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Annuity perks: Corrupting the business or moving it forward?

Harry J. Lew

People either love or hate U.S. Senator Elizabeth Warren. Both sentiments became even more fervent in late April 2015 when she announced her investigation into the non-cash compensation practices of annuity insurers.

Many annuity agents and companies decried her efforts to shed light on the “vast range of perks (paid) to entice sales.” But critics of the industry’s incentive system applauded her for sparking debate on the need to eliminate conflicts of interest that weaken people’s ability to save for retirement.

At the National Ethics Association, we believe reality falls somewhere between the two camps. Still, her investigation, along with several other regulatory initiatives over the last several years, represents a sea change in how regulators and the public view conflicts of interest. Financial advisors must adapt to what is rapidly becoming a conflict-phobic marketplace or suffer negative consequences. Are you open to reconsidering your long-held beliefs about sales incentives and other sources of conflict that erode trust between advisors and their clients? If so, keep reading this article!

The first step is to understand where Senator Warren is coming from. She views cruises, trips to glamorous foreign cities, and diamond-encrusted Super Bowl-style rings as obvious conflicts that could tempt you to sell unsuitable annuities to consumers nearing retirement. She looks at FINRA (then NASD) banning non-cash compensation back in 2003 and wonders why that hasn’t occurred in insurance. And she sees companies giving motorcycles and exotic cars to their top producers and wonders if such rewards might be better spent adding to an annuity’s consumer rate of return.

In short, Warren believes that “annuity agents that (sic) are more interested in earning perks than in acting in their clients’ best interest can place Americans’ savings and retirement security at risk.” Before you dismiss this as just more posturing from a liberal politician, consider this. Warren is extremely popular in certain quarters and has the ear of the media. So what she says resounds loudly. When the Senator charges the industry with being corrupt, many people will listen… and believe.

And Warren isn’t alone in criticizing the industry. Stan Haithcock, dba “The Annuity Man” in Ponte Vedra Beach, Fla., is also uncomfortable with annuity sales perks. “The annuity industry hasn’t gotten the memo yet,” he says. “Agent recommendations are too often motivated by the trip (agents) will go on or the gift they will earn if they sell enough of a particular annuity.

“… There are a ton of annuity salespeople that (sic) pride themselves on doing the right thing and always working on behalf of the client’s best interest. However, when a trip to France is on the line with an annuity sale, my fear is that some agents (will) lose their client focus and fiduciary responsibility (will) take a back seat.”

Joining Haithcock in opposition to non-cash perks is Scott Dauenhauer, a fee only financial planner in Murrieta, Calif., who specializes in the 403(b) marketplace. “There is no law against offering special perks, and insurance companies are within their right to offer agents big incentives to sell their products,” he says. “However, it’s my opinion that this is a major conflict of interest that should be disclosed and potentially even banned. Fully paid-for vacations to exotic locales could certainly persuade an agent to sell one annuity product or another or to sell an annuity when another financial product would be more appropriate.”


From where we sit, accepting perks for annuity sales represents a significant ethical risk. Here’s what worries us. They may…

• Distort your professional judgment so that you recommend an unsuitable product because it generates significant production credits, not because it’s the best solution for the client.

• Tempt you to “gang production” with one carrier or FMO in order to meet qualification thresholds, when another carrier or FMO might have more suitable offerings for your clients or be in a stronger financial position.

• Hook you and your spouse on taking nice trips and receiving prizes you’d otherwise not be able to afford. You begin to ask yourself, “What’s more important… keeping the wife or husband happy or doing what’s right for the client? And once you qualify for a number of years running, it becomes even harder to tell a spouse you didn’t qualify this year.

• Color your judgment on the quality and support your FMO provides or tempt you to overlook their flawed recommendations.

• Put you at a marketing disadvantage with fiduciary advisors who don’t accept perks.

• Place you in the awkward position of explaining to clients how their purchase funded your London or Paris trip or helped to pay for your sparkly diamond ring.

Now, we’d be foolish to suggest that annuity perks serve no legitimate purpose. They generate sales and profits for insurers, which fund product development and technology enhancements that benefit clients. They fund the efforts of FMOs who help advisors learn about products, generate leads, close sales, and stay in compliance. They motivate agents and advisors to talk to prospects about their retirement-income needs and to motivate them to take action now to fund those needs. And in the case of conventions and trips, they provide onsite education, networking, and inspiration that helps advisors become more capable, focused, and excited about helping their customers achieve their financial goals.

Now that you’ve heard from both camps, where do you stand? Do you think the current environment merits taking another look at the perks you accept? Does it make sense to position yourself as an advisor who stands above the conflicted herd? Might you consider swearing off pure cash or merchandise rewards that do nothing for the client, while agreeing to go on trips that have significant educational elements that make you a better advisor? And should you begin disclosing your non-cash sales incentives even though you may not be legally required to do so?

Only you can answer these questions, but with everything happening on the regulatory front these days, we encourage you to answer them soon. Because ultimately you need to decide why you’re in this business. Do you want to provide objective advice and to serve the best interests of the client? Or do you want to leverage the incentive system for maximum financial gain? Is there a middle ground, and will it be defensible in the fiduciary marketplace of the future? Perhaps Senator Warren can let us know!

• Where do you stand on accepting perks? Chime in on this new thread:

Accepting perks and incentives in the annuity market

Harry J. Lew is Chief Content Officer for the National Ethics Association. For more information on affordable errors and omissions insurance for low-risk financial advisors, visit E&OforLess.com. For information on ethical sales practices, please visit the National Ethics Association’s Ethics Center.



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