Insurance industry uses kickbacks to boost sales, Senate report finds #IndustryFinance

A report issued by Sen. Elizabeth Warren (D-Mass.) today alleges that the insurance industry makes extensive use of kickbacks, perks and other incentives to boost sales of retirement and annuity plans.

“These secret kickbacks hurt consumers by incentivizing agents to sell certain products because they will earn a bigger cash bonus or fancier vacation, not because they are in the best interests of their customers,” the report notes.

Clients are not aware of these illicit incentives, meaning they believe their insurance agent is working for them when, in reality, the agent is working to score their own rewards.

The 22-page report revealed trips to Cancun, luxury cruises on the Danube, a five-star resort in Mexico, and more extravagant incentives offered by insurance companies to employees in exchange for promoting plans that may not be in the best interest of their clients.

A Department of Labor rule issued to end the kickbacks was set to go into effect this week, but has been delayed by industry groups and an 5th Circuit Court ruling that Warren said put retirement and annuity industry profits over American families.

Harmful tactics

In April, the Department of Labor issued its “Retirement Security Rule,” which requires financial advisors to always make recommendations in their client’s best interest.

Shortly after the rule was issued, Senator Warren launched an investigation into the prevalence of perks and kickbacks in the annuity and insurance industry, requesting information from the country’s 15 largest annuity companies regarding their use of the harmful tactic.

This week, in conjunction with what should have been the first week of the DOL rule’s implementation, Senator Warren published the findings of her investigation in a new report.

The report’s key findings include:

1. Kickbacks are still used by at least 29 companies to pay off conflicted advisors, including: a week-long escape to “one of the most privileged locations on the white sands of Punta Cancun,” a “luxury Danube river cruise,” and an extra $4,500 bonus for issuing three “cases” of a given product.
2. Insurance companies are using third party “Sales and Marketing Organizations” (SMOs) and “Field Marketing Organizations” (FMOs) to dodge responsibility for these unethical practices.
3. Current National Association of Insurance Commissioners’ (NAIC) and SEC standards are not sufficiently protecting consumers.
4. Companies hide behind inadequate disclosures to deflect accusations of conflicts of interest.

Americans lose billions

The bad advice incentivized by industry kickbacks causes Americans to lose billions of dollars yearly on low-quality or high-cost investment products pushed onto them by conflicted advisers.

As the new report notes, “conflicts of interest among advice providers cost retirement savers as much as 20 percent of their retirement income over a lifetime, and conflicted advice on fixed-index annuities alone cost savers as much as $5 billion every year.

As a result, retirement plan participants would save $55 billion over the next decade in fees with the implementation of the DOL’s new rule, and “investors rolling over into annuity products could save another $32.5 billion over the same period.”