We’ve changed our name. The BAM ALLIANCE has become Buckingham Strategic Partners. Find out more

BAM Intelligence

Buy This Annuity So I Can Take a Cruise

The current controversy over the proposal by the U.S. Department of Labor to impose a fiduciary standard on those who advise retirement plans has little to do with the rule’s merit. Rather, I believe it’s at issue because stockbrokers are the beneficiaries of a cozy system that permits them to have conflicts of interest which are not disclosed to their clients. They can (and often do) resolve those conflicts in a way that benefits their bottom line, as long as their recommendation meets the murky definition of being “suitable.”

Conflicted advice harms investors

The cost of this conflicted advice has been estimated by the White House Council of Economic Advisers to be $17 billion annually. Investors relying on conflicted advice earn lower returns from their investments, about 1 percentage point less each year.

I have never met an investor who would knowingly do business with a financial advisor who could provide them conflicted advice with impunity. The problem is many investors have no idea this is happening.

My litmus test

I recently made a recommendation that will help you determine whether your advisor has conflicts. Simply ask for confirmation, in writing, that your advisor “will always put your interests first.” Every Registered Investment Advisor will do so. I know of no stockbrokers, who sometimes also like to be called “wealth advisors” to conflate the difference in the legal standard between themselves and Registered Investment Advisors, who will make this representation.


It’s difficult to get investors to pay attention to this issue in a vacuum. Thanks to a shocking (and depressing) report from the Office of U.S. Sen. Elizabeth Warren, the tawdry details of how this system works against the interests of investors is now a matter of public record.

The report details how kickbacks are paid to agents for recommending high-cost financial products. While a system involving the receipt of kickbacks is troublesome enough, it’s worse that investors are not told about them. As a consequence, many investors believe they are getting objective advice when in reality the opposite is true.

Sen. Warren asked 15 leading annuity providers whether they offered “non-cash incentives” like lavish cruises, luxury car leases and other “perks” to agents in exchange for promoting their annuity products. Thirteen of the 15 companies who responded admitted to offering these kickbacks directly, indirectly or both. One company described these payments as “common in the industry.”

Typical incentives were “all-expense-paid trips to expensive vacation destinations” like Aruba, the Bahamas and other resorts, golf outings, dinners, tickets to sporting events and theatre tickets.

The report found current disclosure rules were inadequate to ensure that investors were informed about these kickbacks.

Kickbacks work

These incentives clearly are having an impact. The report found that $235 billion of annuities were sold to customers in the United States in 2014. While annuities may be suitable for some investors in some circumstances, the report detailed abuses that included sales to seniors for whom the products were not appropriate, sales to those with terminal illnesses and even sales to some investors suffering from Alzheimer’s or dementia.

An easy choice for your stockbroker

Think about it this way. Your stockbroker has many options when considering what investments to recommend. He could suggest a globally diversified portfolio of low management fee index funds, passively managed funds or exchange traded funds in a suitable asset allocation. This type of portfolio is “evidence-based,” meaning it’s supported by dozens of peer-reviewed, academic articles indicating that your expected returns will be higher if costs are kept low.

Alternatively, your stockbroker could recommend a high-commission annuity, without telling you he will receive an all-expense-paid trip to Aruba next winter if you buy it. Which option do you believe he will select?

The report concludes with this understated observation:

“New regulations are needed to protect consumers and end this financial conflict of interest.”

You think?

This commentary originally appeared November 24 on HuffingtonPost.com

By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.

The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2015, The BAM ALLIANCE

Share Button

Dan Solin is a New York Times bestselling author and has published several books on investing, including his “Smartest” series. In addition, he writes financial blogs for The Huffington Post and Advisor Perspectives. Dan is a graduate of Johns Hopkins University and the University of Pennsylvania Law School.

Industry Events

No events scheduled at this time.