Dear Ms. Schapiro, It’s NONE OF YOUR BUSINESS!!

The combination of the NASD and the NYSE into one self regulatory organization must have NASD chairman, Nancy Schapiro, lusting over the potential for the increase in her power and authority. In her recent talk at a Phoenix meeting for the Securities Industry and Financial Markets Association, New York, she insisted that she will continue to focus on the “sales practices aimed at seniors” and the “emerging life settlement industry.” It would be a very good thing if Ms. Schapiro did in fact try to clean up the serious violations of ethics in the securities industry in the sale of unsuitable and fraudulant risk instruments to our senior population. Brokers routinely place elderly clients with limited assets and income in high risk stocks, mutual funds, or in variable products, and brokers openly practice the illegal acts of churning client accounts for no other purpose than to generate themselves a commission. These practices are rampant, and no one in the regulatory branches of the securities industry is doing anything to try to control or eliminate these abusive actions.

But somehow, Ms. Schapiro seems to think that she DOES have time to meddle in the insurance industry affairs and implies, just as her predecessor did, that she should have authority over insurance matters that have nothing to do with securities. The only connection that Ms. Schapiro, or anyone else who has raised such a claim, can use to offer any reason for her need to step into the insurance industry and gain control over the sale of fixed and indexed annuities, and now the life settlement business, is that these products directly compete with the securities industry. Her claims that there should not be any kind of “regulatory arbitrage that provides an incentive for the sale of one product over another,” is really just her admission that these products are more suitable for this senior market, and in many cases these insurance products are beating the securities alternatives in a head to head competition, stealing hundreds of millions in commissions from NASD members.

What better way to compete with your competition than to get regulatory control over them? Already, by the combination of the NASD and the NYSE, the monopoly factors in the securities industry have been increased. Competition is the backbone of our free enterprise system. No one ever said that the economic playing field has to be level. It is the goal of business and industry to find a difference, secure a selling edge, in order to maintain, or gain market share.

Insurance is a completely different type of product than a security and the rules that govern them have correctly been placed under the authority and control of our state insurance departments, and should stay that way. To make any attempts to force similar regulation over these two different industries, just because they often compete for the same dollars among the same market, would be as ludicrous as requiring that automotive, bus, and rail travel be regulated the same as air travel. Both are getting passengers from point A to point B, but other than this, the similarities end. The same is true here. Insurance products may offer a means to financial growth, but they also offer guaranteed features and benefits that no securities products can match.

The proper way for the securities industry to compete with insurance is not to bash insurance, or try to change it or control it, but to dig deep into their creative processes and find product solutions that CAN compete with the safety and guarantees of insurance products. Oh, and if along the way you can stop the abusive selling of unsuitable risk investments to seniors, that would be a worthwhile way for you to devote your time and energy.

The Perceived Evil of Selling ANYTHING

There is nothing more dangerous for the good of this country than someone using a carefully crafted marketing plan to sell something to the buying public. Let the target of this plan be people over the age of 60, and you have a real national crisis on your hands. At least, that is what some in the financial media and in competing industries would have us believe. There has been so much hype lately about how insurance agents are methodically plotting to sell unsuspecting seniors some type of dreaded insurance product; you would get the impression that there was a major reason to panic about the safety of our retired population. Truth is that the real problem is more in perception, or perhaps in this propaganda, than in reality.

The fact that the American public is subjected to constant marketing assaults is an accepted part of the culture which arises from our democratic society and the free enterprise system. We are bombarded daily with some type of marketing blitz, whose sole purpose is to sway our decision to buy certain products over other competing brands. If effective and intentional marketing methods get us interested in something, and then capture us in a moment of weakness, like when we are eating a free meal at a seminar, critics imply that such marketing tactics can completely remove all resistance and reason from an otherwise, intelligent and rational adult.

Retail stores spend millions of dollars each week in print ads, TV, and radio commercials, just to get you to come to their store for the possibility of capturing your interest in some product they sell. The customer is free to visit the store, look at the merchandise and leave without spending a dime. If they want, they can choose to talk to a salesperson and get information for later consideration; or, if they prefer, they can make a purchase decision right there on the spot and go home with their new acquisition today. We value this freedom to choose and even if our choices do not turn out so well, we defend our right to make our own decisions.

Service professionals do not have retail sites where people can casually come browse the merchandise they offer before they consider a purchase. Even though some commercials would have you think otherwise, financial products are not a do-it-yourself purchase and most people need much more information and explanation than they can acquire on their own, before being in a position to make an informed decision about such an important consideration.

Seminars have become the “stores” that many financial professionals have chosen to use to market their products and services. The meal, an obvious part of the draw, is no different than the many sales ads and commercials we hear that entice us to go “shopping” at some particular store this weekend. But once in the room, no one who attends the seminar becomes a sure thing. Like a casual visit to the mall, the seminar allows the attendee to anonymously “browse” through the ideas presented by the sponsor, and to preview the financial professional’s credentials before agreeing to allow them into their personal space by way of a follow-up appointment.

The goal of the financial seminar is no different than any other marketing campaign used by countless businesses every day. It is to attract potential customers for the purpose of being able to tell your story about what you have to offer that might be of interest to those who respond to your advertisement. Then, from those who attend the seminar, the goal is to identify those who have further interest from those who do not. Anyone who attends a seminar does so of their own free will, even if they are over the age of 60. Once there, any attendee who decides to continue to meet with the sponsoring agent does so of their own choosing. Finally, even after attending a seminar and meeting with the agent several times, the person is completely free to choose to purchase a product from this agent or not. To assume some evil or malicious intent on the part of an agent, simply because they have chosen this particular marketing method with which to expand their potential clients, is puzzling. And to chastise any agent or supporting marketing organization, who attempts to develop the most effective seminar marketing system, is to challenge the very foundation of our economic freedoms.

The real questions in all of this debate about marketing financial products to seniors, is why some consider it inappropriate to use the same acceptable types of marketing methods regularly used in other industries in the area of insurance products, and equally as curious is why some think that this particular elderly segment of our population is so helpless and in need of special protection? Interestingly, it seems that ALL of the criticism of how insurance agents are marketing insurance products comes from OUTSIDE the insurance industry from competing segments, especially the securities industry. They refuse to accept that insurance falls under a completely different regulatory authority then securities, and that insurance has its own set of rules, none of which are being violated by the current marketing practices, which include the use of seminars as a means to meet prospective clients.

It is time for those who have unwittingly gotten aboard the bandwagon to condemn the sale of annuities and other insurance products to seniors, first set in motion by the securities industry, to take a clear look at what is really going on and stop overstepping their bounds. This is a turf war by the securities industry and nothing more. The insurance industry is one of the most highly regulated and respectable industries in the country and every product that is offered today has undergone an intensive review for product design, pricing, and suitability for the market in which it is approved for sale. This means that if an insurance agent is promoting the use of annuities as retirement financial tools to a primarily senior group, even if they use a seminar marketing system, they are completely within compliance and within the legal authority of their insurance license to do so. Most importantly is that any criticism or opinion of the securities industry is totally irrelevant.

What is Suitability, and WHO Should Determine it?

In a previous blog I talked about the legal and contractual nature of an indexed annuity. Their structure is so tight; it has left little room for critics to really pick them apart from a legalities standpoint, so they instead have chosen to go after the events surrounding the sale of an indexed annuity, all under the guise of a concern for “suitability.”

First of all, even in the broadest terms, who can say without question exactly what is suitable or not? Suitability of any sale of any product to a particular individual, or group of individuals, is seldom a black and white issue; and in the case of meeting financial objectives, everyone’s financial circumstances are unique and very personal, and are not an exact science as much as a progressively moving target. Suitability, even on an individual basis, is a very objective concept at best, and for some outsider to peek into an industry, or even just glance at a particular case and believe that, for some reason, THEY have better qualifications to determine suitability, is not only absurd, but is nothing more than arrogant vanity. To take such critical judgments and make a legal case out of them is completely ludicrous.

To demonstrate how bazaar this attack on indexed annuities really is from a suitability position, let’s take a look at another industry and determine if “unsuitable” sales are being made there. Automobiles are getting to be a huge expense for those who choose to buy new vehicles periodically. In order to help facilitate the sale of the more expensive ones, dealers have devised financing deals and leases to allow people, who otherwise could not afford such expensive purchases, to drive home in a brand new car. In the case of long term auto loans, if the buyer wanted to sell or trade their car in the early years of the loan, they find that the depreciation of the automobile has eroded the value of the car well below the balance on the loan, and they would have actually have to “pay” in order to sell their car.

If we apply suitability to auto sales in the same way it is applied to indexed annuities, it could be determined that this would be an unsuitable sale. It puts the marginal buyer in a precarious financial position, first by burdening them with a huge monthly payment, which could impact their entire financial picture. Then, they have to cough up significantly higher premiums to insure this more expensive vehicle, and hope that their driving record stays clean. Finally, this deal greatly restricts their future options to unload this car and virtually “freezes” them in this vehicle and this payment until such time as they can at least break even in paying off the remaining loan with the proceeds of a trade or a sale.

But are you hearing any clamor out there to control the sale of new automobiles based upon some outsider’s view of suitability? No! We accept that the buyer is responsible for making that decision on their own and we assume if the financing is approved, and the buyer is willing, the deal must be ok and we give them the right to make a bad decision if they want, knowing that they are the ones who will ultimately have to suffer the consequences of their decisions, good or bad.

In the sale of an indexed annuity, the client and the agent usually spend hours together over several meetings that could span a time frame of days or often weeks or even months. During those discussions, a thorough agent is finding out, not only the client’s financial picture, but is determining the client’s financial concerns, their needs, and their goals. An agent who sells fixed indexed annuities knows that these products are safer than any security product, have better long term returns than most other fixed products like CDs or bonds, and that annuities are the ONLY product out there that can provide a guaranteed stream of income that the client can NEVER outlive. If the client is seeking safety of their limited assets, or has a concern that they may run out of money, the agent knows that of ALL financial products available, ONLY an annuity meets both of those requirements and will likely recommend the client consider putting a portion of their money in one. The next value decision that has to be made is how much of the client's liquid assets should be placed in such a vehicle. Again, there is seldom a clear answer to this question, and the BEST answer can only be determined after understanding the client and what is important to them.

Ultimately, the buyer of the annuity, regardless of their age, unless they are senile or mentally incompetent, is not only capable of making a reasonable and informed decision, but should be allowed the right to make the decision for themselves, either good or bad. Why is it that just because someone is elderly, annuity critics ASSUME that they are no longer able to make good judgments? If they have reached this state of being unable to manage their own affairs, shouldn’t the concern be more for committing them to some type of supervised care?

Truth is, the critics of fixed indexed annuities are simply playing the empathy card and using the elderly as their pawns for their own personal agendas. If we want to protect our senior population, why don’t we talk about how we can protect them from being used as a political football and allow them to maintain the dignity of independence for as long as possible, and be able to enjoy the quality of retirement they worked so hard to achieve without being insulted and belittled as the constant objects of political power plays?