Subject: File No. S7-06-04
From: John (Jack) Schoen, MBA, CLU
Affiliation: True North Financial Services
March 30, 2005
I recently received an e-mail from NAIFA urging me and countless other members to contact you and lobby against new rules which would require broker-dealers and their sales reps to provide their customers with new disclosures regarding fees and costs associated with the purchase of mutual funds and variable products. I am afraid I cannot, with a clear conscience, comply with their request. On the contrary, after 15 years in the industry and after having seen many instances of serious abuses in the sale of variable annuities, I can only urge you to follow your proposed course of action.
Last year, a retired couple that had just moved to the area called me on the basis of an endorsement from their daughter's friends (my clients) and asked me to review a proposal made to them by a RR from a local bank. The RR had suggested they take the $600,000 in the husband's 401k and split it between a variable annuity and B-share mutual funds. Great sales pitch and they almost bought into it. You already know what was motivating the RR: $36,000 in gross dealer concession to be split between the bank's BD, the bank and the RR. I shared with the couple an article from the Wall Street Journal questioning the wisdom of putting large sums of money into B shares and rolling qualified money into a variable annuity and was able to save them substantial fees over the life of their investment.
Two years ago a colleague had a single 50-year old woman, a close friend of his mother, call him. She had just been down-sized and had $250,000 in her 401k. He worked with AXA and was going to pitch a variable annuity to her. We sat down and went over the likely outcomes of two courses of action: investing in low-expense ratio A-share mutual funds vs. investing in the AXA annuity. Assuming the same returns for each of the two options and then taking into consideration the expenses (for both) and load (for the A-share funds) for the two alternatives, we determined that she could have upwards of $100,000 more at retirement based on conservative assumptions and using the A-share mutual funds. That would have been an additional $5,000 a year of income in retirement, assuming a 5% rate of withdrawal. I asked him, did he think that she or any other single woman in retirement would be better off if they had an additional $5,000 a year or $400 a month to spend in retirement? He said he thoug
I recently attended a sales pitch by a Prudential/American Skandia marketing rep. The room was packed. Lunch was provided, as was C.E. (though much of the subject matter focused more on sales and less on knowledge). One sales pitch being taught: "How many of you insure your home?" "Is your home your most valuable asset?" (The answer doesn't matter.) "How about your 401k/403b? Is that your most valuable asset/second most valuable asset?" "Well, if you insure your most valuable/second most valuable asset, don't you think you should insure your second most valuable/most valuable asset - your 401k/IRA/403b?" The rep went on to pitch putting roll-over money into the variable annuity. The insurance? A rider called "GRO". If, after seven years, the value of your account is below what you put in, the annuity contract will make you whole. The cost? Just 25 b.p. But wait. Then there is the cost of the variable annuity, something in the area of 1.55% per year for M & E, etc. There goes the cash
As a side note, the marketing rep from American Skandia was suggesting that money going to the American Funds for rollovers should go to the Skandia V.A. I looked at one of their funds, Washington Mutual. Since its inception in 1951, there has been no 7-year rolling period (and there were 45 of them) where the fund lost money even after sales charges. I would not be surprised if that was the case with hundreds of large cap value, balanced, or income funds or even a portfolio comprised of 40% large cap value, 30% fixed income, and 20% large cap growth and 10% international. I need to do the research using specific funds and indices.
A mortgage broker informed me yesterday that she had put a few hundred thousand dollars with a "friend" who was watching her money for "no charge". She went to see another advisor when her account just couldn't seem to make money and was informed she was in a high expense variable annuity; American Skandia.
The industry needs more disclosure. NAIFA's position is that you should put your efforts into getting the consumer to read the prospectus. I am sure, to paraphrase Woody Allen, that given a choice between death at dawn and reading a prospectus, the average consumer would choose death at dawn. A one or two page disclosure, highlighting the commission; a one or two page disclosure printed in BOTH red and black, with BOLD lettering urging the client to read before signing, printed at the TOP of BOTH pages if there are two pages in the disclosure, would be a great step forward. With variable annuities, you should consider a table with a summary of each expense and the TOTAL of those expenses. Make it clear that the client will pay those expenses each and every year going forward. The abuses are neverending in this industry: individuals without a series 7 offering advice on stocks and bonds, individuals who abuse their client's trust and still churn accounts but are now protected by "swit
Our profession is one of the only professions with very little in the way of barriers of entry. If you have a common cold, you go to a physician with fours years of college, four years of medical school, a residency and a possible fellowship. If you want an attorney to draft a simple will, you are hiring someone with four years of college, three years of law school, and someone who has passed the bar exam. If you want an accountant to do your tax return, your are hiring someone who has four years of college, someone who majored in accounting at the college or graduate level and someone who has passed the CPA exam. Our industry? 40 hours of study for the Series 6 and another 40 hours for a life/health insurance license. These same individuals are offering investment advice to families that have spent a LIFETIME accumulating a nest egg for retirement and it is happening numerous times each hour around this country each day. Any steps you can take towards increasing the level of disclos
As a sidenote, I am not a fee-based advisor. I make my living from the commissions derived from product sales. These proposed rules will effect me as much as any other RR, and I would welcome them. Please feel free to contact me with any questions or concerns.
John (Jack) Schoen, MBA, CLU
True North Financial Services (518)580-1082
73 Washington Street, Saratoga Springs, NY 12866
Securities Offered through a Registered Representative of Jefferson Pilot Securities Corp.
Branch Office: 5 Forest Park Drive
Farmington, CT 06032-1492