of the insurance company's products.

In 2019, agents have already been to Kauai (staying at the Grand Hyatt), and are headed for wine tasting in Napa this fall. In 2020 they'll be heading for Palm Beach as an appetizer and the Ritz-Carlton in Tokyo for the full course.

















Next time you meet with someone calling themselves an advisor and they pull out paperwork for LSW products you should rejoice. You've found an 'advisor' that you should NEVER use. Don't forget to tell your friends and colleagues to stay as far away from this conflicted company and their agents as possible.

Friday, May 10, 2019

Opinion: 403(b) Vendor Reps and The CFP Designation

The CFP is being used as bait.
Note to reader: I've chosen to redact the name of the company that I'm writing about for two reasons. The first is that this company has a history of threatening lawsuits against financial advisors who write about them negatively and second, I honestly don't believe this company stands alone, most of the commission-based vendors in the 403(b) space have similar or worse conflicts of interests that their CFPs will face.

Recently, a representative of an insurance company with a significant presence in the 403(b) market gave a presentation at my wife's school (she is a teacher at a middle school in Southern California). I asked her to record and send me the audio. When I received the audio and listened to it what struck me was not the typical methods used to get people to work with him, but that he touted one of his credentials.

The representative said that when it comes to a financial plan, "If you don't have one, I'm a Certified Financial Planner." Mind you, this visit was supposed to inform the teachers only about their 457(b) plan, but that's not what's bothering me today. The representative's statement came as a surprise to me because being a Certified Financial Planner (CFP) has specific requirements that working as an insurance agent of an insurance company or even working as a representative of a typical broker/dealer would make difficult if not impossible to fulfill. I thought to myself, this guy is holding himself out to these teachers as if he is in the same business that I am in, teachers won't be able to tell the difference. He's holding himself out to be a fiduciary. I don't see how that is possible.

Don't get me wrong, I think everyone who is in the financial planning business should be a CFP, and I commend the representative for attaining the designation. However, when your primary business is the sale of products, it's nearly impossible to put the best interest of the client ahead of your own, let alone that of your firm, yet that is what being a CFP entails (at least it will, starting in October of 2019).

My wife also sent me a flyer that was put out by the representative and while it listed his name and insurance license number (as well as another paragraph of disclosures) the CFP designation was nowhere to be found. This struck me as odd. The CFP is a real accomplishment, and it provides at least some credibility, why would he mention it out loud, but not in writing? I suspect the company he works for might not want it in writing.

Let's step back for a moment, I left something out.

The Certified Financial Planner designation is the premier financial planning designation in the industry, but, it's not the planning equivalent of the CPA or the CFA, at least not yet. Currently, the CFP designation does not have a strong fiduciary duty requirement. A fiduciary duty requires the advisor to place the client's interests ahead of themselves and their firm. This is one area where the CFP falls short of other professional designations, but this is changing starting in October of 2019 when the updates to the Standards of Conduct are scheduled to take effect.

In the new CFP Standards of Conduct, the first standard is a Fiduciary Duty (A.1). The language is pretty strong (stronger than the SEC Regulation Best Interest by far):

"At all times when providing Financial Advice to a Client, a CFP® professional must act as a fiduciary, and therefore, act in the best interests of the Client. The following duties must be fulfilled:


Duty of Loyalty. A CFP® professional must:

i. Place the interests of the client above the interests of the CFP® professional and the CFP® Professional's Firm;

ii. Avoid Conflicts of Interest, or fully disclose Material Conflicts of Interest to the client, obtain the client's informed consent, and properly manage the conflict; and

iii. Act without regard to the financial or other interests of the CFP® professional, the CFP® Professional's Firm, or any individual or entity other than the client, which means that a CFP® professional acting under a Conflict of Interest continues to have a duty to act in the best interests of the client and place the client's interests above the CFP® professional's.

b. Duty of Care: A CFP® professional must act with the care, skill, prudence, and diligence that a prudent professional would exercise in light of the client's goals, risk tolerance, objectives, and financial and personal circumstances."

Here is a link to the full Standards: CFP Standards of Professional Conduct

The Duty of Loyalty within the CFP Standards of Conduct is quite strong and rather unambiguous. I suspect complying with this standard while working for a major 403(b) vendor is going to be extremely difficult, if not impossible.

I pulled up the SEC disclosure document for the company the representative speaking at my wife's school works to get an idea of what sort of conflicts he might encounter. What I found was shocking even to me, I see no possible way a person who works for this company could continue to hold themselves out as a CFP.

One reason I'm doubtful they won't be able to fulfill their fiduciary duty is due to the bait and switch system this particular (and I suspect many) 403(b) vendors have in place to fool you into believing you are receiving advice from a fiduciary. I've excerpted an incredible few paragraphs that discloses a considerable conflict of interest. It's the ultimate bait and switch:

"A client may enter into a financial planning engagement with (company name redacted) by signing a financial services client agreement and, in most cases, agreeing to pay a fee in exchange for those services. We offer both fee and non-fee financial planning programs, although in either case (company name redacted) and the Financial Professional generally will receive commissions in their insurance agent, broker-dealer and registered representative capacities if the client decides to purchase any products through the Financial Professional."

Here's where the bait and switch comes in:

"The financial plan or advice will not include investment advice, analysis or recommendations regarding specific securities, or investment or insurance products. Upon delivery of a financial plan or advice to a client, the client will review the plan or advice and provide acknowledgment of their receipt of said plan or advice. Acknowledgment of plan or advice delivery may be done by obtaining a signed delivery receipt or via an electronic acknowledgment. Acknowledgment of receipt will end the financial planning advisory relationship between the client and us.

However, because our Financial Professionals are also registered representatives of (company name redacted), a registered broker-dealer, and licensed insurance agents of (company name redacted), they are able to identify products and securities offered by (company name redacted), its affiliates and various carriers that may be suitable for implementing the plan or advice.

These product-specific implementation recommendations may be prepared in a separate written document, generally following plan delivery. Any document in which they may be set forth is not part of the plan or advice. (company name redacted) generally will receive commissions (or, in some cases, advisory fees) if the client decides to purchase any products through the Financial Professional, and the Financial Professional will receive a portion of any commissions received in his or her capacity as a registered representative of a broker-dealer or as an insurance agent. Clients have no obligation to purchase any products through (company name redacted), its affiliates or other carriers."

Allow me to translate.

First, you should know that insurance agents and registered representatives of broker/dealers owe no fiduciary duty to their client when acting in those capacities (this is not to say they won't, simply that they are held to a different standard). They are required by law to offer suitable recommendations, which allows them the flexibility to sell you almost anything. The products do not have to be in your interest, let alone your best interest. Yet, these individuals are allowed to call themselves "Advisors," "Financial Consultants," "Financial Planner" and all sorts of other professional sounding names.

Without getting technical, your financial planner should work as a fiduciary 100% of the time.

The "Advisor" in the above paragraphs is not a true advisor since they won't commit to acting in your interest at all times. What the company is attempting to disclose above is that when writing and delivering the financial plan they will act as a fiduciary. This is not the controversial part. You are likely paying them a fee for the plan, they are acting in a fiduciary capacity to deliver it. What you might not understand from the above disclosure is that after the plan is delivered, your "advisor" is no longer a fiduciary to you. It's quite clear when they state "Acknowledgement of receipt will end the financial planning advisory relationship between the client and us." The company means this quite literally, they now no longer are working in your best interest as a fiduciary. The next paragraph states "… our Financial Professionals…are able to identify products and securities offered by (company name redacted), its affiliates and various carriers that may be suitable for implementing the plan or advice." This is the point in the relationship where your advisor transforms into a salesperson of the companies product.

Don't believe me? Read the next paragraph of their ADV:

"These product-specific implementation recommendations may be prepared in a separate written document, generally following plan delivery. Any document in which they may be set forth is not part of the plan or advice. (company name redacted) generally will receive commissions (or, in some cases, advisory fees) if the client decides to purchase any products through the Financial Professional, and the Financial Professional will receive a portion of any commissions received in his or her capacity as a registered representative of a broker-dealer or as an insurance agent."

Recommendations for how to implement the plan ARE delivered at the same time as the plan, but they are NOT part of the plan ("any document in which they may be set forth is not part of the plan or advice"). They can't be; otherwise, they would be fiduciary in nature. The advisor is no longer acting in the capacity of an investment advisor, but as an insurance agent or registered representative (or both) of the company and is now selling you commission based products or fee-based products that have significant conflicts.

There is no possible way, in my opinion, a Certified Financial Planner can operate under such a regime come October 1, 2019.

While this company does say that you can continue on in an "advisory capacity" by being placed into one of their fee-based programs, the conflicts of interest involved in these fee-based programs are significant, and again, in my opinion, there is no way a CFP could operate in such an environment.

One disclosure, in particular, got my attention:

"(Company name redacted) and its Financial Professional may receive non-cash compensation from investment advisory asset management program sponsors. Such compensation may include such items as gifts of nominal value, an occasional dinner or ticket to a sporting event, or reimbursement in connection with educational meetings or marketing or advertising initiatives. Such sponsors may also pay for education or training events that may be attended by Financial Professional and (company name redacted) employees."

In other words, there are incentives in place to recommend one particular "asset management" program over another.

It gets worse. Check out the following provision:

"Financial Professional and their managers may receive higher levels of cash compensation or other incentives for selling products issued by (company name redacted) and/or its affiliates ("proprietary products") rather than products issued by third parties. Among other things, they may qualify for certain benefits, such as health and retirement benefits, based solely on sales of these proprietary products."

You read that right. It appears that health insurance could be subject to a proprietary sales requirement at this company. Since the disclosure doesn't go deeper into what this means, we can only infer that if an "advisor" doesn't sell enough proprietary products, they will have to pay for health insurance out of pocket. This is a very tough conflict to endure, an advisor shouldn't have to make this type of decision. In my opinion, a CFP designee cannot operate under the new Standards of Conduct while working in such an environment.

So what will CFP designee holders do? What will companies do? I've emailed the company that the representative works for to ask them what they will do, I've yet to receive a response. I can only see a few paths. The CFP designee resigns or stops holding themselves out as a CFP.

Why do I hold this view? I don't believe these companies have the foresight to create the room necessary for their representatives to be true fiduciaries. It conflicts with their business model. Let me give you an example. What follows is an excerpt from the CFP Code of Standards and Professional Conduct:

Sound and Objective Professional Judgement

"A CFP® professional must exercise professional judgment on behalf of the client that is not subordinated to the interest of the CFP® professional or others. A CFP® professional may not solicit or accept any gift, gratuity, entertainment, non-cash compensation, or other consideration that reasonably could be expected to compromise the CFP® professional's objectivity."

Contrast this provision with the following excerpt from the (company name redacted) (SEC Disclosure document):

(Company name redacted) ADV:

"(company name redacted) and its Financial Professional may receive non-cash compensation from investment advisory asset management program sponsors. Such compensation may include such items as gifts of nominal value, an occasional dinner or ticket to a sporting event, or reimbursement in connection with educational meetings or marketing or advertising initiatives. Such sponsors may also pay for education or training events that may be attended by Financial Professional and (company name redacted) employees."

This provision directly conflicts with the CFP Code of Conduct policy. Can a (company name redacted) representative who intends to comply with the CFP Code of Conduct successfully operate in the (company name redacted) environment? It would seem very difficult. I'm not saying they can't, but they would face a callous work environment without significant help from (company name redacted). Perhaps (company name redacted) is going to create this space, if so, they should outline it publicly and soon as their Form ADV disclosure document is a landmine for a fiduciary.

If you come across a salesperson who represents themselves in writing or orally as a CFP Designee, you must ask them how they intend to comply with the CFP Code. While this situation might resolve itself, if a representative from a 403(b) vendor represents themselves as a CFP, you should be very skeptical.

Monday, April 01, 2019

Why Are Indexed Annuities Allowed to Market in Misleading Ways

Embed from Getty Images

“The ups of the market without the downs.”

“Don’t lose money when the market goes down.”

These are just a few of the claims you’ll hear when being sold an equity-indexed annuity. I’ve actually heard much worse. But why is a savings product with no exposure to the stock market allowed to be advertised to consumers as if it is similar to investing in the stock market, but somehow with less risk?

I recently read a tweet, which I can't seem to find, but it perfectly sums up indexed annuities:

“It’s like someone telling you that you can eat the desert and there are no calories.”

This is a good metaphor for an oversold product, and also a Seinfeld episode (“The Non-Fat Yogurt episode).

The Securities and Exchange Commission (SEC) and Financial Industry Regulation Authority, Inc. (FINRA) have pretty stringent guidelines when it comes to advertising of financial products (though some would argue not stringent enough), yet insurance companies, agents and marketing organizations that sell indexed annuities routinely mislead consumers about what they are placing their money in.

The National Association of Insurance Commissioners (NAIC) continues to allow the practice of blatantly misleading sales presentations and advertising by companies selling indexed annuities. Indexed annuities suffer from a lack of real regulation at the sales level, it’s a case of the fox watching the hen house. My experience is that the information asymmetry isn’t just between the agent and customer, it exists between the state insurance regulators and the insurance companies themselves.

Indexed annuities arrived on the scene a little over twenty years ago and have experienced rapid growth. Indexed annuities are complicated versions of fixed annuities. Even with their complication, they are still just fixed annuities. There is not a special agent license needed to sell indexed annuities (some states require additional “training”), the products are general account products, and none of the participant's money is ever exposed to the risks that come with investing in the stock market.

They are called “indexed” annuities because the interest that is credited to the annuitant is based on how a specific (usually stock index) performs. The product sounds like it’s invested in stocks, but it’s not. The insurance companies typically invest a small portion of the premium paid by the annuitant into options or futures contracts to gain exposure to a particular index. The majority of the annuitant’s money is invested in relatively safe bonds which when compounded over the life of the contract will provide at least a minimum account value even if the money invested in options turns out to be worthless. Let me repeat, the annuitant's money is never at risk (stock market risk that is, there is always the credit risk of the insurer) and never exposed to the ups and downs of the stock market. Yet, I challenge you to find marketing material that doesn’t compare the path of an indexed annuity to that of the stock market.

In the graphic below, AIG is advertising their “Power Select Builder” indexed annuity product and is illustrating it against the S & P 500. This should not be legal. The representation is not just inaccurate, in my opinion, it’s fraudulent. Yet, this type of advertising is commonplace in the marketing of these product types. The only accurate comparisons would be other fixed annuities with similar ratings and perhaps bond funds (I get in trouble when I say CDs, but in my opinion, it’s undoubtedly a worthy benchmark as indexed annuities must return a higher percentage than CDs to be a viable alternative and because they have a similar investor base).

My point is that the comparisons should be to savings options with similar risk characteristics.

A close look at the above advertisement reveals several items that should never be allowed by competent regulators.

1. It compares a fixed annuity to the stock market 

This shouldn’t be allowed. Full stop. The stock market has very different risk characteristics and can lose money if it goes down, it’s an investment, not a savings account.

2. It cherry picks the time-period 

I find it curious that the time-period chosen is one that might make the indexed annuity look better compared to the stock market. The irony is, when compared to a similar investment, the period chosen is not favorable to this product.

3. The product wasn’t in existence for the time-period presented 

This is egregious. The product didn’t exist during this time period and thus shouldn’t be allowed to be illustrated. The assumptions used bear no resemblance to how the company would have likely credited interest. It’s blatantly misleading.

4. It illustrates with the same cap rate each year even though the cap rate would be different each year based on market events of the time. 

While possible, I find it highly unlikely that the company would have the same 5% cap for every reset period during this time-period. The cost of options and the significant differences in interest rates during this time-period would have likely seen much more variance in the cap.

5. No mention of surrender charges which reduces the value immediately below the initial investment if the annuitant wants the money back sooner.

You lose money day one in an indexed annuity because you lose liquidity. You can not pull 100% of your money out of the product the day after you make your deposit. So, yes, you can lose money in an indexed annuity, this is not clear. Your principal is not protected in the first several years of the contract due to surrender charges that must be paid to compensate the company for paying out a commission to the agent selling the product.

6. The chart compares annuity to the S & P 500 index without dividends either paid out or reinvested. 

With dividends reinvested the index ending value would have grown to $115,256, not the $95,238 illustrated above. While this is important, it should be noted that this annuity should never be shown next to a stock index. This is a blatant misrepresentation and in my opinion flat out fraud. Insurance companies want the illusion that you can beat the index, but then misrepresent how the index performed over particular time-periods. The two shouldn’t be compared to each other at all, but if they are, the index return should include dividends. Not including dividends is deceitful (and purposeful). Any firm that advertises in this manner is not worthy of your dollars.

7. AIG has no idea how their product would have performed over this decade as it wasn’t in existence. 

As mentioned earlier, this product wasn’t in existence during this full period above, so there is no real way to know what decisions AIG would have made each year at renewal. Also, you might recall that AIG nearly took down the global economy in 2008, something conveniently left out of the marketing. AIG could have made a more reasonable comparison by using their current plan for how they will credit interest based on the price of options and the level of interest rates, but even then, this would be highly misleading as we don’t know how executives would use profitability pressures to manipulate crediting rates.

8. There is no comparison to a bond index. 

If one had solely invested in an intermediate term treasury bond fund, they would have ended up with over $180,000 assuming reinvested dividends. The bond fund lost money in only one year (not till 2009) and the balance never fell below the initial investment and had full liquidity at all points along the way. The first three years saw the bond fund return 6.07%, 7.55% and 14.15%, years in which the annuity would have credited either 0% or a maximum of 5%. The worst calendar year return for the bond fund was -1.69%.

My analysis in number 8 is using a default-free Treasury bond index, one would be within their rights to compare to a corporate bond index instead which might have credited higher rates. Regardless, an investment that took less risk performed significantly better and with more liquidity than the indexed annuity. This is not to say that an intermediate treasury bond index will always beat an indexed annuity, it’s just a more apples to apples comparison.

This advertisement is so misleading, it feels fraudulent. Don’t believe me, just read the small print:

“This chart is for illustrative purposes only and is produced with the benefit of hindsight for the period, 12/31/2000 - 12/31/2010. It is not intended to be indicative of the performance of any specific investment.”

How is an insurance company that shows a chart with the name of their annuity and that annuity beating the S & P 500 NOT intended to be indicative of how that annuity will perform in the future? What exactly is the point of the illustration then? AIG is clearly intending (by cherry-picking data sets and leaving out dividends) to show that their product could perform better than the S & P 500. To believe otherwise is intellectually dishonest. Also, why are they using a period of time that ended eight years ago? This chart is on their website right now, in 2019.

AIG discloses that the “index cap rate is hypothetical,” so where did the 5% cap rate come from? It's anyones guess. AIG has a lot of resources, and they know how they intend to credit interest in this product. They could have taken their current pricing model and applied it to this time-period (they would have looked at historical option prices and interest rates) to determine what their cap rate might have been each year. Instead, they apparently made up a number that makes them look good even though it may have little basis in reality.

Imagine if a mutual fund company advertised how they might have performed during the most tumultuous periods the stock market has gone through in modern history, it wouldn’t be allowed. You can’t advertise back-tested, hypothetical returns. Why is AIG allowed to make such false comparisons and misleading claims? I can only imagine it’s because there is not a strong enough regulator. It’s not really AIGs fault, they are just following the industry leaders and taking advantage of the lack of regulators doing their job. I take that back, they could have chosen to be a leader and not advertised like the rest of indexed-annuity industry, but that would have required morals and guts.

Insurance companies want to be governed by weak state insurance commissions instead of a robust national regulator, they love the current status quo. Regulators should be ashamed of what they’ve allowed to occur in the indexed annuity product market, they need to correct the abuses. The pendulum has swung too far, insurance companies have taken advantage, and consumers are paying the price.

I was watching a webinar put on my IAMS (an insurance marketing organization) the other day and was shocked when I heard the representative talk about a new “inverse index” crediting method. He intimated that if you foresee a downturn in the market, you could move your client to the "inverse index" and end up getting interest credited during the downturn. Of course, this assumes that you are correct about the decline happening, an unlikely scenario. Besides, isn’t the indexed annuity supposed to already protect you from downturns? How is any of this marketing legal?

The current state of indexed annuity marketing is, in my opinion, misleading at best and fraudulent at worst, but it’s perfectly legal. Regulators have completely abdicated their responsibility to the public. It’s time for insurance to be regulated at the federal level or at a minimum that indexed annuities become subject to SEC regulation. Also, insurance agents should be required to be a fiduciary in all transactions involving these products (mind you, I haven’t even gotten into the incentives offered to entice agents to sell these products, which should also be illegal).

I invite you to submit your own examples of misleading indexed annuity marketing.

Tuesday, March 26, 2019

What The Indexed Annuity Carriers Won’t Tell You, It’s Not What You Think

Embed from Getty Images

(Author’s note: A general understanding of indexed annuities is assumed)

High commissions, luxury trips, long surrender periods and high surrender charges are just some of the problems that make indexed annuities a non-starter for fiduciaries like myself. However, even if the insurance companies could overcome these barriers, it’s unlikely that a fiduciary would risk recommending these products. Contrary to popular opinion, fiduciary advisors are open to all products, it’s part of our responsibility to our clients. That said, I don’t recommend these products because I lack trust in the insurance companies and can’t get the data to overcome that lack of trust. I can’t get the data because the insurance companies don’t want to provide it. This trust deficiency is widespread among fee-only, fiduciary advisors.

Indexed annuities are typically long term contracts, and in those contracts, the party purchasing must have a level of trust in the insurance company that they will be treated with respect over the entirety of the contract and even beyond. Crediting a rate of interest that is reasonable is one primary expectation I have as a fiduciary. I have no way of knowing whether an insurance company selling indexed annuities will act responsibly because they will not make available historical renewal rates on their products.

With the hundreds of indexed annuity products in existence and the number of indices used inside of them multiplying by the year, shouldn’t we expect there to be a Morningstar type database for indexed annuities by now? The fact that there isn’t one is baffling until you realize that you can’t build a database without reliable data and a reliable source is not available.

It’s common for an indexed annuity to offer better terms during the first contract year than in later years and getting data to determine how policyholders are credited interest in those later years is, as far as I can tell, nearly impossible.

Let me provide an example.

A common crediting method used by insurance companies in their indexed annuity products is called point-to-point (P2P). The P2P method divides the difference between the ending index value and the beginning index value for the term (generally one year, excluding dividends), by the beginning index value. The formula produced is the percentage point gain in the index. See example below:

Beginning index value:    1,000

Ending index value:         1,100

Percent gain:             10%        (1,100 - 1,000) / 1,000


In determining the interest to credit, the insurer will then apply some combination of a cap, a spread and/or a participation rate (I call these levers) at the beginning of the term. You might see a 100% participation rate combined with a 2% spread and a 4% cap, in this scenario if the index went from 1,000 to 1,100 during the term the participant would earn 4%.

Index percent gain:        10%

Participation rate:          100%

Spread:                     2%

Cap:                        4%

Interest credited:            4%    (10% - 2% = 8%, the cap is 4%)

In the above example, the participant would earn 4% interest in a year where the point gain in the index was 10%. In many policies, you will see the cap and spread much higher in the first year. The cap might be 7% while the spread is 0%. The same product would then credit 7% instead of 4% in the example above. 

You’ll notice how important the levers are to the annuitant’s return. The insurance company sets the maximum spread as well as the minimum cap and participation rate in the contract, but these are set in favor of flexibility to the insurer which allows the insurance company an incredible amount of leeway to manipulate the levers. Given that the insurance company has so much discretion in determining what it wants to credit each year, we need to know what these levers were renewed at in the past. If you don’t understand how the levers were manipulated in the past, you have no idea whether the insurance company is likely to treat you fairly. I’ve seen policies where the spreads were increased, and the caps were decreased to a point where the participant would never expect to make more than 2% in interest no matter how well the markets did.

Why isn’t this data already readily available to consumers, producers, and interested fiduciaries?

The only answer that comes to mind is that the insurance companies are playing games and don’t want the type of scrutiny that would come with disclosure. The industry might say they don’t release this information for competitive reasons, but this belies the fact that the data is available for other lines of business and is vital for performing due diligence. Not releasing the data breeds distrust and distrust precludes any desire to enter into a contract. Indexed annuities are hitting new sales high, so it’s not like the insurance companies are concerned that lack of data is affecting sales, but this thinking is like an ostrich with its head in the sand. The lack of disclosure is not a bug; it’s a feature. Pretending that the potential returns can be significant in these products allow the continued sale of them, but if the data is released and doesn’t confirm what is being sold, there is likely hell to pay.

Imagine someone trying to sell you a mutual fund, and when you ask for the return history, they tell you it's proprietary and can’t release it. Would you be less likely to purchase that mutual fund? Of course, you would. It’s the transparency and track record that allows a fiduciary to perform due diligence on a particular investment option.

Why are insurance companies allowed to hide such vital information or make it difficult to get? No one is pushing them on it. State insurance regulators don’t push for the data to be readily available and indexed annuities are outside the purview of the Securities Exchange Commission as well as FINRA. Insurance agents could boycott products that don’t provide the data, but they have an interest in not doing so and perhaps an interest in keeping the data private. I’d argue that insurance agents have the most to gain from compelling this data release, of course, if the data shows that these products are as bad as they appear, it would be an ugly indictment.

In California, many of the top products sold in public school teacher 403(b) programs are equity-indexed annuities. In one of the largest school districts in the United States I estimate that over 50% of new contributions are directed to indexed annuities, yet at no point in time that I’m aware have these companies disclosed publicly or made publicly available historical renewal rates for their products. Mind you that since these products are savings options within a public defined contribution plan, they are likely subject to greater scrutiny as there is a public interest.

There is no way to measure how a particular product would have performed in the past or whether the insurance company has a history of keeping its promises. I can find first-year data (by scouring the internet), but renewal data is only available if you can get statements from people who have already purchased the product (and even then it can be difficult). I’m always told by indexed annuity salespeople how great the product is, if true, prove it. 

Agents have access to historical statements and could show us how great their product is for consumers, yet there is only silence. Of course, even if agents started sending me statements, that data would be subject to bias and incomplete (there is an incentive to send the statements where the performance was positive). Thus the information needs to originate with the source, the insurance companies themselves.

My distrust of insurance companies selling indexed annuities is well founded, but if they began to disclose first year and renewal rates and provided the same information on a historical basis, I would at least have something to work with. I could find people who own the product and request statements to verify if the data being provided is accurate. If the data turns out to be accurate, I could then easily determine the historical returns for different products and place those returns in the proper context. I could compare one point-to-point indexed annuity to another point-to-point indexed annuity and determine whether the insurance company is crediting reasonable rates. I could align the time periods with market data (interest rates and option prices) to see whether the insurance company is acting in my clients interest or their own.

I might even find that an indexed annuity issuer is creating a product that is fair and could deserve a spot in my client’s portfolios. If indexed annuities are as good as insurance agents tout them, then the data should prove it. After all the bad press these products have received (which hasn’t stopped their dramatic rise, that should tell you something), wouldn’t it be simple to show us that the press might have gotten something wrong? 

Here’s what I’m saying to insurance agents and companies - please prove me wrong. Force me to change my mind. Provide the public with the data they need to make objective decisions about your products. 

Prove me wrong, please, I beg you. Historically, providing the data without being required is much simpler than being compelled.

I always try to base my recommendations on the best data available, right now that data is almost non-existent. If indexed annuities are the superior product, it shouldn’t be tough to prove; there are now over two decades of data.

I want to be clear that I’m not looking for selective disclosure. I’m asking for everything. Every product, every time period. There is no other way to evaluate these options. Adequate disclosure should not be controversial; it’s the bare minimum in due diligence. I’m also asking that this data not be hidden behind an expensive firewall (i.e. made available only to an industry insider who can then sell it). 

My plea to insurance regulators is to get on top of this issue. Learn about these products (and not just from the carriers) and work in the public interest to properly allow for more transparency. Don’t wait for an NAIC or ACLI working group to make a recommendation, be leaders and be true consumer advocates.

Friday, March 15, 2019

NTSA, AXA and VALIC Team Up To Mislead CT ASBO Leaders

I've written recently about the issues surrounding the latest reports put out by the National Tax-deferred Savings Association (NTSA), a lobbying organization for insurance agents, brokers and vendors who market to public school employees. The report used statistics to mislead readers into believing things that haven't been proven. You can read the article here.



Now the NTSA and two of its members are teaming up to present the report to the leaders of the CT ASBO. Why this conflicted organization was invited is not clear to me, though it does appear AXA is a member. These three highly conflicted organizations should not have a seat at the table.



I've included a copy of the presentation that was made, see below.



You'll immediately notice the push for "education," which of course will be fulfilled by members of NTSA and their new designation program. The new education program is, in my opinion, just a trojan horse. Under the guise of education, the representatives of insurance companies will use the opportunity to sell financial products.



You'll also see who has served on the CT ASBO Financial Services Coalition, it's a who's who of some of the worst players in the 403(b) industry.



One slide, in particular, is demonstrative of why the NTSA shouldn't be allowed to provide education. In the slide, they use an 8% growth rate (which is overly optimistic) and compare a pre-tax account to a taxable account. The problem is that they only portray the accumulation, which advantages the pre-tax account, they don't show the de-cumulation time period. The slide isn't even necessary, yet it's misleading (for no apparent reason).



On several slides, they summarize the findings in the report mentioned above (which I thoroughly debunked). The NTSA is fully aware that the report they put out would not pass any academic muster, it's just a propaganda piece. This is a situation in which a good bit of propaganda works. The entire point of the presentation is to preserve their precious payroll slots and expand their insurance rep and broker access to the campuses.



They even had the gall to present a slide on fees and why they matter, acting like they care about fees even though their goal seems to be to ensure a fiduciary doesn't provide the education to employees. They are VERY concerned that they won't be the ones providing the education.



Another slide talks about another fake study that AXA put out last year about how vital Advisors are. While I agree that an advisor is essential and can make a difference, what is not mentioned is that the NTSA, AXA, and VALIC representatives almost exclusively don't provide advice as Registered Investment Advisors or Investment Advisor Reps. If they do so, they are not and will not commit to being a fiduciary in 100% of their dealings with school district employees (note: there might be a few full-time fiduciaries now who are members of the NTSA, but this would represent a minority).



The vendors and agents who sell products to teachers have a powerful lobby. They are backed by deep pockets with significant incentives. School employees should be fully informed about these conflicts. Relying on the NTSA to provide balanced financial education is a terrible idea and can only lead to a more significant percentage of school teachers income going into the pockets of an insurance company.



What schools need is auto-enroll, coalitions that provide truly unbiased financial education and low-cost vendor access.

Scott Dauenhauer

Monday, February 04, 2019

NTSA and the Swimming Pool Dilemma

Opinion piece: NTSA Confuses Correlation and Causation 


Recently, the National Tax-Deferred Savings Association (NTSA, an entity that exists to lobby on behalf of vendors and salespeople to government 403(b) & 457(b) plans) released a report titled “Improving Retirement Savings for America’s Public Educators” in which it aims to provide evidence that increasing or maintaining (many) choices for public educators increases participation. After reading the report, I found no evidence to support the conclusions reached. Further, I believe those conclusions were reached through clever misrepresentations of the data to justify a primary goal of the NTSA, which is to “Prevent elimination or limitation of retirement plan options for public employees.”

The one thing you must know about government 403(b) plans to understand this report is, unlike 401(k) plans, there are usually multiple vendors. Public school employers rarely offer less than five 403(b) vendors and sometimes over sixty. Each vendor might offer numerous products sold by a long list of (typically) insurance agents. It can be very confusing as there is not a single place to go to get unbiased information. 

Insurance companies and their agents rely on the multiple vendor system to maintain their ability to sell retail products to public school employees. If a school district were to consolidate vendors and use the purchasing power of their employees to gain better pricing (think of this like a Costco using it’s buying power to buy wholesale) the sales agents and their product providers would either be out of business or would need to find a new market in which to sell their expensive products. There is a significant interest in maintaining the status quo of multiple vendors in public schools as the insurance companies and their agents are making billions of dollars from it. In recent years, a trend toward fewer, higher quality and lower cost vendors have threatened these insurance companies and this report is an effort to sway the public into believing that our nation’s teachers are better off buying at retail, rather than wholesale prices.

As I started reading the report, I found myself agreeing with some of it. The first paragraph of the Executive Summary was well written, and I agree that “…the importance of personal savings in 403(b) plans is more critical to their retirement security than ever.” The report then goes on to promote the association's members as the solution, but disguised as “research.” This access to data could have potentially been used to improve these plans; instead, it's used to justify the status quo.

The main conclusion was that “The data shows a decrease in the participation rates for 403(b) plans when the number of choices are reduced.” If true, this report would be evidence that Nobel winning research on behavioral finance is wrong. However, it’s not true. The data doesn’t confirm the claims, and it should concern everyone involved that it’s represented as something it’s not.

Have you ever heard the phrase “don’t confuse correlation with causation”? It’s a common phrase in the world of academia (and statistics) that means because two things happen to be correlated, one didn't necessarily cause the other.

Tyler Vigen maintains a website that demonstrates the absurdity that arises when we connect things which aren’t related. Let me give you a few examples to make the concept more relatable:




Did you know that between 1999 and 2009 the number of people who drowned by falling into a pool closely correlated with films in which Nicolas Cage appeared? The data is irrefutable, both went up or down together, but you can rest assured that the next time Cage appears in a film, there will not be an increased risk of falling into a pool and drowning. Sometimes two things that are entirely unrelated look like they are related. Statisticians have many ways to attempt to tease out what is, in fact, a true correlation and what is just a coincidence.

Did you know that every year people die by becoming tangled in their bedsheets? I had no idea. However, did you also know that per capita cheese consumption highly correlates with those deaths? If only we could get people to eat less cheese, we could save so many people from needless tangled bedsheet deaths.

It’s ALWAYS better to have a younger Miss America. No, I'm not misogynistic or ageist, I care about people murdered by steam, hot vapors and hot objects. The data clearly shows that the older Miss America is, the more murders by hot objects there are, the information seems to indicate we should stay away from anyone over 20 years of age.

I could go on and on. Tyler Vigen ended up writing a book showing all sorts of crazy things that correlate. My main point, just because two things relate, even if it might make sense that they are correlated, it doesn’t mean one is caused by the other, the work to prove causation is still ahead of you.

My problem with the NTSA report is that it doesn’t do the work to prove any of the claims made from the data. They merely cite correlations; they don’t prove causation (or even attempt it).

The central claim of the report (on page 4) is that “The research revealed that the number one factor driving participation and savings rates in school districts is participant choice.” and that,
“Simply stated, the data reveals a positive and significant correlation between the number of choices/advisors and participation.” The author might be correct that "the data reveals a positive and significant correlation,” but we can’t know that because so far the NTSA has refused to release the data. Notice that the claim is made real by the evidence of the data correlation? In other words, the NTSA is saying that because there is a positive correlation, therefore higher numbers of vendors CAUSE higher participation. However, didn’t we learn that correlation is NOT causation? Just because two variables are linked, it doesn’t mean one is caused by the other. 

The NTSA has committed an academic foul here; they aren’t lying, the data DOES correlate. However, they spend no time attempting to find out if the correlation is just a coincidence or if it's caused by other factors (such as the age of the population, employer pay scales, the simplicity of enrollment process, employer-provided education, rural vs. urban area, teacher pay, the strength of the defined benefit plan, access to Social Security, etc.). All of the work is still ahead of the NTSA, they’ve not proved, as the report states, that more vendors lead to higher participation (or that reducing vendors causes participation to fall). They’ve only found a correlation. Interestingly, the correlation they found is the one they wanted to find, curious.

I’ve spent hours tearing apart this report claim by claim and wrote the framework for a six-page paper, but such a long piece would be boring. Why be boring when a short article on correlation and causation completely discredits the report.

The bottom line here is that this report is not worth reading or citing, it is industry propaganda to maintain the status quo. There are solutions to increasing participation, adding more vendors is not one of them. 

It shouldn’t surprise you that the industry put out “research” that shows how much you need them, but this report should be taken with a grain of salt. If you want to understand better how 403(b) plans can be improved, I suggest the website run by my esteemed colleague, Dr. Dan Otter, www.403bwise.com. Dan’s site sometimes correlates learning with wittiness, but I’ve not yet been able to prove causation!

Author's note: I've been tough on the NTSA (formerly NTSAA) over the years and for good reason, they've consistently worked on behalf of salespeople and mostly low-quality vendors under the guise of representing public school educators. In recent years they've made a few changes that I feel are positive and there are some people involved in leadership whom I respect (even if I disagree with them). My hope with this piece is to convince the NTSA to let the data lead them, not the other way around.