The Anatomy of a Fiduciary Complaint

A lot of things are troubling about the Department of Labor’s rule to enforce a “best Interest” contract between an annuity agent, broker or advisor and someone who is interested in purchasing or even finding out about an annuity. At our last meeting with the DOL they informed us that the main objective of the rule was to give “consumers a legal path to seek resolution of a sale of a retirement product that was not in their best interests.”

That is why we decided to research how a consumer would actually fare in this new fiduciary world. Here is what a consumer, let’s call her Shirley, needs to consider and do to file a fiduciary complaint.

First, we must assume Shirley is comfortable on the computer, even though many older consumers (the ones who traditionally buy annuities) are not. In particular, when reading mountains of information, the “Shirleys” of the world like something in their hands! But nonetheless, Shirley’s first step is to download or read online almost 1,600 words of the SEC’s “How to File a Complaint.” We couldn’t find an easy way for Shirley to ask the SEC to mail a brochure.

Even we, as annuity experts and fairly savvy to regulatory wording, found it a bit daunting to scroll through page after page of information and determine what we needed to do. But, here’s how we think Shirley would go about filing a complaint.

Step 1: Shirley must go through information on not just how the SEC can help her but on how they CANNOT help her. Under the section called “What the SEC Can and Cannot do for You,” Shirley discovers that the SEC will facilitate informal (our emphasis) resolutions of complaints and many often succeed.

But, Shirley also discovers that in some cases, however, “an entity may deny wrongdoing or it may remain unclear whether any wrongdoing occurred. If that happens, [the SEC] cannot act as a judge or an arbitrator and force a broker, brokerage firm, or investment adviser to resolve your complaint to your satisfaction. Nor can [the SEC] act as your personal representative or attorney. But [the SEC] can provide you information on how to pursue your complaint on your own.”

Step 2: Shirley learns what she must do “on her own.” She is told to talk to her lawyer or follow these steps:

1. Talk to your broker or adviser and explain the problem.
2. If your broker or adviser cannot resolve your problem, then talk to the branch manager.
3. If the problem is still not resolved, write to the firm’s compliance department. Explain your problem clearly and tell the firm how you want it resolved. Ask the compliance office to respond to you in writing within 30 days.
4. Then and only then, is Shirley advised to contact the SEC or FINRA or her state securities administrator.

It is difficult to believe that Shirley, let alone any typical annuity owner, would be comfortable contacting the entity or individual that she feels did not serve her well and act in her best interest.

Step 3: With further research, Shirley learns that she has “More Complaint Options.” If informal attempts to resolve her complaint don’t succeed, she can continue to “act on her own” and resolve the complaint through the courts, arbitration or mediation (note that many fiduciary contracts require arbitration and it is likely to be permitted in the DOL Rule). Shirley is told that in order to take advantage of “these laws,” she must take legal action promptly or she may lose the right to recover funds.

So what does Shirley do?

The annuity marketplace is made up primarily of individuals with moderate or modest means. The average household income for a typical annuity owner is $100,000. And, many annuity owners - particularly those coming out of employer-sponsored plans which the Rule is intended to cover - rollover on average $30,000, with 85% less than $50,000.

Also, we need to ask if Shirley has the extra funds to hire a lawyer or even if she does is the “damage” worth the expense.

So Shirley either needs to go it alone or give up the complaint, or:

Step 4: Shirley consults FINRA and learns that:

“If you have a brokerage account, you probably agreed to settle all disputes with your broker or firm through arbitration. But even if you did not, you may choose to use arbitration to settle disputes. If you use arbitration, arbitrators will apply either a federal or state statute of limitations, depending on whether the claim involves a violation of federal or state law.”

But wait, a study by PIABA, Public Investors Arbitration Bar Association, from the fall of 2014 states that FINRA’s “increasingly homogenous arbitrator pool has led to a reduction in the number of cases in which investors prevail,” PIABA president Jason Doss said. The ‘’win rate” for claimants has dropped from about 60 percent in the early 1990s to 42 percent in 2013.

The PIABA study also claims that FINRA’s arbitrator recruiting is flawed and that its arbitrator disclosure process fails to give investors a clear understanding of potential arbitrator conflicts and biases. So, a “Conflict of Interest” Rule is sending consumers to an arbitration process that is conflicted and biased?

We do not doubt that the DOL is sincere in its wishes to provide consumers with a safe, well-regulated, and in their words, enforceable buying experience. However, it is clear from reading the comments and opinions of all those in favor and those who oppose the rule that they do agree on three things: the rule will make more consumers (1) use savings to pay for advice, (2) pay lawyers to resolve disputes, and (3) lose valuable annuity benefits due to the increase in compliance costs for all.

Today, Shirley has an enforceable contract in her annuity policy, which is governed by state insurance laws and enforced by state insurance regulators.

Today, Shirley merely picks up the phone to file a complaint with her insurance department, and they take it from there. Her state insurance department, whose job it is to protect consumers, is her mediator.

Today, what she saves goes directly into her annuity and starts working immediately! Tomorrow, she will need to use some of her savings to pay everyone else who must comply with the rule. All this in the name of her “best interest”?

Judging by the exceedingly low complaint rate on annuities and the various state departments’ efficiency in resolving those complaints as demonstrated by the NAIC Complaint Report, this process is working better to protect consumers. What is more stressful, going through the expense and time of an arbitration or court case on your own, or working with your state insurance department? We think it is an easy call.

At Americans for Annuity Protection our job is to make sure the annuity consumer is represented in a well-regulated and comprehensive annuity marketplace. That means we are here to ensure a safe and trustworthy sales environment that provides:

1. Information that is and easy-to-understand and conveniently available;
2. Choice of competitive, comprehensive and abundant annuity products; and,
3. Affordable Access to experienced and well-trained professionals that provide annuity guidance and assistance.

Kim O’Brien is the vice chairman and CEO of Americans for Annuity Protection. She has 35 years of experience in the insurance industry. Kim served The National Association for Fixed Annuities (NAFA) for almost 12 years and led the organization to defeat the SEC’s Rule 151A. Contact Kim at [email protected].

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