Just this week I received three invitations to steak dinners at Ruth’s Chris and Sullivan’s in Raleigh, promising all the information I would need for a happy retirement. Not surprisingly, they all came from local companies we know as annuity sellers. One of the invitations came from an agent who has a local radio show who unashamedly calls himself a fiduciary. Why the regulators allow this guy to imply he has no fiduciary conflicts of interest when he sells annuity products with compensation ranges anywhere from 1% to 7% as well as incentive trips and other perks is beyond me.
Last week, we met a couple, who had been ‘entertained’ by this guy. When objectively demonstrated the perils of placing ALL of their nest egg into his latest-greatest-annuity which effectively locked up their funds for 12 full years with only a paltry .5% inflation hedge they quickly changed their minds.
Annuities can be hugely profitable for insurance companies that offer them. As reported in Financial Advisor magazine, AIG, the company we taxpayers bailed out in the financial crisis of 2008, announced in January that they would be adding 600 new salesmen, or ‘agents’ to begin offering more annuities and other retirement products as well as the life insurance products they traditionally sell. “What we’re really doing is moving a bit upscale into a more mass-affluent space, incorporating retirement planning into the protection focus,” according to John Deremo, chief distribution officer for the company. AIG Financial Network has 50 regional offices and about 100 satellite locations, Deremo said. CEO Robert Benmosche added “we are capitalizing on the best of AIG to build an unparalleled financial network.”
According to Merriam-Webster a fiduciary is: “in law, a person in a position of authority whom the law obligates to act solely on behalf of the person he or she represents and in good faith.” The distinction between salesman and fiduciary is the first reason we should avoid steak dinners. We are being sold, not advised. The AIG comments above make it clear management is building an ‘unparalleled financial network’ by ‘capitalizing’ on the best of their sales force. The steak dinner salesman may not be acting ‘solely’ on your behalf because his compensation is tied directly to the products he sells you.
The second reason to avoid these sales traps is that we are artfully influenced by the presenters. Fundamentally we understand that that a steak dinner obligates us to listen to what they have to say. We are willing to do that because we expect to learn something (which further obligates us). To our peril, we underestimate the power of the reciprocation principle. We humans are wired to want to repay what another person has provided us. The very phrase ‘much obliged’ used to thank someone confesses we are ‘much obligated.’
During the presentation there will be other forms of manipulation beyond reciprocation that are going on. They include:
- social proof – seeing others in the room like ourselves provides increased comfort as well as credibility for the presenters.
- authority – presenters of complicated subjects are deemed to be experts and we allow experts to influence our decisions.
- liking – we tend to say yes to the people we like. Salesmen are likable people.
- contrast – you have likely already been burned by the stock market, so the guarantee of lifetime income with no losses sounds very appealing.
The third and most important reason to avoid the steak dinner is that your lifestyle and your heirs’ inheritance will be more negatively effected than you know or have been told. Annuities plainly and simply lock owners into a fixed level of income which dwindles principle over the annuitant’s remaining lifetime. Prices for the goods we will buy rise persistently and our lives will change in unpredictable ways, making that fixed income more restrictive down the road than we can anticipate today. But once an annuity is purchased, the owner is trapped by large surrender charges for years on end. The couple we met last week had been advised to by our radio show host to put all of their money into a single annuity with surrender charges of 12% for the first three years declining slowly for the next nine!
Good informational meetings stand on their own; they don’t need the carrot of steak dinners or other gifts to attract attendees. Education by noted experts provides sufficient draw.
What distinguishes a fiduciary meeting from a sales meeting is intent and good faith. Whether you are being sold or purely advised, conflicts of interest on the part of the presenters are openly shared with the audience. While the presentation, by its nature, will likely embody some or all of the influencers discussed above (social proof, authority, liking, and contrast), note that nothing more than a process or a philosophy are being presented for consideration by the audience. There is no one-and-done transaction involved. The purpose of the fiduciary presentation may range from purely educational, perhaps provided for the edification of clients or it may be designed to actively seek new clients. But in either case, the fiduciary only wins when the client engages him, not through a one-time transaction, but though a relationship that endures as long as that client believes his interests are being best served by that fiduciary.