Structured settlements and fiduciary standards, is this the future for settlement planners?

In my commentary last week I opened up the idea of whether or not structured settlement annuities, which are used to fund structured settlement payment programs, need to be sold under a fiduciary standard. My discussion centered around a series of events in the profession, specifically the AIG class action suit, which is alleging some degree of deception or undisclosed information on pricing and compensation, as well as the Department of Labor rule that the Trump administration announce will be reviewed with an eye toward reducing some of it’s more harsh compliance requirements on retirement account management.

Well since that video and commentary, the Trump administration rule review has been formally announced and we as professionals can anticipate that some, if not all, of the more punitive compliance measures the former rule contained, will be eliminated or softened so that commission investment products sold to retirement account investors will not be subject to Fiduciary rule standards.

So what does this all have to do with structured settlement annuity funding, which enjoys a historic exemption from not only the fiduciary standard rules, but also the more recent NAIC rules that mandate greater training, compliance, disclosure and suitability standards for the sale of annuity contracts in 27 states, a number which is certain to grow in the coming months, as more states adopt these standards as well.

As a 30 year veteran of the structured settlement and settlement planning profession, I’ve witnessed a lot of changes, but our little niche profession seems to sit here in a quiet, sheltered place where the same rules applied to retirement investors, retail annuity investors and others, simply don’t apply to us. We are not required to do suitability standard analysis. We are in almost every instance working as agents, not brokers or fiduciaries, when we set up structured settlement programs. This vitality important, irrevocable annuity package involving minors, injury victims, widows and others, relies upon our objective analysis, but which analysis and sales recommendation, is not overseen by a regulatory body similar to that which other professionals must answer too.

I believe this is about to change and that the move toward a fiduciary, full disclosure standard and a clear declaration of whether we are agents, brokers, advisers or registered representatives at the time a recommendation and sale is made, will be the professional standard required by trial lawyers in every case going forward.

As evidence I point to the fact that just about every major bank and brokerage firm recently declared in a Wall Street Journal article that even if the DOL softens rules and backs away from the fiduciary standard, they intend to keep most if not all of the protections and compliance in place as they believe it is the direction consumers are going and regulators will adhere to in the future. In short, most of the “Big Guys” are deciding that self policing and setting a higher bar is good business and will avoid issues in the future.

I believe the structured settlement profession needs to do the same in light of litigation and what our peers in other areas of finance are going to do. We can set a higher bar voluntarily or we can have one imposed upon us by courts, litigation and regulators. I think we would be wise to choose self discipline rather than the heavy hand of regulation and the risk of litigation.

The tide is turning and we need to be ready. Full disclosure with honest and clear communication of what role we are playing when giving advice, coupled with a compensation model that makes clear who are clients are, as well as the cost of our services, is not just a good standard, it’s good business.

You can learn more or contact Mark Wahlstrom at Wahlstrom & Associates.

Should structured settlements be sold under a fiduciary standard?

So What is the fiduciary standard and why is it important to discuss in relation to how structured settlements are sold, marketed and explained to personal injury victims?

I’ll place a link to the definition of The Fiduciary Standard in the blog post or video description, but for purposes of this commentary lets just go with the most basic of explanations, that being a standard in which the adviser, broker or agent is required to put the needs of the client, in this case the personal injury victim, ahead of their own financial or professional interests, ensuring that compensation, sales trips, production requirements or other factors don’t interfere with the type of recommendation they are making when it comes time to allocate their settlement dollars into a plan which designs and income or future needs plan.

As it stands now there is really no clear duty as to what the adviser is recommending, as the sale of annuity contracts that fund structured settlements seem to fall into some great gray area where we don’t do suitability studies and there is no expectation or legal requirement for us to act in a way that our recommendations comport with those of a fiduciary standard.

It is my theory that this is going to change and change soon, due to pressures and outside requirements which to date, the structured settlement profession has been largely exempted from.

So if structured settlements are not sold under the fiduciary standard, than what standard are they in fact sold or recommended? Essentially all annuity and life insurance agents are held to what is known as the “suitability standard” in which the recommendation of the product only needs to be considered generally suitable, regardless of whether or not it might meet the stricter test of a fiduciary. As I mentioned last week in my discussion on transparency in pricing, if I am writing a non-structured annuity contract I am required to do an exhaustive suitability interview and questionnaire with the client to make sure my recommendation is suitable to their age, needs, investment risk and future requirements. No such requirement is imposed on structured settlement agents and brokers. Why that is the case is a big part of why I’m raising the issue in this commentary.

So, why is the fiduciary standards “ a thing” to even talk about, why not just keep on as we have been for decades? Why make this a problem when the profession hasn’t needed to address it previously? Well, you only need to look to the massive changes facing the annuity and mutual fund profession as a result of the Department of Labor deciding that in 2017 any advisor working on an IRA, KEOGH, 401K or pension plan MUST adhere to the fiduciary standard in their recommendations and offer dramatically expanded disclosure on commissions, fees and potential conflicts of interest. This trend is accelerating, whether or not that particular regulation stands under the new administration or not. Many of the largest fund, bank and investment managers elected to stay under that standard as they feel ultimately it is pro consumer and will be the de facto legal and administrative law standard going forward. In short the big bad world of compliance and law is catching up with the annuity profession and it is only a matter of time before structured settlements are swept into that category or agents are required to meet that standard in order to be licensed or appointed.

So what happens if structured settlements move to a fiduciary standard? Personally I think it would elevate the profession but it would also disrupt many of the current sales practices that are under examination, such as the AIG structured settlement program, approved lists, sales contests, trips, daily rate pricing and underwriting disclosure, adherence to HIPA standards and other elements that are currently common but not generally disclosed to clients in every case and situation, as there is no legal requirement to do so. None of these are big deals to fix or get rid of, but a lot of people in our profession object.

So why all the objections? In short because our profession has a history of preferring minimal disclosure, compliance and visibility. The Spencer vs Hartford case, The Weil vs Manufactures Life case and now the AIG class action all illustrate an unfortunate history of changing when forced by court order or some other outside agent or event. The objections against a higher professional standard will increasingly sound like the death rattle of a profession that is fighting a necessary change. Hopefully we as a profession elect to change before it is once again forced upon us from the outside and at great cost.

To learn more, contact Mark Wahlstrom at Wahlstrom & Associates. 

Will the AIG structured settlement class action suit increase transparency in pricing?

In last weeks commentary on the question of “How much commission does a structured settlement broker get paid” I mentioned two key areas I wanted to expand upon. The first, “Transparency in Pricing” is the subject of this week's commentary.

The event which is driving a lot of this discussion, the class action suit against AIG structured settlements and it’s claims of a RICO level conspiracy with settlement brokers nationwide, raises some key issues related to how structured settlement annuities are priced, who is paid and how pricing and payments should be disclosed to the vulnerable end user of the product, that end user typically being a personal injury victim. The complaint focuses a great deal of attention on the non-disclosure of commissions, pricing and I'm sure it will be an area of discussion in the coming months are structured settlement professional association meetings. 

As I stated last week, the standard commission of 4% on all premium placed is consistent across all markets. You send in premium as the agent and you get paid 4%, what could be simpler? However, nowhere is that compensation or it’s impact on the pricing of the annuity plan disclosed to the annuitant, or their legal counsel, by the structured settlement agent, the life insurance company or the casualty company negotiating the settlement. There is no disclosure in pre-sale literature, applications or in court proceedings, other than requirements in a very small number of states or counties that have disclosure statutes, with those law typically enforced in cases involving minors or incompetents. Consequently, in the vast majority of structured settlements, there is no clear disclosure of how the pricing was arrived at, what the commission is, who the agent actually is and if there are any commission split arrangements between the structured settlement brokers involved in the case.

Settlement professionals at this point are probably throwing up their hands and saying “ What difference does it make?” Their point being that the commission has been “baked in” to the pricing for decades, no one ever asks and the actual client buying the annuity is the casualty company, so as to fund the structure laid out in the settlement agreement and release. The injured party isn’t even the buyer, according to this logic, but is simply the recipient of a cash flow that happens to be provided by an annuity company selected by the defendants in most cases.  According to this logic, the question by most professionals is "Who cares about commission and pricing disclosure?"

Well, as the AIG class action case seems to indicate, as did the Spencer vs Hartford case which ended the Hartford’s commission rebating on structures, trial lawyers, consumer advocates, judges and increasingly regulators, ALL seem to care. Many are in fact taking a dim view of this opaque process that is often filled with potential conflicts of interest. Further, some of our profession’s biggest competitors, such as trust companies, investment advisers and others are making the professions lack of disclosure in pricing and commissions a BIG issue in their presentations to injury victims, highlighting the level of regulatory supervision they need to adhere to and the Fiduciary Standard they are required to uphold when dealing with the injury victim.

I’ll discuss the Fiduciary standard issue next week, but for this week let’s just reflect on the fact that if I, as an agent, sell a NON-Structured annuity to a consumer I am required to:

• Provide a full, company illustrated term sheet explaining pricing, returns, liquidity costs, surrender charges and ownership/beneficiary rights and this must be signed by the owner and annuitant.

• I am required to do a full suitability interview with the client to determine assets, income, sophistication, understanding of the product and how we arrived at the decision that this annuity makes sense for them.

• The client must sign the disclosure agreement, must initial or sign the illustration and I must, under penalty of perjury, sign that the statements, disclosures and information is true to the best of my belief.

Few, if any, of these things are required when we write a structured settlement annuity contract for people who are typically unsophisticated, badly injured or impaired.

My question to the Settlement Profession is How long do you feel that this major and glaring difference in standards is going to continue in a world where disclosure and fiduciary standards are becoming the norm across all financial sales and investments?

In short, our failure to simply follow the same standards that are required of any life or annuity agent when selling these contracts, is coming back to bite the structured settlement annuity profession and it’s time to change voluntarily before change is forced upon us. The AIG Class Action and RICO suit might seem like a distraction to some in the settlement profession. I can promise you that it is much bigger than that, and that structured settlement professionals need to take this head on and change our disclosure, pricing and sales practices to at least match those required of us in non- structured settlement sales.