Posts tagged #settlement planning

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.

 

Are structured settlements a good idea in a zero interest rate environment?

"Should a trial lawyer propose, and should an injury victim accept, a structured settlement to settle their personal injury case in such a low interest rate environment?"

In this week's commentary on The Settlement Channel, I'm looking at the issue of zero interest rates, or even negative rates of interest, being offered on fixed income investments, in particular structured settlement annuity contracts. One of the constant refrains that structured settlement experts hear from trial lawyers, as well as their clients, is that structured settlements are a bad idea in a world where interest rates are offering effectively zero rate of returns when you factor inflation into the yield at 2%. On its face, you would think it's hard to argue with that logic as we are clearly in a historic period of zero to negative yields on fixed income and annuities. 

However, in practical experience, settlement planners and structured settlement experts have been hearing this same narrative for over 15 years now, as we have been in a 25 year bond market rally where rates have gone from double digits to the current negative or zero yields on high quality bonds and notes. It has always been "rates are too low compared to the past," but all along that 25 year curve, the value of a guaranteed, tax free income has been proven to be the key component of just about every successful settlement plan. The rate of return or yield is important for sure, but the consistency of the cash flow, monthly income, and security are paramount to injury victims who rely on those funds to live. I can personally attest that 15 years ago people were rejecting tax free yields of 7% to 8% as "too low," when the evidence of the last 15 years now shows that anyone smart enough to take those tax free deals was getting a yield roughly equal to that of the S&P over that same time frame, particularly when taxes and management expenses are deducted and a net yield is calculated. 

The question now is, what will planners, attorneys and injury victims be saying about their decisions to not structure annuity payments in the current rate environment? Will it be considered wisdom to have declined the option for lifetime, tax free income that was guaranteed, predictable, and couldn't be outlived or outspent by the injury client? Will they look back and say that the low rate environment was actually the precursor to a historic stock market correction, or even more likely, an eventual bond market correction that wiped out huge chunks of principal and crippled their ability to care for their future needs?

The bottom line is that no one can know what the economic and financial market futures of the US will be, they can only speculate. However, the one thing any experienced settlement planner or structured settlement expert does know is that guaranteed, tax free, no fee income for a person who can no longer work, care for themselves or needs to support a family, is like GOLD to them. Every plan requires an income strategy and over the last 35 years the structured settlement annuity approach has been proven time and again as the bed rock foundation of most settlement plans. There is almost always a place in the settlement plans of an injury victim for this monthly income and it is the wise attorney, planner or family that elects that option as PART of a comprehensive settlement plan. A structured settlement cash flow provides a safety net, a floor income and planning certainty in an uncertain world. No other investment option offers zero on going fees, administrative costs or taxes like a structured settlement does. It is truly unique in that regard. 

Conclusion: That even in a low interest rate world such as we see now, that while it might seem counter intuitive, it's entirely possible in a period of economic turmoil that the certainty and safety of a structured settlement payment stream makes the MOST sense as the people who rely on it can't afford to be with out an income, ever. Don't just focus on rates of return and what you think you might get in alternative investments, instead engage a competent structured settlement expert from the Settlement Expert directory to assist you in designing a settlement plan that makes sense. Chances are good you won't look back in 10-15 years with buyers remorse if you do. 

CBS News takes on Maryland lead paint structured settlement cases

Last week those of us in the structured settlement profession were treated to a CBS Evening News story covering the uproar over the purchasing of settlement payments by a number of factoring/settlement purchasing companies. This followed on a series of stories first reported in the Washington Post last year, along with subsequent legislative changes in both Maryland and Virginia tightening the process required for a party to sell their payments to a third party. Among the companies discussed in the report were Stone Street Capital, and interviews with Attorney Earl Nesbitt who is a long time industry spokesman in his role with NASP. 

Link to the CBS News original story here. 

So what you might ask? Isn't it a good thing that the factoring companies are being exposed for alleged abuses? In a way, yes. I don't think I've spoken to a single factoring or settlement purchasing company who doesn't agree that certain abuses needed to be addressed and procedures tightened in the court approvals that already governed these transfers. 

 

 

However, if you watch this CBS report and take in the sound bites regarding the pathetic lead paint damaged woman they profiled, you can't help but come away from it asking a very simple question. "If she was so clearly impaired and incapable of making even simple decisions, why weren't her funds placed or paid into a trust or guardianship?" This will of course elicit the usual protests from my friends at NSSTA and the structured settlement primary markets that I'm some how implying that the attorney's, brokers and settlement professionals were somehow incompetent. So let me address directly my thoughts on this and some suggestions for trial lawyers and others who wish to avoid seeing their clients sharing equally tragic stories in the future.

  • If you have a class of victims who are either incompetent, brain damaged or have a very high probability of being incapable of managing their affairs, you should set up an asset protection trust, a guardianship, a settlement trust, etc. There are multiple ways to insure that the structured settlement payments go into a managed trust where these vulnerable injury victims can be protected long term. Specialized trust companies, such as First Capital Surety & Trust in Milwaukee, WI, offer a wide range of services tailored specifically for personal injury victims that could prevent most of these abuses. 
  • Be sure to engage a PLAINTIFF settlement planner to work with the trial lawyer, the client and the rest of the team. It has been noted in recent litigation involving a major defense broker where in they stated in testimony that they believe they owe no duty to the plaintiffs for their long term financial protection. Their duty is to the defendants. The solution is to bring in a settlement professional who represents the long term interests of the plaintiff and can assist in the type of planning that protects the future payments. Dual broker arrangements where both parties are represented is the industry norm these days, single broker deals are the exception. 
  • Don't throw the concept of structured settlements under the bus! The long term, or life time, payment options offered by a structured settlement are ideally suited to injury victims who struggle with decision making, financial concepts and are vulnerable. However, you have to provide a post settlement management process that prevents them from making decisions with out the assistance or approval of a guardian, trustee or adviser. Defense brokers by their very business model do not provide long term, personal service to structured settlement beneficiaries. They have no idea in almost every case that payments are being factored or sold. The client must have a party to rely upon over time to hold off the solicitations to sell their payments if it's not suitable. 
  • Does a long term guardianship or trust cost some money or potentially reduce the amount allocated to a structured settlement annuity? Yes absolutely it adds cost and may result in less premium for the brokers. However, isn't the benefit of protecting people from unwise and reckless financial decisions well worth the price of having a professional trust company or guardian watch over the assets? 

In short, the structured settlement profession, who put the annuity payments in place at settlement, needs to expand the degree of services offered to match the obvious needs of the plaintiff. The best advocate for that is a plaintiff oriented structured settlement expert, of which there are hundreds to choose from who take this long term planning responsibility seriously. The legislative changes are welcome and needed on the sale process, but the structured settlement profession needs to also up their game to not just sell and annuity and wish the claimant luck in the future. We can do better, get paid for it and provide real value if we communicate the message to trial lawyers effectively.