May 8, 2018
To Whom it May Concern:
The original rule proposed by the Department of Labor had good intentions, but would have rendered quality financial advice for lower-income households infeasible for the financial services industry to provide. I am happy to see that the SEC is taking over in attempting to create a rule that will protect investors' best interest in receiving financial advice without the unintended consequences that the original DOL rule created for investors.
While some critics have said that the SEC rule is too weak and easily allows broker-dealers to bypass it with a disclosure, (and with some merit) it is important that the rule that is finalized does not place unnecessary burden on the financial services industry in regards to paperwork and processing.
I work with a firm that works with everyday blue-collar Americans. I love my clients and I have always recommended what I truly believed to be in my clients best interest, even when it requires me to challenge them with difficult truths to hear. I am in this career because I want to make a genuine tangible difference in the lives of others. Unfortunately, the DOL rule forced many firms, mine included, to drastically change our processing compliance procedures to the point that I had to turn down people who wanted financial advice who had less than $100,000 to invest. My cost of processing more than tripled. While I am in this career to do good, I also have a family to feed and my business needs to be profitable if I am to put food on the table.
The proposed rule clearly shows an understanding of what it is like day-to-day in the financial services industry, and I thank you for that.
Where both the DOL Rule and the SEC Best Interest Rule seem to fall short, is regulation of the insurance industry. While there is a need for a best interest standard to be applied to the securities industry and for transparency between investors and the firms they trust their futures with needs to improve, it is absolutely unbelievable that both rules almost ignore the blatant abuses of the insurance industry.
If there is one thing that can mend the relationship between client and advisor, investor and institution, it would be a complete revamping of how the insurance industry is regulated. The most common abuse of the insurance industry is obvious in the misrepresentation of Equity-Indexed Annuities. These products are hands down the most complicated contracts ever created in the financial industry, and they pay 7% - 12% up-front commission on every dollar that is placed into them. Because they have high commissions, they have without question, the longest and highest surrender schedules in the insurance industry. They are technically fixed annuity products and thus not regulated by the SEC or FINRA, but when they are sold they are promising the same benefits of full market exposure without the risk. When the crediting method is applied to the indices that these contracts are tied to, they rarely, if ever, average more than 3% when plugging them in to a historical hypothetical. I have personally overheard one of these being sold before, and many of my clients have told me how the conversation went when they first bought the equity-indexed annuity.
To be candid, here's the conversation:
Insurance Salesman: Hello Mr. Client, I have this product that can is tied to the market, and the market over the long run has averaged 10 - 12%. But the great thing is, it has a floor of 0% so that means you can't lose any money.
In exchange for this, we place a cap on the contract, and any growth above the cap is the insurance company's to keep, but you're guaranteed not to lose any money.
And on top of that, there's absolutely no fees And if you sign up today, we'll even give you a "bonus" by giving you 5% on every dollar you put in. How's that sound?
Client: Well that sounds great, let's do it.
With this sales pitch, who would not easily be tricked into buying one of these products? But what is happening across the country, especially in the public sector, is people are purchasing these contracts, and seeing their account values stay the same and not increase year after year, and while they are guaranteed to never losing money, their money is not producing even a fraction of what they need to be able to retire and protect their families.
As a financial professional, when I read all of the fine print on most of these contracts, my conclusion is not that the sales person is trying to do harm. Most sales people want to help others. My conclusion is that whoever designed that product is very aware that this product will be extremely profitable for the insurance company at the expense of the client, and will be misrepresented by wholesalers to the sales force, and the sales force inadvertently to the public.
While fees are an important for investors and advisors alike to consider when making recommendations and decisions, opportunity cost and opportunity benefit are more important. Indexed-annuity sales have soared because of the industry regulators' emphasis on low fees, while the opportunity cost of being in these conservative contracts is absolutely ignored.
All that to be said, my point is that at a fundamental level, the Best Interest Rule needs to solve the problem it is designed to solve. It needs to protect investors' best interest without rendering financial advice too expensive for the average American, and it needs to specifically address the abuses of the insurance industry, which will require more than simply addressing excessive fees and documentation.
My Recommendation on the Rule in short:
- Demand that indexed-annuities be regulated by the SEC and regulate allowable surrender schedules OR make these products illegal to sell across the board.
- Require that registered representatives or those selling a commission bearing product to go inside of ANY retirement account to sign a disclosure at the time of sale stating that the representative specifically and audibly disclosed to the client the dollar amount that they are being paid from the transaction.
- Require fees to be itemized and printed in bold, 12 point font on the front of every client statement
I apologize for the long winded response but we need a rule that will genuinely protect investors, not just limit financial advice to the high net worth.