The SEC offered its own version of an investment advice regulation in April. The comment period for that proposal, which has broader support in the investment industry than the Obama-era fiduciary rule, ends Tuesday. | AP Photo
Months after President Donald Trump abandoned a sweeping Obama-era rule preventing conflicts of interest among financial advisers, some of his biggest supporters are finding themselves vulnerable to abuse: elderly investors.
Older savers are often the targets of brokersâ€™ self-enriching sales that saddle them with expensive products or investments they canâ€™t easily exchange for cash, interviews with financial advisers and their clients show. And the problem is probably being underreported since seniors are usually reluctant to disclose questionable conduct, they say.
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Fourteen days after his inauguration, Trump heeded pleas from the business community and ordered the conflict-of-interest rule to be reconsidered. The so-called fiduciary rule required brokers to put their clientsâ€™ interests ahead of their own compensation when offering retirement advice. They also had to disclose fees and commissions more directly to customers.
Earlier this year, the Justice Department declined to defend the rule after it was vacated by an appeals court â€” a major setback for associations such as AARP, the 38-million-member advocacy group for retirees that tried to save the regulation.
Now, the focus is on the SEC, which offered its own version of an investment advice regulation in April. The proposal â€” whose comment period ends Tuesday â€” has broader support in the industry than did the fiduciary rule. Yet some Wall Street analysts and consumer advocates say it would be softer on brokerage businesses and insurance companies than the Obama-era measure and wouldnâ€™t allow for investor lawsuits.
â€śDisproportionally, senior citizens who risk being steered into high-cost annuities or other questionable products are the ones who would benefit from a broad fiduciary duty for retirement assets,â€ť said Quinn Curtis, a professor at the University of Virginia law school who has researched retirement accounts. Seniors â€świll be the ones who are most vulnerable.â€ť
The debate over the rule highlights a broader concern about the financial plight of the elderly. One in 5 are victims of exploitation, according to a 2016 report by AARP. On July 11, the House Financial Services Committee approved a bill to set up a task force at the SEC to protect senior investors. That same day, the SEC, DOJ and other agencies announced a joint unit to combat fraud against the elderly and other potential victims.
The fiduciary rule, finalized by President Barack Obamaâ€™s Labor Department in 2016, was part of the effort to protect seniors. But it was vehemently opposed by many financial advisory businesses and insurers because it would upend their sales systems and expose them to potential litigation.
Financial firms frequently offer incentives like trips to Hawaii, Italy and other destinations to top-selling brokers â€” practices that the fiduciary rule would have mostly prohibited. Those incentives, critics say, encourage brokers to push high-fee products on retirees.
After the rule was finalized, many brokerages began to move away from such programs. Now, some are considering reintroducing sales contests and other incentives, according to lawyers working with the firms. In June, Bank of America subsidiary Merrill Lynch said it is conducting a two-month review of sales policies for individual retirement accounts.
In abandoning the rule, Trump is working against the interests of a key part of his base: The elderly strongly backed him in the presidential election. The four U.S. counties with the highest median age in 2016 all voted for Trump, as did a majority of Americans 65 and older, exit polls showed.
Spokesmen for the Labor and Justice departments declined to comment.
These seniors canâ€™t afford to make investing mistakes caused by biased advice, Curtis said. â€śYou can undo a careerâ€™s worth of prudent, well-guided investing real fast by making one bad decision when you roll it into a really crappy annuity,â€ť Curtis said. â€śAnd thatâ€™s where I think weâ€™re going to miss the fiduciary rule.â€ť
Among those who opposed the alternative proposal that the SEC offered was Democratic Commissioner Kara Stein. In her dissent, Stein referred to a report about how people are losing money to annuities, non-traded securities and high-fee investments.
In interviews with investment advisers quoted in the report, POLITICO found that senior citizens are frequently the victims of brokersâ€™ questionable sales.
From Brevard County, Fla., investment adviser Steven Podnos described the case of a 71-year-old retired nurse he took on as a client in May. Podnos said he found that about half of her $1.3 million in savings were in poorly performing investments. About $300,000 of nontraded securities cannot be quickly cashed â€” a problem for a retiree who might need emergency money. And another $300,000 of her savings is in a variable annuity that is generating painfully low returns, he said.
â€śSeniors are particularly susceptible to these annuitiesâ€ť because they guarantee a certain amount of income, Podnos said. â€śThey are reasonably protected in terms of principal but the returns are beyond-belief terrible. Because she waited five years to trigger the guaranteed income, and the distributions for the first 12 years will be just the return of her original investment, she will have a zero return on investment for the first 17 years after her purchase.â€ť
An annuity is a contract with an insurance company that requires the firm to make payments over a set period. People buy annuities to get guaranteed income and because they donâ€™t have to pay taxes on them until cash is paid out.
In Seminole County northeast of Orlando, investment adviser Brian Fricke described the case of an 87-year-old woman who had three variable annuities and stakes in a nontradable real estate investment trusts. One of her annuities was in an Individual Retirement Account, an obvious sign of conflicted sales because a variable annuity is already a tax-deferred product, he said.
Another of Frickeâ€™s clients, a 71-year-old retired flight attendant for Delta Air Lines, described his travails with a broker. As he and his wife retired and started converting their 401(k) savings, a broker he knew from a local service organization started selling him annuities.
The client, who did not want to give his name, admitted he did not know much about the annuities, including that brokers earn commissions to sell them. He also wasnâ€™t told his 401(k) savings could have stayed with the company rather than being rolled into new savings.
â€śI learned later on he was receiving a commission,â€ť the retired flight attendant said. â€śI was not knowledgeable about that at the time.â€ť
Senior citizens can become targets for conflicted retirement sales when they take savings out of their 401(k) plans, which have strong investor protections, said Bob Veres, who publishes Inside Information, a news service for financial planners and whose report was cited by Stein.
â€śAny harm youâ€™re talking about as it relates to confusion is probably going to be magnified in the senior citizen community,â€ť he said.
While the fiduciary rule dented annuities sales over the last couple years, they are poised for a rebound.
With the rule eliminated, â€śwe have revised our 2018 annuity forecast and now expect a 5-10 percent increase in annuity sales growth,â€ť Todd Giesing, annuity research director at the LIMRA, a research provider, said.
When the appeals court vacated the rule in June, Chip Anderson, executive director for the National Association for Fixed Annuities said in a statement, â€śWe should celebrate.â€ť
A spokesman for the American Council of Life Insurers, a lobbying group whose members include Allianz, Jackson National and Transamerica, said annuities fit the retirement planning needs of many retirees because the products can provide guaranteed lifetime income.
â€śThere is no place in the life insurance industry for sellers who would take advantage of any consumer,â€ť ACLI spokesman Jack Dolan said. â€śThat is why there are strict regulations at both the state and federal level to punish bad actors.â€ť
Still, insurance companies may be reluctant to disclose their commissions.
Antoinette Zirkle, 61, of Roseville, Calif, bought an annuity from Northwestern Mutual through one of its affiliated sales agents shortly after her husband died in 2015. In April 2018, Zirkle sued Northwestern Mutual and two of its affiliated sales agents, alleging she was duped into buying the annuity.
In February 2018, after Zirkle complained to the insurer about the sale, the company sent her a letter saying, â€śthere is no regulatory requirement for financial representatives to disclose the compensation they receive on the sale of an income annuity.â€ť
The letter, which Zirkle shared with POLITICO, said Northwestern Mutual considers its commissions â€śconfidential.â€ť
Betsy Hoylman, a spokeswoman for the Milwaukee-based company said: â€śwe reviewed this case and concluded the purchase of this immediate income annuity was a suitable recommendation.â€ť
Companies that opposed the fiduciary rule have applauded the SECâ€™s effort to come up with an alternative rule. Its rule would in part require brokers who give investing advice to act in the best interest of the customer.
â€śEdward Jones has consistently supported the creation of a uniform best interest standard of care,â€ť a spokesman for the company said.
But Wall Street reports show the SEC rule is likely to be good for the businesses that sell investment products.
â€śThe operating environment for asset managers, insurers, and financial advisors are also improved following the death of the [Department of Labor] fiduciary rule, which we think will be replaced with a more workable and industry-friendly SEC rule,â€ť analysts at Credit Suisse wrote in a July 9 report.
Theyâ€™re not likely to face much resistance from the elderly.
â€śMost older people will settle for mediocrity rather than have conflict,â€ť said Sharlee Cretors, president and CEO of SC Financial Services in Scottsdale, Ariz.
â€śUnfortunately, the incentivized sales process for those products is so bad,â€ť she said. â€śDonâ€™t sell your client anything you would not sell your mom.â€ť