Should Your Financial Advisor Be in Jail?

It looks like insurance agent Glenn Neasham is about to get his ticket punched at the big house. The California advisor found himself in hot water after selling an indexed annuity to a woman with dementia back in 2008.

Annuities are structured investment products sold by insurance companies like Genworth Financial (NYSE: GNW  ) , or, in this case, Germany's Allianz. Indexed annuities are more complex than plain vanilla annuities, as the interest they pay is derived from a formula based on market indexes like the Dow (INDEX: ^DJI  ) or the S&P 500.

Prosecutors claimed that Neasham took advantage of 83-year-old Fran Schuber to sell her an indexed annuity for $175,000 and, in the process, pocket a $14,000 commission for himself. While there normally isn't a legal issue with selling an indexed annuity to an 83-year-old (more on that in a moment), Schuber was suffering from early-stage dementia at the time and may not have been able to understand what she was buying.

Glenn Neasham isn't the problem
From the press reports, it's tough to tell whether Neasham really is the predator that the jury apparently saw him as. But what bothers me about this story goes well beyond Glenn Neasham.

Selling a complex insurance product to an 83-year-old with dementia is unconscionable. However, that it's A-OK to sell this product to any 83-year-old -- or, perhaps, any average investor at all -- boggles my mind.

Allianz's MasterDex 10 Annuity -- the product sold to Fran Schuber -- is an illiquid, long-term product. In order for holders to get any of the many promised benefits, the bulk of their investment will stay tied up for more than 15 years -- first a five-year deferral period and then a minimum 10-year annuity payout. Schuber would have been nearly 90 before she could have reasonably started taking payouts from the annuity.

But even for younger folks, the complexities of indexed annuities like the MasterDex 10 are daunting. Not surprisingly, Allianz's marketing materials make the supposed benefits very clear:

  • You get a 10% "bonus" added to your investment right up front;
  • Your interest is based on equity indexes; and
  • "Your premium and bonus are protected from index losses."

The downsides, however, are far less clear.

Though the brochure outlines a handful of ways to tap into the money tied up in the annuity, many of those options are far from attractive.

Withdrawal Option

Downside

Take a contract loan You can only borrow a limited amount, and the interest rate was a usurious 7.4%.
Take a 10% withdrawal You can only do this once per year, and the total of the withdrawals can't exceed 50% of your premiums without triggering penalties.
Take a lump sum or distributions over less than 10 years You lose the upfront bonus, you lose all of the highly touted market-index gains, and you're left with 87.5% of your original premiums and a 1.5% interest rate.

If that isn't enough for you, the actual index-based interest that you receive may leave you disappointed. Sharp-looking graphs in the brochure show that between 1995 and 2004, $100,000 in the MasterDex 10 would have -- with the help of that 10% upfront bonus -- grown to $234,427. But because of the way interest is calculated for the MasterDex 10, that performance was far short of the index's actual return. An investor that simply bought and held SPDR S&P 500 (NYSE: SPY  ) over the same period would have ended up with $72,355 more.

Got all that? Great! Sign here.
Somebody reasonably adept at math and willing to sit down and think through the details could probably figure out why one investment advisor called this "the investment from hell." But it usually doesn't work that way. Statistics from a 2009 FINRA survey are very revealing:

  • 58% of non-retired households have not tried to figure out how much they need for retirement.
  • 29% of those with mortgages on their homes said they didn't know whether the mortgage was interest-only or had an interest-only option.
  • 53% of those with an auto loan said they didn't compare offers with different lenders.
  • 26% of investors with self-directed employer retirement plans or non-employer plans don't know whether they have more or less than half of their account in equity products.

With many Americans apparently ill-equipped to make "normal" financial decisions, how do they have any shot at unwinding the reality of a complex financial instrument like an indexed annuity as it's being pitched by a slick broker?

When we look at the case of Glenn Neasham, the question shouldn't just be whether Allianz's MasterDex 10 was appropriate for Fran Schuber -- obviously it wasn't -- but rather, whether these types of financial products are appropriate at all for the mass market that they're aimed at.

Beware of free
The word "free" comes up quite a few times throughout the MasterDex 10 marketing materials, but the word "fee" only shows up twice -- both times in a section touting the lack of fees or sales charges. For any consumer, the alarm bells should start to go off as soon as it looks like you're getting something for nothing.

Remember:

  • In the Neasham/Schuber case, Glenn Neasham was paid a whopping $14,000 for selling this product.
  • As promised in the brochure, the buyer "gets" a 10% upfront bonus. For Fran Schuber, that would have been $17,500.

And yet there's no mention anywhere of what Allianz gets out of this. I don't think I have to put on my tinfoil cap to suspect that somebody's getting screwed here -- and it's probably not Allianz.

The bottom line is that though Glenn Neasham may be on his way to jail, the real story here is much bigger than Glenn Neasham. This is not just a story of one particular broker doing ill to a client. This is a story of an entire system that pits brokers and advisors at odds with clients in a savage battle to scalp clients for big profits.

To really tell this story, though, we need your help. Whether you're a broker or financial advisor yourself, or a client of a broker or financial advisor, we want to hear your side of the story. Chime in down in the comments section or send us an email at tips@fool.com.

The Motley Fool has sold shares of SPDR S&P 500 short. Motley Fool newsletter services have recommended creating a put butterfly position in SPDR S&P 500. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Matt Koppenheffer owns shares of Genworth Financial, but does not have a financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 23, 2012, at 2:15 PM, fightingamish2 wrote:

    As I see it, the bigger problem is that the insurance industry continues to package products like this that most of us can see should be illegal. They, however, have a powerful lobby that has been successful at preventing common sense prohibition of probucts like this.

  • Report this Comment On March 23, 2012, at 4:24 PM, cloggervic2 wrote:

    You said it all. "Investment advisors" are often out for themselves, and work against the clients' interests. They are paid commisssion to sell particular products, and don't even have the math needed to analyze how good or bad they are. Annuities are a particularly bad idea right now, but that is mainly the government's fault for not allowing the client to direct the investment within an annuity. Once you convert an annuity to regulat incme, a 70 year old will be lucky to get 6% p[er year of his capital, which bearly uses t up over his expected lifetime, and so there is absolutely no interest paid or gain on the capital tied up. The Insirance comapny is effectively getting "free money". There are many instances of such rip-offs in the financial industry, and it will take an honest, ethical and finacially astute president to turn a deaf ear to the lobbyists and pass laws that protect the People. Who could that be? Donald Trump seems the best bet to me.

  • Report this Comment On March 23, 2012, at 4:35 PM, unbiased wrote:

    You seem to miss the point of a fixed indexed annuity completely. These products are attractive to clients for whom preservation of principle is important. They do an outstanding job at providing guarantees to the policyholder while at the same time offering higher interest rates than other fixed options like CD’s. Also, please tell me other than annuities what products can provide guaranteed income for life?

    Annuities can be miss-sold for a variety of reasons just like most any other financial product. Since I don’t know anything about this client’s financial needs it’s a little hard to say whether this product fit her needs or not.

    In the meantime, you claim that the agent made a “whopping $14,000” for selling the client this annuity. Perhaps we should discuss what he would have made had the agent put the client in a managed money portfolio. If that were the case and had the rep only charged 1.0% (that’s below the industry avg.) to manage the portfolio over 10 years he would have made $17,500 (of course that assumes no growth or loss to the account balance.)

    Had he put her in managed money or perhaps a brokerage account or even a variable annuity at the age of 83, what guarantee would she have had that she would not have lost a significant portion of her investment during the market downturn in 2008?

    Biased much Matt?

  • Report this Comment On March 23, 2012, at 5:15 PM, ThirdJoker wrote:

    Side note: "Investment advisors" (which Glenn Neasham wasn't nor to my knowledge ever claimed to be) DO NOT get paid a commission for anything. Insurance agents, on the other hand, do get commissions for insurance and annuity product sales. It's an important distinction and the fact that there is confusion even here is problematic.

    I've spent some time following this and here are my thoughts...

    The product that Mr. Neasham sold to his client is probably not the product that I would have recommended to her if she was my client (given what I know of the case). But that's not really the issue. Good advisors can (and often do) disagree on the "correct" product to fit a given situation. Regardless, as an insurance agent, Glenn has to adhere to the "suitability" standard and in this case, the product was absolutely suitable given his clients needs. As such, there is no way I can see how Glenn was guilty of any crime. He followed every best practices procedure and attempted to do right by his client, based on her stated needs and an evaluation of her situation. What he did couldn't even be considered malpractice, much less "theft from an elder". He didn't steal anything!

    For what it's worth, I wouldn't typically use a product like this simply because it has too many "moving parts" for my taste. But not all indexed annuities are like that. And while this one may or may not have been the "best" product for this case, it was most certainly "suitable" given the situation.

  • Report this Comment On March 23, 2012, at 5:26 PM, thinkB4youwrite wrote:

    Research should be second nature for a published writer. If you are going to take a biased position on a subject, make sure you have all the facts. From the sound of it, this writer went for "sex appeal" instead of presenting the truth. Headlines seem to matter more than factual journalism.

  • Report this Comment On March 23, 2012, at 6:53 PM, TMFKopp wrote:

    @thinkB4youwrite

    Can you please cite the instances where I got facts wrong in this article? Getting the facts right is a very serious matter to me and if there are inaccuracies above, I'll have them changed.

    If, on the other hand, you're simply not happy with how I characterized the situation, be aware that that's a writer's point of view or opinion and is a very different matter than factual inaccuracies.

    Thanks for reading.

    Matt

  • Report this Comment On March 23, 2012, at 7:08 PM, TMFKopp wrote:

    @ThirdJoker

    "Side note: "Investment advisors" (which Glenn Neasham wasn't nor to my knowledge ever claimed to be) DO NOT get paid a commission for anything. Insurance agents, on the other hand, do get commissions for insurance and annuity product sales. It's an important distinction and the fact that there is confusion even here is problematic."

    Note that I only used the phrase "investment advisor" once in the article, and it was when I was referring to a specific investment advisor.

    Your general point about confusion over titles is an important one though, as wirehouses and other firms have muddied the waters by referring to what are essentially brokers as "financial advisors" or, more generically, just "advisors." Investors are already hopelessly confused about differences when it comes to fiduciary/suitability standards, and this loosey-goosey nomenclature doesn't help.

    As for insurance products, of course insurance agents get commissions for insurance product sales, but keep in mind that very many "financial advisors" are insurance licensed and therefore sell insurance products and collect a commission on those sales. In some cases, advisors that otherwise run a fee-based practice may still sell insurance products and be paid a commission on those.

    Matt

  • Report this Comment On March 23, 2012, at 9:08 PM, ourporch wrote:

    Annuities are not in investors best interest. Very, very seldom are they justified for anyone. So, tell everyone you know, "DON'T BUY ANNUITIES", period.

  • Report this Comment On March 23, 2012, at 9:23 PM, ptgnwl wrote:

    Matt, your facts are spot on but its the facts you left out that call your conclusions into question.

    One fact that you did mention bears further clarification-the policy loan interest rate of 7.4%. Most contracts with this provision require that the client's contract value be placed in the plan's fixed account. During the time period referenced the fixed rate would have likely been in and around 3%. Remember this is a loan so the value of the contract remains intact and can earn interest, less the interest for the loan. So the likely net effective rate for the loan would have been a more "Foolish" 4.4% or better.

    You comparison to the hypothetical returns in the product disclosure versus those of a SPDR S&P 500 could use a little more elaboration. Is the comparison fair? I'm no fan of Allianz but did their material suggest that the product is designed to compete directly with an equity investment? Even back in the Wild West days of the marketing of Fixed Indexed Annuities the goal was to to earn a better rate of return than comparable safe money alternatives like CDs and Money Markets.

    It should be noted that the funding source for the annuity in dispute was a partial withdrawal from the CD. It was proven in court that the annuity performed better than the CD (though that was not a material issue in the case).

    You also have the benefit of hindsight on how the SPDR S&P 500 performed after 2004. How would have the annuity compared with the SPDR S&P 500 during the Financial Meltdown? Isn't the real risk of loss more punitive than the limited liquidity of the annuity?

    I read the results of the FINRA 2009 survey and come to an entirely different conclusion than you do. Even "Foolish" investment choices seem to befuddle the average consumer. Those are exactly the folks who should consider a plan that protects principal, discourages (and penalizes) reductions in that principal and encourages long term accumulation and life long income!

    Yes, I'm an advocate for fixed indexed annuities.

    But the facts support that these products protected principal, grew in value and provided flexibility for millions of consumers during "The Lost Decade". My fixed indexed annuity has earned an annually compounded rate of return of 7.9% over the past 8 years. That's a fact!

    "Fools" pride themselves on making informed decisions regarding financial matters. Weigh the benefits of these plans against their limitations and you might come to a different conclusion.

  • Report this Comment On March 24, 2012, at 1:47 AM, ariel6363 wrote:

    Everyone ,please remember just one simple rule,

    If anyone is coming to your house to sell you ANYTHING,period. and you let him in .....you can be assure 99.9%

    YOU WILL BE SCREWED !!! one way or another.

    Even if you buy a simple vacuum cleaner you will find out later that the deal was not as good as you thought, and not just a complicated financial annuity,etc'.

  • Report this Comment On March 24, 2012, at 11:22 AM, nofollishbias wrote:

    How people get screwed:

    1. Losing money chasing hot investments. More investors lose money by making poor decisions; I.e., buying after a run up and selling after a loss, than a pure index (I'm not referring to index annuities). Source: Dalbar QAIB study year after year.

    2. Paying management fees based on assets under management added on top of underlying managed money platforms with their own fees. So-called "unbiased" registered investment advisors charge your readers fees for essentially doing nothing after the sale. Source: See any managed money platform - SEI, Brinker etc. where "advisors" add another 1-1.5% on top of manager fees.

    3. Getting eaten for lunch when trying to create income for retirement from their "well-balanced asset allocated investment portfolios" when markets fall (er, crash like a rocket falling out of orbit) 25, 35, 50%+, never recovering or being able to re-gain a prior income. Source: see 2000-2002; 2007-2008.

    I HATE the Allianz MasterDex product for most of the reasons you cited but guess what, Matt? This lady was better off in the piece o crap MasterDex than she would have been in any of the above.

    And so would any CONSERVATIVE retiree interested in retirement income. Almost all of the index annuity products sold today have GLWB riders that guarantee lifetime income at withdrawal rates that are much higher than "so-called sustainable withdrawal rates" from uninsured portfolios that experts now have lowered to 3-4%.

    Egregious commissions? Let's see... Neasham was paid 7% one time by Allianz. Had she put that money into a managed account, SHE would have likely been charged in the neighborhood of 1.75% all-in assuming a combined underlying manager fee of roughly 0.75% plus a 1% advisor fee - PER YEAR.

    So let's compare: 1.75% per year, assuming no net growth on her account means SHE (not Allianz) would have paid $3,500 per year. In 4 years (not an unreasonable life expectancy for an 83 year old female which she obviously with hindsight already lived) SHE would have paid $14,000. So, which is really better FOR HER?

    Now, as it turns out, the 83 year old buyer didn't need to withdraw a penny from her account. Do you know whether this was discussed before a recommendation was made to her? (I don't.) Let's assume for the sake of discussion that she had not been taking withdrawals from her CD. She would have been paying taxes on the CD earnings which would have had the ripple effect of potentially causing her Social Security income to be taxed. Do you know if deferring tax on the growth on that sum of money helped lower taxes on her Social Security thereby RAISING her net spendable income? (I don't.)

    Given that we DO know that she didn't request a penny of her money via up to $20,000 per year of penalty free withdrawals up to $100,000 (or $10,000 per year for up to ten years, for example) let's assume she NEVER took a withdrawal and DIED! You DO know that her heirs would have received her full account value, in cash, without a penny in penalties... dontcha, Matt?

    I think - but am not sure that if her heirs wanted to also receive the full bonus amount in addition to the base account value, they would have the CHOICE (their choice, not yours nor Allianz's) to take that amount, penalty free as well, over a five year payout period.

    So, dear Matt, let's be clear.

    1. Mrs. Shuber didn't lose a dime when the markets crashed in 2007-2008.

    2. She didn't pay a penny in commissions or fees.

    3. She MAY have benefited by a higher net spendable income due to the elimination of taxable income on $200,000.

    4. She (apparently) based on her actions did not need to access the or use the money she positioned in the annuity.

    5. She did not allocate all of her CD into the annuity, leaving roughly 40% in liquid accounts.

    6. She earned more than she would have had she left her money in the bank CD.

    Beyond the particulars of this case, the fact that you dismiss an entire asset class writing, "that it's A-OK to sell this product to any 83-year-old -- or, perhaps, any average investor at all -- boggles my mind," boggles MY mind.

    The reality is that EVERY ASSET CLASS has advantages and disadvantages. Stocks, bonds, mutual funds, options, commodities, ETF's, bank CD's, treasuries... you name it. It's ludicrous to say that one asset class is better than another. They all have applications for which they are well suited.

    Was a MasterDex a good product for an 83 year old? OMFG! NO WAY! But, don't throw the baby out with the bathwater.

    If you want to be an OBJECTIVE journalist as opposed to a mouthpiece for what Motley Fool loves as appropriate for (seemingly) everyone, take a look at the actual (not hypothetical) results of an actual index annuity available and sold beginning September 1998 versus your example of buying and holding the S&P 500 through September 2011. You'll find that the "$70,000+ advantage" doesn't go to the index, but to the annuity. Source: American Equity Insurance "The Real Benefits of an Indexed Annuity" which I'm sure you can receive a copy of from their public relations department.

    Try not to let your bias show so much Matt.

    For the record, I obviously have an insurance license. I also have current FINRA registrations as an investment advisor (Series 65) plus full stock-broker registration (Series 63 & 7) so I can offer clients ANY FINANCIAL PRODUCT that I believe is not only suitable, but appropriate based on the fiduciary standard to which I am held regardless of product as a result of my registered investment advisor title.

    Yes, I HATE the MasterDex, probably as much as you, but I EQUALLY HATE one-sided journalism.

  • Report this Comment On March 25, 2012, at 9:53 AM, IALCouncil wrote:

    Just like all financial products, we encourage consumers to do their homework, understand all the terms and, based on their own circumstances decide what is best for them. There are many products in the market that can help you prepare for retirement. The Indexed Annuity Leadership Council recognizes that a balance of products along the risk spectrum, including Indexed Annuities meet many American’s retirement planning needs.

    Indexed annuities are insurance products, and comparing their potential returns to those of stocks is apples to oranges. Negative market experience can come at the most inopportune time – when consumers do not have the ability or capacity to wait for the market recovery just to get back to even. Indexed annuity buyers purchase insurance as protection from fluctuations in market value and can use these products as guaranteed income for life.

    As far as agent action and sales practices, strict suitability rules established by the NAIC, and required insurance company compliance, are designed to ensure indexed annuities are sold fairly and ethically to consumers. These requirements were designed to mirror the Financial Industry Regulatory Authority’s (FINRA) suitability standards for investment products and in fact, have additional standards of training, education and insurance company suitability review.

    For more facts on indexed annuities, visit indexedannuityinsights.org.

  • Report this Comment On March 26, 2012, at 9:42 AM, webgirlpa wrote:

    I have been following this case pretty extensively even blogging about it for my day job. In the Neasham case, the annuitant passed Allianz suitability requirements for purchasing. Neasham had done all his due diligence regarding the sale.

    Neasham was recommended by the annuitant's long-term boyfriend because he was pleased with his annuity. The bank manager, which is a mandated reporter of elder abuse, called the CA adult protective services when she went to cash in the CD because she seemed to be confused and influenced Louis Jochim (b.f.).

    There were several issues regarding the trial including the failure of two jurors to disclose immediate family members suffering from dementia. Others made up their mind regarding the case based upon newspaper accounts. In addition, since Schuber didn’t suffer a loss so there was no theft. In fact, by the time the case went to trial she gained $43,000 and still held the annuity.

    There was also possible prosecutorial misconduct and Schuber was not legally declared in competent until 3.5 years after the sale of the annuity.

    I think the greater issue of this case is whether or not it will change how all financial institutions will market to anyone over the age of 65. CA laws stated that everyone over 65 is considered elderly.

    There are a plethora of other questions that come up but I will make the post entirely too long.

    If you're interested you can read them here. http://rescuecapital.com/blogs/?s=Neasham

  • Report this Comment On March 27, 2012, at 10:15 AM, lenrmartinez wrote:

    Your headline suggests to the reader - "has your advisor made a poor (in your opinion) recommendation? Then, should they be in jail?"

    Really? Does responsibility matter at all to you?

    "Should Matt and the editors of the Motley Crew be in jail?" How does this irresponsible and blatantly pointed comment make you feel?

    A glance at your advertisers tells more of the story than your story does - eTrade, TD, Scott. Oh, of course losing 40% of their life savings in 2008 would have been a better investment than a principal-secured annuity. How about Wells? Their lead product is a variable annuity. Yeah, that's better......Good grief guys. Pull up your pants. Your bias is showing.

  • Report this Comment On August 27, 2012, at 12:41 PM, buzman wrote:

    The idea that Mrs. Shuber did not pay a penny in commission or fees is simply wrong.

    The commission was deducted from the cash value of the annuity.

    Annual costs of EIAs are deducted from the returns.

    Complain to FINRA while you are at it.

    http://www.finra.org/investors/protectyourself/investoralert...

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