NAIFA Survey Fills in Some Blanks in Sen. Warren’s Report on Non-Cash Compensation

A new report issued by the office of Sen. Elizabeth Warren (D-Mass.) implies that non-cash compensation, such as training trips and contest prizes, pose a serious problem because they incentivize financial advisors to “sell products that are not in the consumers’ best interests.” Sen. Warren seems to base this conclusion on the fact that 13 of the 15 annuities firms that responded to a survey created by her office said that they do indeed offer non-cash compensation in some form.
 
The senator says that the Department of Labor’s proposed fiduciary rule would address non-cash compensation issues.
 
[See why the DOL proposal is unworkable.]
 
The report provides a number of anecdotal accounts of advisors receiving trips to lavish locations. Unfortunately, the senator’s data do not clearly indicate how widespread the use of non-cash compensation is or how much incentive it would provide for an unscrupulous advisor.
 
Fortunately, a NAIFA survey completed in conjunction with the American College, fills in some of the blanks. The 2013 NAIFA-TAC study found that 56 percent of advisors received no non-cash compensation during the previous 12 months. Another 25 percent received non-cash compensation valued at less than $1,000.
 
Interestingly, when the study considered only registered representatives, who could be most affected by the Department of Labor’s proposed fiduciary rule, the percentage of advisors receiving non-cash compensation amounting to zero climbed to 63 percent.
 
Respondents to the NAIFA-TAC survey who received training trips as non-cash compensation overwhelmingly said those trips provided important training opportunities, gave them a better understanding of product offerings and helped them serve their clients better.
 
The senator’s report mentions, but deems inadequate, regulations and laws already on the books that substantially limit non-cash compensation for advisors. However, some scenarios the report cites as problematic would seemingly violate existing rules.
 
For example, the report claims:

“When companies can offer kickbacks to agents for recommending high-cost financial products, and when those kickbacks are hidden from the customers, the likelihood that consumers will be duped into buying bad products increases sharply.”

Yet, FINRA rules state that training or educational meetings provided by the issuers of products cannot require recipients to achieve sales targets, and internal non-cash compensation arrangements can only be based on total production and equal weighting of product sales, not on the sales of specific, high-cost products.
 
Senator Warren’s report is the latest in an unfortunate string of attacks on advisors aimed at pushing forward the DOL’s unworkable fiduciary proposal. NAIFA has urged DOL to reconsider the proposal and has suggested changes that would make it workable for advisors and remove unintended consequences for middle-market investors.
  • Posted October 29, 2015 IN


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