Part Two: A Deadly Cocktail? The “Extreme Makeover” of Annuity Agents into Registered Investment Advisors
Written on September 21, 2007
Based upon the number of responses it elicited there clearly was no shortage of interest in Part One of this series. I can understand why. Many annuity agents have been thrust into something of a netherworld by events largely beyond their control.
Annuity agents are experiencing a continuing disruption of their traditional sales practices that began with the issuance of NASD (FINRA) NTM 05-50. For agents it can seem as though everything they once viewed as stable has come under assault including their public image, the products they sell, the advice they provide, the seminars they use, not to mention the comparatively lax suitability and compliance standards from the recent past. It’s no wonder that many agents wish for a quick and easy end to the pain. But pain relief comes at a cost than can be significant.
Scare tactics are clearly not out-of-bounds when used by those pitching annuity agents on the Registered Investment Advisor “answer.” “REAP THE REWARDS OF INDEXED ANNUITY SALES WITHOUT THE FEAR” is a prominent theme of the “pitch.” But is becoming a fiduciary advisor really the answer?
In Part One of this series I argued that the RIA option may not prove viable for many annuity agents. The reason is that for the RIA transition to be successful, an annuity agent must be willing to undergo a radical transformation in terms of allegiance (in both a practical and strict legal sense) and in the manner in which he or she is compensated. How many will sign-up to undergo such a dramatic transformation?
It was advertising directed to annuity agents that I characterize as exploitive that first got me interested in this subject back in April. I saw print and video advertising designed to convey both overt and covert messages. The thrust of the advertising- the “pitch”, if you will- seemed to convey that it’s possible for annuity agents to retain their customary sales and marketing strategies and compensation model while also operating as a Registered Investment Advisor.
This assertion was and is the “rub” as far as I’m concerned. I’m all for swelling the ranks of RIAs. However, I also believe it is grossly unfair to lead annuity agents to conclude that they can continue to legally represent the best interests of insurance companies, continue to rely upon rich, first-year compensation, and, act as a fiduciary all within the framework of a single client relationship.
Why Do the Ads Neglect to Mention the Heightened Responsibilities Fiduciaries Assume?
Why is there is no mention of fiduciary responsibility in the ads for the “pitch?” Or, for that matter, any mention of the “rewards” for consumers? Is it because the purveyors of the “pitch” believe it is possible for an individual to act as an indexed annuity agent and a fiduciary at the same time with the same client? Or, is it that they simply prefer to avoid mention of the substantial and complex responsibilities that come with acting as a fiduciary advisor?
In Part One I attempted to demonstrate through the comments of experts including experienced RIAs that the “pitch” is dangerous if not bogus. Attempting to induce annuity agents to believe that they can easily side-step broker-dealer compliance is a disservice to the very people the proponents of this approach claim they are serving.
So let’s now examine what can happen when an individual producer seeks to operate as both a traditional annuity agents and a Registered Investment Advisor at the same time.
Do RIAs Receive Extra Protection? Can $2,000,000 in Indexed Annuity Commissions Get You Noticed?
Meet Mark K. Teruya, president of USA Wealth Management L.L.C.
Mark Teruya’s story seems to be a sad one. I don’t know him but I’d bet he is a decent person who is liked by his clients. I doubt that Mr. Teruya ever imagined he’s be in all kinds of trouble. He is by all accounts in a great deal of trouble. He is also a registered investment advisor based in Honolulu, Hawaii.
Judging by some of his published articles Mr. Teruya was a very effective marketer. He wrote numerous articles for newspapers in Hawaii that were focused on providing pro-consumer financial advice. As an example, click here to read one of his articles in which he blasts high mutual fund expenses. I suspect that authoring such articles was integral to his overall annuity marketing strategy, i.e. cultivate a well known and strong pro-consumer identity in order to create a favorable prospecting and selling dynamic. This is not an unusual marketing strategy for annuity agents to pursue.
On September 10 the online version of National Underwriter highlighted a story on Mr. Teruya, a Hawaii-based RIA. The first paragraph of National Underwriter’s piece included this:
“The U.S. Securities and Exchange Commission is accusing an investment advisor of using free lunches to persuade older consumers to shift money from existing investments into equity indexed annuities.”
The story also contains this:
Both state and federal regulators have accused Teruya and his firm of using breakfast and dinner seminars to attract retirees, then arranging for one-on-one follow-up meetings.
What? Did you hear that? Using seminars to attract retirees? And make appointments with them? I don’t know whether to laugh or weep. These are usual and customary marketing tactics have been a relied upon by thousands of successful annuity producers.
Mr.Teruya has been charged by both the SEC and the Hawaii Securities Commissioner. The SEC is seeking “disgorgement of ill-gotten gains with prejudgment interest, and civil penalties.”
If you don’t know what “disgorgement” means it refers to the repayment of ill-gotten gains that is imposed on wrong-doers. Teruya may be forced to refund the $2,000,000 in commissions he earned- plus interest… and also be forced to pay substantial penalties, to boot. I hope he’s been a good saver.
Where it Breaks Down
Just reading the headlines tells you that it’s simply not viable for an annuity agent to observe traditional sales practices while acting as a fiduciary advisor. Could it be more plain?
“The U.S. Securities and Exchange Commission is accusing an investment advisor of using free lunches to persuade older consumers to shift money from existing investments into equity indexed annuities.“
and,
Teruya committed fraud, …”when he failed to disclose that he was an insurance agent in a position to collect large commissions on the purchase of EIAs.” the complaint said.
Destroying Careers at Digital Speed
The annuity industry has been far too slow in utilizing digital content and web-based communications strategies to help its agents reach more annuity prospects in a compliant manner. The price for this delay is being paid on a daily basis. For example, we’ve observed the fallout from agents and IMOs placing non-compliant presentations on the Internet (for more see my article in the September issue of Broker World magazine called “Dangerous Trends In Annuity Marketing Put Industry And Brokers In Jeopardy“). I know this particular article resonated with many annuity agents based upon the number of phone calls I’ve received from agents since its publication.
In the case of Mark Teruya we can see how an agent’s reputation can be damaged and his career potentially destroyed at digital speed:
September 7
Teruya is accused of fraud by the SEC.
September 11
Teruya’s SEC charges make the front page in the same newspaper he previously his columns had previously appeared.
September 12
The SEC posts the results of its seminar sweeps (likely heralding a sea change)
September 12
Major newspapers across the U.S, produce stories about the SEC action and, or, Teruya. One example: In Tampa, Florida both major papers produce front page, non-syndicated, locally authored articles discussing seminar abuse.
You Can Run But You Can’t Hide
The “pitch” says to annuity agents that they can seek shelter under the umbrella of RIA status. Don’t believe it. It didn’t shelter Mark Teruya. I’d bet money that he is now facing penalties that are far more severe than what the state insurance department might have sought. And he is facing these harsher penalties precisely because he is a registered investment advisor.
According to Joseph W. Maczuga, a Certified Fee Insurance Specialist from Troy, Michigan, “Those who are recruiting agents into the ranks of Registered Investment Advisors under the premise (fiduciary and annuity agent at the same time) that you have shared are, in my opinion, fraudulently presenting erroneous statements as fact. They do not appear to be knowledgeable about the provisions if the Investment Avisors Act of 1940, or the court decision and its basis in the case of the Merrill Lynch Rule. Unless, that is, they have developed a mischievous “end around” process that they feel will shelter them from clear and concise regulatory language. Our industry has a history of creating circumventing concepts to move product.”
How Far Indexed Annuities Have Fallen
The fallen reputation of indexed annuities is a tragedy of grand scale. The underlying value proposition indexed annuities provide- safety of principal combined with upside growth potential- is not only legitimate it is vital to millions of Americans as they approach retirement and enter the Transition Management phase. Unfortunately, what has played out over the past decade, “The Process” – in which the activities of good and decent people leads to sub-par results- has zapped the industry of its vitality at a critical moment. Rome really is burning. And lots and lots of very decent people are being hurt.
Not too many years ago it was an accepted belief that seniors were the most qualified purchasers of deferred annuities. Now it is generally believed that seniors require protection from deferred annuities. It’s not difficult to imagine business school students in the future studying the disastrous decline in public perception of an important industry as an example of how not to conduct business.
This sad state of affairs will not be repaired until fundamental reform occurs, technology comes to the forefront and the focus on consumers’ best interests becomes everyone’s top priority.
©Copyright 2007 David A. Macchia. All rights reserved.
First of all, I will say that if a producer’s intent is to try and minimize or avoid regulatory scrutiny, clearly the individual is either terribly naive or utterly unethical. Acting as a fiduciary is a much higher standard than simply making a suitable sale. A fiduciary must always act in the client’s best interest. RIAs are not unregulated, they are just regulated by a different entity.
An RIA very well may recommend insurance products because they are in fact in the client’s best interest. There is nothing improper about this so long as the commission is disclosed. The greater problem may be that most RIAs are not familiar or comfortable enough with insurance products to use them effectively as part of a financial plan. More on that later.
In your latest blog article, you specifically mention “annuity specialists” being lured into a supposedly less rigid structure in order to avoid oversight. The term “annuity specialist” implies that one is predisposed to using an annuity as the primary solution to an individual’s financial needs. This also implies that other financial instruments may not be fairly considered as a potential option to solve a particular financial problem. It is unlikely the “annuity specialist” will be able to fulfill fiduciary responsibilities in that case.
I will also say that for the most part producers are honest and do want to do the right thing for their clients. So to those people I say – embrace the scrutiny! Use it to your advantage. The bigger the suitability questionnaire, the more opportunities you will uncover! Also, when you ask a lot of questions and delve deep into a client’s financial situation they assume that you are trying to do everything in your power to act in their self-interest – not your own – this builds trust.
But doesn’t the exclusion of annuity and other insurance products also raise questions about the RIA’s fulfillment of fiduciary responsibility?? If so, why don’t more RIAs feel comfortable recommending annuities as part of an overall portfolio, when it is obvious that they can be a very important part of an individual’s financial plan?
There are two related answers to this question:
First, RIAs use planning software to develop recommendations, and annuities (and other insurance products) are not included as an asset class in these software programs.
The second reason is distrust. As a producer selling an annuity, has a client ever looked you in the eyes and asked a question such as “would you recommend this product to your parents?” waiting to see if you flinched?
Transparency is the reason you can’t model fixed annuities as an asset class in asset allocation software. It is also the reason for consumer distrust. A consumer can’t go to the library and check on an annuity recommendation. Just like bonds before Bloomberg and mutual funds before Mansueto, when the manufacturer of the product also controls the product information, there will always be distrust (and therefore pent-up demand). And this is also why the vast majority of the stories that hit the press are negative.
Where else in the financial arena do you have a $70 billion/year market with total assets north of $500 billion and virtually no transparency?
As long as this is the case, we as an industry will be stuck “pushing” product based on brand instead of the actual merits of the product!
Oh, and by the way, the $10 trillion in retirement assets that the industry expects to capture will mainly be allocated elsewhere.
David,
You need to read further into this. What did Mark Teruya’s RIA have to do with it? Fiduciary responsibility had nothing to do with it, he was a straight crook.
“According to the SEC’s complaint, since at least 2004 and continuing as recently as August 2007, Teruya, through Senior Resources, has on multiple occasions fraudulently induced clients to sign a series of pre-printed, fill-in-the-blank forms by misrepresenting the purpose of the forms. The complaint alleges that Teruya used the signed forms to sell the seniors’ existing securities holdings without their knowledge or authorization.”
Full SEC litigation. http://www.sec.gov/litigation/litreleases/2007/lr20287.htm
The fact that you would back that “advisor” in hawaii doesnt seem right. If you are accused of having clients sign blank documents which are used to liquidate securities and setup new accounts and … “SEC attorney Sam Puathasnanon noted the state has fielded two dozen calls either inquiring or with complaints about Teruya since news broke about the lawsuit and state action”, there may be more than you lead people to believe? I believe you called his story a “sad one” …sad ha?
Thanks for your comment. Oh, I do think it’s quite sad. And to be clear I’m not “backing” Teruya. But I believe one is innocent until proven guilty, and he has yet to have his day in court.
One of the issues where annuity agents are likely to stumble under the RIA banner is in the development of marketing materials, forms, etc. As RIAs they act as their own compliance officers. Few agents, in my judgment, are qualified to take on this burden. As a result the propensity will be to use things that are inherently misleading. That’s different from malicious intent. It may ultimately be proven that that’s what Teruya was up to.
Regarding two dozen calls to the State, that’s not surprising given the level of publicity over this and considering the fact that the guy likely has many hundreds of customers.
Great discussion. All I can add is “Disclosure Disclosure Disclosure!”
I agree – I think it is akin to a crime that agents can sell an annuity or life insurance policy and not have to disclose the % that they are being paid, or that they may have a great incentive to sell one particular product over another due to incentives (cruise, golf clubs, cash, etc.).
This is not allowed in the securities industry – and probably will be the biggest shock to agents stepping into the RIA world. When I consider it, I don’t think it would be a bad thing if all equity-indexed annuity selling agents were required to affiliate with an RIA or at least have to pass a FINRA series 6 or 65 or similar exam. At the very least, Consumer groups (where’s the AARP in this?) should be demanding full transparency and disclosure from their agents.
But this happens at the top, too. Wholesale marketing firms are not required to disclose to their agents if they are wholly owned, partially owned, or have other controlling interest exterted on them by an insurance company, which may make the wholesaler more likely to recommend one product line over another.
Fair is fair. If a simple thing like potential conflicts of interest were required to be disclosed to the agent as well as to the consumer – not withstanding all the new “suitabliity” regs being tossed around – I think we’d see a huge reduction in lawsuits and regulatory action.
January 5, 2008
David,
This is regarding your comment on Sept.. 26, 2007. Thank your for your comment on “I believe one is innocent until proven guilty, and he has yet to have his day in court.” I feel same.
Mark Teruya was accused of having clients sign blank documents to liquidate securities and set up new accounts. Where is written that a potential cannot sign a partially blank forms as a matter of convenience as long as they know what its for, they know how much is being liquidated and where its being transferred to, and have received disclosure about the product they are being sold. Why would Mr. Teruya have them sign blank forms to supposedly steal their monies, knowing that the clients would get their statements later. And I would think that the people in Hawaii are better educated and not just sign forms about their hard earned monies not
knowing where its being transferred to.
Regarding two dozens calls to the state, you are absolutely right, its because of the level of publicity over the case. Mr. Teruya probably have hundreds of clients and surprisingly they only got 2 dozens of calls despite of what was written.
CONT. FROM ABOVE.
According to SEC’s complaint, Mark Teruya has on multiple occasions fraudently induced clients signing blank forms and misrepresenting the purpose of the forms from 2004-2007, if they knew since 2004, why wait till 2007 to do something about it, if it was true.