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The $9,000 Steak Dinner

November 2, 2018 By Jeremy Jones, CFA

By Vitaliy Netiaga @ Shutterstock.com

The Department of Labor’s Fiduciary Rule almost spelled the end for the annuity industry, but with the rule’s rollback, Americans can once again look forward to the high fees, pressure sales tactics and poor returns on their money promised by annuities. The Wall Street Journal reports:

Lawmakers have panned the product’s high commissions, and Sen. Elizabeth Warren (D., Mass.) has criticized the prizes given to sales agents, like expensive vacations. The estimated average commission received by agents selling certain types of annuities is more than 6%, according to Wink Inc., an industry market-research firm. In those cases, if a customer buys an annuity for $150,000, the agent would make around $9,000 in commission.

Eloise Prevost of Peoria, Ariz., invested much of her savings in annuities several years ago, after getting a flier in the mail for dinner at a nice local restaurant with an annuity salesman. With the financial crisis on her mind, she liked the idea of not losing principal. The salesman sent her chocolates and invited her to holiday and Valentine’s Day parties.

“He was offering a meal,” Ms. Prevost said, “and I thought, ‘Knowledge is power.’”

But Ms. Prevost, a 65-year-old retired tour-bus driver, recently attended a dinner with another salesman and decided to switch. At his encouragement, she paid steep penalties to withdraw her money and invest in a new portfolio that included, among other things, several annuities.

Both advisers have blemishes on their record, according to the Financial Industry Regulatory Authority’s BrokerCheck records. One was banned for 10 years from securities sales in Canada; the other has multiple customer complaints concerning annuity and life insurance recommendations, as well as criminal charges.

Ms. Prevost said she deems her current adviser’s blemishes less worrisome, as some of them were personal in nature and not relating to his job.

Some types of annuities can be big moneymakers for the industry. Insurance companies get a bundle of cash to invest for profit, and extra revenue from withdrawal fines or fees for add-ons. Sales agents typically get commissions from the insurance companies.

The fiduciary rule wouldn’t have prevented all unscrupulous sales practices. But it could have forced brokers to be more transparent about their commissions and constrained them from putting customers in high-fee annuities if similar low-fee products were available.

Read more here.

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Jeremy Jones, CFA
Jeremy Jones, CFA, CFP® is the Director of Research at Young Research & Publishing Inc., and the Chief Investment Officer at Richard C. Young & Co., Ltd. Richard C. Young & Co., Ltd. was ranked #10 in CNBC's 2019 Financial Advisor Top 100. Jeremy is also a contributing editor of youngresearch.com.
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