An old joke goes, "You know it's going to be a bad day when you discover a TV camera crew waiting at your office."
Readers may recall the TV expos? in April 2008, in which senior investors were induced to buy annuities.1 Dateline NBC's secret cameras and hidden microphones recorded the sales pitches. The show and other testimony were presented during hearings before the U.S. Senate as evidence of widespread abusive sales tactics by unscrupulous and dishonest agents. Of course, the vast majority of insurance agents today do not engage in behavior that is even close to the dishonesty exhibited by such bandits that operate within any industry.
Even in view of the high standards to which we hold ourselves (and the regulatory standards we must observe), we know an older individual can be lucid at the time of the sale, only to begin losing his or her mental faculties in the future. If a client's thinking begins to slip due to advancing age or illness, the soundness of an insurance or annuity purchase can come into question. If you are challenged in such an event, you may be grateful to have documents that demonstrate your thorough fact-finding, professional presentation of the possible courses of action, and general good faith conduct.
Observing the following intelligent business practices can help protect an agent from questions or concerns that may arise during a client's later years.
When dealing with older clients, establish a records routine to help avoid misunderstandings involving family members or regulatory authorities. The routine should include documenting significant discussions of the client's investments and policies. With the client's permission, send a letter of understanding to an authorized advisor or trusted family member, as well as to the client, with a copy for your file.
Use care when seminar selling or conducting a marketing campaign aimed at seniors. Some elements of these otherwise innocent activities are alarming to regulators -- and the press. For example, if you sponsor seminars as a way of introducing your service to the public, try to avoid any actions that could be construed as deceptive or high-pressure sales tactics. Disclose that you are licensed to sell at the same time you discuss your expertise in Social Security, retirement planning, etc. By clearly disclosing how you do business, including your intent to generate insurance sales, you help create an open and honest atmosphere for your participants.
We all benefit from aggressive prosecution of the few bandits who try to operate in the insurance industry. In a 2005 lawsuit, the attorney general for the State of California claimed that sellers used bait-and-switch tactics to sell annuities to seniors. The defendants were accused of, among other wrongdoings, sharing confidential client information (which had been obtained from interviews that had been advertised as free estate planning opportunities) with associates who set up subsequent meetings with the sole purpose of pitching annuities to the unsuspecting prospects. The defendants did not disclose at the outset that their objective was to sell annuities. The case closed in 2007 with a stipulated judgment worth $7.2 million and the accused were forced out of business.2
Political dictators know how to inflame the emotions of an audience in order to confuse and manipulate them. Such behavior should be out of place in the world of insurance and financial planning. In the 2008 Dateline program, one of the sellers made an outrageous claim that the FDIC had received a financial strength rating of "F-minus," according to the MSNBC transcript. An agent should not unduly disturb a customer, and it is equally important to convey only truthful information. To avoid making false claims, check the facts before you talk.
We know that high-pressure salespeople hurry through their presentations in order to quickly close a deal. This tactic is designed to discourage buyers from thinking it over or getting an independent opinion. By contrast, most insurance agents usually expect the client to thoughtfully consider any recommendations before taking action. As professionals, we welcome working with clients' other trusted advisors. It is this type of behavior that helps maintain the elevated community standing that agents enjoy and rightly deserve.
Annuity sales have been criticized in the media for their surrender charges and commission rates. A fair-minded agent sells the same types of products to all customers. Avoid selling seniors products that pay higher commissions than those you offer to other types of customers. What's more, it is wise to devote a distinct portion of the sales discussion to clearly disclosing all product charges and expenses, and avoid recommending products that have excessive surrender charges or very long surrender charge periods.
Immediate annuities are popular among seniors because these products guarantee income for a person's lifetime. If purchasing an immediate annuity is going to be your recommendation, try to always include a refund or guaranteed period to help assure a residuary payment will be made to the client's heirs if he or she should die before all or a substantial portion of the annuity's purchase price has been recovered.
Selling a life-only annuity should be reserved for certain estate planning situations or where other assets are clearly substantial and adequate to cover future cash needs. When working with a client who is at an advanced age, be sure to involve a trusted family member or professional advisor in the discussion, and obtain their approval of your sales recommendation.
The sale of variable annuities is tightly regulated. Even so, agents are wise to avoid recommending any product, fixed or variable, that exposes a client to investment risks which could later be construed as unreasonable in light of the client's knowledge, assets and income. Avoid allocating values among variable annuity subaccounts solely on the basis of outstanding recent performance or popular acclaim. Hot performers may come and go, but annuities are designed for long-range conservative planning.
Equity indexed fixed annuities are also under public scrutiny thanks, perhaps in part, to the Dateline program. As a precaution, consider whether your senior client can tolerate one or more years in which zero interest is credited to the account. This is a definite possibility in many indexed annuities, even though client premiums are not invested in the stock market. By clearly disclosing the product's provisions, you can help promote the proper use of this potentially valuable retirement planning tool.
Does an agent need to do more than simply comply with the insurer's suitability requirements? According to FINRA, "The seller must have grounds for believing that the recommendation is suitable for the customer based on the facts disclosed by the customer."3 While we must respect the letter of the law, we all know that the client's best interests are paramount. Many successful agents regard meeting legal requirements as their minimum standards of conduct. However, our code of ethics often calls us to a higher standard than the law requires.
By observing common sense precautions, as well as obeying the law and regulations, insurance agents can help reduce the possibility of attack after a sale, even after the client's eventual death. Create and retain documentation of your adherence to sound client practices. Cultivate a professional relationship with client's advisors and family members to ensure consistent mutual understanding of your shared decisions. Wise business practices can help protect clients as well as ourselves from misunderstandings or -- heaven forbid -- a TV news crew.
Fred Burkey, CLU, APA, is a senior advanced sales consultant for the UNIFI Companies. For more information about the UNIFI Companies, please visit www.UNIFIcompanies.com. Each UNIFI company is solely responsible for its own financial condition and contractual obligations.
Footnotes:
1. "Dateline NBC: Tricks of the Trade," 2008. Transcript from MSNBC Interactive: http://www.msnbc.msn.com/id/24095230/
2. People of the State of California vs. First Family Advanced Estate Planning, et. al., Case number BC328584 from the State of California's Office of the Attorney General: http://ag.ca.gov/cms_attachments/press/pdfs/n1513_stipulated_judgment_12_dec_07.pdf
See also Attorney General's news release, "Brown Settles Annuity Sales Scam," from the State of California's Office of the Attorney General: http://ag.ca.gov/newsalerts/release.php?id=1513&
3. "Recommendations to Customers (Suitability)." FINRA Manual, NASD rules, Sec. 2310, from Financial Industry Regulatory Authority: http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=3637
