The "Rogue Agent" Defense Strikes Again (Insurance Edition)

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I really didn’t expect “rogue agent” to become a mini-theme, but a mere two days apart, we have stories in the Wall Street Journal and the New York Times on rogue agents ripping off the unwary and the unsophisticated.

However, as we discussed, the Journal story about rogue mortgage brokers made it sound as if their employers were completely at their mercy, when there is already ample evidence of institutionalized fraud and predatory lending in the subprime end of the market. That doesn’t mean that there aren’t some crooks out there that have pulled the wool over their bosses’ eyes, but to make all organizations out to be hapless bystanders is naive at best.

The Times, by contrast, in a story by Charles Duhigg on independent insurance agents taking advantage of the elderly with unsuitable and high-fee annuity products, It reports that several large insurance companies have failed to rein in brokers in their networks, despite complaints and evidence in broad daylight that the sales are inappropriate (age of the buyer versus payout structure). And they don’t prey solely on the elderly. Annuity peddlers swarmed like hornets at former Mead-WestVaco paper mills being sold to NewPage Corporation (a Cerberus entity). Why? Employee 401 (k)s were eligible to be rolled over into other retirement accounts, and blue collar workers are easy marks.

And frankly, I don’t see how anyone can call annuities or any financial product with a 9% upfront fee an investment. The term of art is “ripoff.” These vehicles are inherently predatory. So buyers will almost without saying have to be ones unsophisticated enough so as to be unable ask basic questions or compare it to alternatives.

And the article demonstrates how several major companies, like Allianz, Old Mutual Financial Network and American Equity Investment Life Insurance are paying entities one, or sometimes two steps removed from brokers to provide training for impressive sounding and substantively worthless credentials like “certified senior adviser” that reassure unsuspecting retirees.

From “For Elderly Investors, Instant Experts Abound,” in the New York Times:

Elderly clients thought they had every reason to trust Michael DelMonico as a financial counselor. After all, the Massachusetts insurance agent had become a certified senior adviser in 2002, a credential he made sure to advertise on fliers sent to retirees.

He did not mention how easy it had been to get that title.

He had paid $1,095 for a correspondence course, then took a multiple-choice exam with questions like, “Marketing can best be described as:” (The answer: “The process or technique of promoting the sale or distribution of a product or service.”) Like more than 18,700 other applicants since 1997, he passed.

Insurance companies, eager for sales representatives, embraced Mr. DelMonico, as they have thousands of other newly credentialed advisers.

The following year, insurers paid him commissions worth $720,000 as his business with retirees soared.

But many of those sales came from steering older Americans into unwise investments, Massachusetts regulators contend in a lawsuit.

Mr. DelMonico denies all wrongdoing, but one of his clients — a 73-year-old widow caring for a son with Down syndrome — said he tricked her into buying complicated insurance contracts that left her unable to pay dental and home-repair bills.

“His office was filled with things saying he was certified to help seniors,” said that client, Mary Ann St. Clair. “The only one he really helped was himself.”

Mr. DelMonico is one of tens of thousands of financial advisers working hand-in-hand with insurance companies to market themselves to older Americans using impressive-sounding credentials like “certified elder planning specialist,” “registered financial gerontologist,” “certified retirement financial adviser” and “certified senior adviser.”

Many of these titles can be earned in just a few days from for-profit businesses, and sound similar to established credentials, like certified financial planner, that require years of study, difficult tests and extensive background checks.

“The degree isn’t worth the paper it’s written on,” said T. Kevin McElreath, a financial adviser in Milford, Mass., who took the certified senior adviser exam but does not use the credential. For many agents, he said, “it’s a scam, a way to put a title on a business card that impresses gullible seniors.”

Many graduates of these short programs say they only want to help older Americans. But they are frequently dispensing financial counsel they are unqualified to offer, advocates for the elderly say. And thousands of them are paid by some of the country’s largest insurance companies — including Allianz Life, Old Mutual Financial Network and American Equity Investment Life Insurance — to sell elderly clients complicated investments that economists say most retirees should never own.

The prize for these insurers and sales agents is a piece of the $15 trillion held by Americans 65 and older, the largest pool of assets ever amassed by an aging population, according to the Government Accountability Office.

As older Americans’ wealth has grown, so too have programs that offer quickly earned credentials or that teach agents how to sell to the elderly. The number of certified senior advisers has increased by 78 percent in the last five years. More than two dozen such programs now exist, and have enrolled more than 39,000 people over the last decade. As more baby boomers retire, the number of programs and enrollees is likely to grow significantly, analysts say.

But some of the existing programs, which are often linked to insurance companies, have taught agents to use abusive sales techniques, regulators say.

The insurers Allianz, Old Mutual and American Equity have been listed as sponsors at seminars with names like the Million Dollar Academy, where thousands of sales representatives were advised to scare retirees by saying, “I am all that stands between you and potential catastrophic loss.” Other seminars instructed agents to “drive a wedge” between retirees and their established advisers.

“The insurers are happy to turn a blind eye to what salesmen are doing, as long as they make a sale,” said Minnesota’s attorney general, Lori Swanson, who is suing several companies, including Allianz, contending their products are inappropriate.

Allianz, Old Mutual and American Equity, whose revenues last year were a combined $163 billion, said they investigate the backgrounds of all agents, screen all sales to consumers to make sure they are appropriate, and have terminated representatives using improper sales methods. Those companies said they were not aware of abusive methods taught at any seminar they endorsed.

In a statement, Allianz said the company did not tolerate misrepresentation. “Allianz is a leader in education opportunities and quality for agents,” the statement reads. Fewer than half of 1 percent of its customers have ever complained, according to the company.

Old Mutual, in a statement, said any evidence of sales agent misconduct, without exception, results in immediate termination.

Nonetheless, complaints over sales of insurance products have soared. In particular, grievances have stemmed from annuities, which are insurance contracts that offer buyers monthly or yearly income in exchange for one large lump-sum payment and are designed to appeal to anyone worried they might outlive their savings.

Over one-third of all cases of financial exploitation of the elderly involve annuities, according to the North American Securities Administrators Association, a group of regulators. Hundreds of lawsuits have been filed against insurers over annuity sales to the elderly. A judge in Minnesota ruled this year that just one class-action suit, against Allianz, could encompass as many as 400,000 plaintiffs.

In interviews, sales agents who have been accused of wrongdoing said they followed the guidance of insurance companies.

“I did what I was told,” said Mr. DelMonico, before declining to discuss the lawsuit against him. “If it was so wrong, why did everyone let me do it for so many years?”

Products With Rich Commissions

Annuities are among the insurance industry’s fastest growing products, with sales increasing 30 percent since 2001, to $182.8 billion last year, according to the Insurance Information Institute.

Regulators say annuities that begin paying immediately are often sound investments for retirees. A 73-year-old customer of one popular annuity, for instance, is guaranteed to begin immediately receiving $252 a month for life, in exchange for a $30,000 payment. If the buyer lives more than 10 years, that income is greater than the original amount paid.

But the vast majority of annuity sales do not offer immediate payouts. Instead, they require buyers to wait as long as 10 years to begin receiving benefits. Such contracts, known as deferred annuities, made up 97 percent of all annuity sales last year.

Financial experts say deferred annuities are a good option for wealthy elderly investors looking for ways to transfer savings to their heirs while avoiding large tax payments. But for retirees living off their savings, most deferred annuities are a bad choice, experts say, because elderly buyers are likely to die before the contract begins paying out.

Deferred annuities, however, offer sales agents the richest commissions, which is one reason so many of them are sold every year, regulators say. Selling a $100,000 deferred annuity, for example, typically earns a sales representative $9,000, though buyers are prohibited from touching much of their money for 10 years. Annuities with shorter tie-ups carry much smaller commissions.

“An annuity that pays a fixed immediate income offers seniors a lot of security,” said Jean Setzfand, director of financial security with AARP, formerly known as the American Association of Retired Persons. “But a deferred annuity is almost always a bad idea for a retiree.”

Those concerns, however, have not stopped many insurance agents from aggressively selling deferred annuities.

Some of those agents have been trained by organizations that require only a few days of classroom instruction.

For instance, the 1,200 people who have enrolled in the certified retirement financial adviser program spent only four days in a classroom, according to a spokesman. The president of that program, Larry Klein, was fined $150,000 in the mid-1990s by securities regulators after persuading an 83-year-old blind woman to speculate on New Zealand’s currency.

Mr. Klein, in an e-mail message, said the charges against him were untrue and that it was “idiotic” to assess a course based on its duration.

Short Seminars Used for Training

The Society of Certified Senior Advisers, which gave Mr. DelMonico his credentials, is a for-profit company that has trained 24,000 enrollees since it was started in 1997. Its founder, Edwin J. Pittock, is a former mutual fund executive who was twice suspended by the Securities and Exchange Commission. Mr. Pittock declined to return phone calls, though a representative said all regulatory actions were settled without admission of wrongdoing.

The society’s course lasts three and a half days, according to recent participants, and includes uplifting lectures, overviews on the sociology of aging and exercises including peering through vision-blurring lenses to get a sense of how some clients’ eyesight can falter.

“It really opened my empathy for what seniors go through,” said Rick Hoogendoorn, a real estate agent and former financial adviser in Victoria, British Columbia.

Regulators, however, are more critical of such programs.

“There are limitless combinations of words getting invented to convey an expertise in senior finances,” said the Massachusetts securities regulator, William F. Galvin. “Most of them seem designed to trick seniors into listening to swindlers.”

A representative for the Society of Certified Senior Advisers said the program’s courses and questions were written and evaluated by experts. In a statement, the company said its training was intended to supplement, not substitute for, professional credentials and education. The organization began asking titleholders in March to disclose to potential clients that “the C.S.A. designation alone does not imply expertise in financial, health or social matters.”

Despite that disclaimer, the company has trained thousands of insurance agents and other financial advisers. And about 100 companies, many of them insurers, endorse the certified senior adviser designation, said Dan Danbom, a spokesman for the group.

“Insurers and financial service companies are big supporters of the C.S.A.,” he added.

Until last month — after the group was contacted by a reporter — the Society of Certified Senior Advisers did not verify employment histories, or whether applicants had criminal records or even high school degrees, a representative said. So when Mr. DelMonico applied in 2002, the group did not know he had been fired by one employer for selling an unauthorized annuity and left another after he was accused of forging a client’s signature, an allegation he has denied.

Soon after he received his designation as a certified senior adviser, Mr. DelMonico started displaying it in ads and on letters inviting retirees to seminars over free chicken lunches, according to Massachusetts regulators.

At those meetings, Mr. DelMonico told retirees that they were perilously close to financial calamity, according to Masschusetts regulators and attendees. He warned them that the stock market’s ability to offset inflation was “a big lie,” according to documents collected by those regulators. Banks contained “weapons of mass destruction,” read one handout.

But annuities, Mr. DelMonico noted, offered guaranteed returns, attendees said. At the time, he was authorized to sell annuities offered by Old Mutual, Allianz, the American International Group, John Hancock Insurance, Jackson National Insurance, Pacific Life Insurance and more than two dozen other companies, state records show.

Mr. DelMonico’s script, Massachusetts regulators say, used materials from another training company, Piece of Pie Strategic Coaching, a Minnesota company that had listed Allianz, Old Mutual and more than a dozen other insurers as “partners” or “carriers” on the company’s Web site.

That Web site was changed to remove mention of insurers after the company was contacted by a reporter. A Piece of Pie executive said the company’s relationships with insurers were through an intermediary.

There are hundreds of companies like Piece of Pie that teach sales agents how to find retirees willing to buy annuities. Many of them are paid by insurance companies that count on such organizations to recruit and train independent sales agents. Allianz, for instance, relies exclusively on 155,000 independent agents working through 300 outside organizations, all of them receiving a payment when an annuity sale occurs.

Allianz said it did not endorse Piece of Pie, although the insurer continues to work with a company affiliated with the program.

Piece of Pie was founded by Michael Kaselnak, who was fined by regulators in 2001 for selling improper financial products.

Mr. Kaselnak said that Mr. DelMonico quit Piece of Pie about three months ago, after he was sued by Massachusetts regulators, and that the Piece of Pie program focused on ethical business practices.

Old Mutual, Allianz and American Equity say they endorse only training programs that are committed to ethical sales tactics and that their support is often limited to providing speakers or marketing materials. But they acknowledge that they cannot always police how agents present themselves.

Regulators assert that insurance companies use independent sales agents because they hope to escape responsibility for the unscrupulous tactics they know are used.

“If insurers would cut off these companies, this behavior would end tomorrow. Instead, they just close their eyes or say it’s not their fault when a supposedly rogue sales agent misbehaves,” said Jim Nelson, an assistant secretary of state in Mississippi. “It’s scandalous that the insurance companies are working with these marketing organizations.”

Many elderly buyers of annuities agree, and say they have been treated as callously by their insurance companies as they were by deceptive sales agents.

Before Mrs. St. Clair accepted an invitation to one of Mr. DelMonico’s seminars in 2002, she had never balanced her checkbook. Her husband died of colon cancer six months earlier. Though she had raised five children, including a son with Down syndrome, she knew almost nothing about her family’s finances.

Mrs. St. Clair soon asked Mr. DelMonico to handle her $75,000 savings.

“All these insurance companies had trusted him, so I knew that I could trust him, too,” she said. “And when he became a certified senior adviser, I felt good, because he had gone to school for a long time.”

Mr. DelMonico transferred much of Mrs. St. Clair’s savings into deferred annuities sold by Old Mutual. Those contracts, which were impossible to cancel without paying large penalties, prevented Mrs. St. Clair from receiving the annuity’s payouts for five years, unless she paid significant fees.

In October, Mrs. St. Clair’s dentist told her she needed a $3,200 bridge replacement. The same week, repairmen said she needed a new furnace and gutter work that would cost a combined $6,500.

She contacted Old Mutual and explained she had never intended to buy the annuities.

“I am 72 years old and need access to my money now,” she wrote, according to a copy of her letter given to The New York Times. She wrote that the contracts were never fully explained to her, a claim Mr. DelMonico denies.

Old Mutual initially denied her request. An executive told her they had contacted Mr. DelMonico and were siding with his account that the annuities were sold properly.

Such rebuffs to complaints are common, regulators and plaintiff’s lawyers say.

Dozens of lawsuits against insurers contend that those companies failed to adequately supervise sales agents who sold inappropriate annuities to aging clients and then did not act when buyers complained.

Allianz, Old Mutual and other insurers, in court filings and interviews, say they spend millions of dollars supervising sales agents and investigating consumer complaints.

“We’ve gone above and beyond what regulators require to make sure these things are sold appropriately,” said Tom Burns, chief distribution officer for Allianz Life.

When Old Mutual learned that Massachusetts regulators had sued Mr. DelMonico in March, the company cut its ties to him and refunded Mrs. St. Clair’s money. Old Mutual was not named as defendant in that suit.

Mrs. St. Clair said her complaints alone should have spurred the company to action.

“How many other seniors have been tricked into these things but are ignored when they complain?” she asked.

In a statement, Old Mutual said the company had no documentation of misconduct by Mr. DelMonico until regulators filed their suit, which contained evidence that he had lied.

Tougher Rules Introduced

In contrast to companies like Old Mutual, some insurance companies, and some state regulators, have changed the rules governing how annuity sales agents can behave.

This year, Massachusetts prohibited most financial advisers from using titles like certified senior adviser unless they were recognized by an accreditation organization or the state. Last year, MetLife and Genworth Financial, two of the largest insurers, told sales agents they could not use the designation of certified senior adviser.

But in most other states and at most insurance companies, sales representatives can use any title they choose.

For his part, Mr. DelMonico, while he awaits the outcome of his case, is still approved to sell annuities by American Equity and more than two dozen other insurers, according to state records.

“I just got my insurance license renewed in Rhode Island,” Mr. DelMonico said in an interview. “Business is still pretty good.”

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