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Sound and Fury

If you've ever wondered how unsophisticated are our elected representatives in Washington regarding financial services matters, you can find evidence in Sen. Elizabeth Warren's latest “investigation” of sales perks in the insurance industry, entitled Villas, Castles and Vacation: How Perks and Giveaways Create Conflicts of Interest in the Annuity Industry. (Curious? You can find it here:

Warren is considered a wonkish critic of the financial services industry in our nation's capital, and she has, in the past, made some good points about the benefits of a fiduciary standard. But one reads with a bit of disappointment that her “investigation” consisted of sending letters asking 15 of the largest insurance sales organizations (representing, she says, more than 70% of industry sales) whether they provide non-cash perks, awards or benefits to their top producers, and if so, what they provide.

You'll be further disappointed to note that Warren doesn't even look at sales commissions, which are by far the primary conflict of interest between unwary consumers and sales agents. Instead, she focuses her full attention on exotic trips, iPads, golf outings and jewelry.

Then you'll read through the report and discover that Warren is irate about the sales of “annuities.” There is no distinction between variable annuities (highly questionable products), equity-indexed annuities (the financial equivalent of toxic waste), and immediate or deferred annuities (potentially beneficial retirement options). What a report this could have been if the perks that Warren is detailing are leading agents to switch their recommendations from one product or another! Or if Warren had looked at the differing compensation that agents can slip into their wallet if they steer a client from a lean product to one that happens to be offering double bonus commissions!

If this is what passes for an “investigation” in Washington, well, let's just say that Elizabeth Warren's staff will not be compared with Woodward and Bernstein.

All these gripes aside, the white paper has enough lurid details that it might attract some attention and even modest levels of outrage. American Equity Investment Life has just concluded its San Francisco junket for agents with sales over $3 million in annuities and life insurance sales. Its top 15 sellers (the Chairman's Club) will spend four days at the Calistoga Ranch & Spa in Napa Valley. Last year, these elite sales agents were given all-expense-paid trips to Disney World.

Athene Annuity & Life's “Leaders of Olympus”-level sales agents (qualification: $5 million of sales) will get a trip to the Ritz-Carlton Aruba in the Caribbean Sea, with a 24-hour casino and exotic cuisine on location. The brochure, surely designed to motivate agents to sell the desired products, talks glowingly about the nearby nightclubs, stunning landscape, and the opportunity to walk barefoot along the coast at dawn-perhaps after the agent and a guest have spent the evening pulling handles in the casino, where the odds of a real return are better than with an equity-indexed annuity. Athene's top ten sales agents, meanwhile, get an additional “ultra-luxe experience”-two more days in Aruba, executives suites for their hotel stay, and a privately chartered catamaran cruise. Last year's perk was a trip to Dublin, Ireland-and a three-day trip extension to Dromoland Castle on the Cliffs of Moher.

Lincoln Financial sent its top agents to South Africa in 2015 and to the Bahamas next year. Fidelity Guarantee & Life sent its “Power Producers” to the Four Seasons Resort in Punta Mita, Mexico. Mutual Trust, obviously watching its pennies, merely invited its leading sales agents to Laguna Beach, California. American National Insurance's top award was a five-day stay at the Cove Atlantis on Paradise Island in the Bahamas. Others simply give out sales credits that can be redeemed for a trip of the agent's choice.

Producers groups, field marketing organizations and independent broker-dealers are conduits for lavish perks paid for by the insurance company. These are typically golf events, transportation and lodging at luxury resorts, and the pipeline is so thick and varied that one person described some of these sales organizations as “glorified travel agencies.” The most generous perk described in the report was a 30-day trip around the world for two, with stops in Bora Bora, Tahiti; the Ritz on Grand Cayman Island; a trip to Monte Carlo and a week in Rome, Italy. The least generous: jewelry, gift cards and iPads.

In the white paper, Senator Warren wonders aloud whether agents are incented to recommend certain products, or more products, or work harder at selling potentially unsuitable annuities when they see the possibility of winning these perks. Do they concentrate their sales with one company, to maximize their chances of winning a particular prize? Is their focus always on the benefit of the customer, or are they more concerned about the sale regardless of whether the product totally benefits the consumer?

Senator Warren also wonders whether there is full disclosure of these perks, noting at one point that Prudential offers one of the most detailed breakdowns-on page 55 of its prospectus. All of the responding organizations told Warren that they were scrupulously following FINRA regulations regarding non-cash compensation for annuity sales, and that one sentence makes FINRA look awful as a vigilant protector of the investing public.

Of course, we know the answer to these questions, and we also know that sales commissions-and bonus commissions, and differential commissions-play a decisive role in sales of variable annuities to people in nursing homes with dementia, which would seem not to be totally in the best interests of the customer. We know that nobody would recommend an equity-indexed annuity or cash value insurance that pay 90% of the first year's premium unless they were paid generously to deceive somebody about their benefits. For gosh sakes, we know that the primary professional organization in the insurance industry, with the largest conference of the year, is called the “Million-Dollar Roundtable,” and you can only be a member if you meet certain sales goals.

It's possible that the insurance world is so rife with conflicts between manufacturers, sales agents and consumers that nobody could make sense of it all in one white paper. In that case, maybe you could see Sen. Warren's “investigation” as a good start, rather than an armchair exercise in fishing for a few sensational details.