It happened in September, during a long layover in the Atlanta airport. Waiting for the next leg, an overnight flight to Paris, I start talking with a man seated across from me. A retired chef, he’s lively, colorful and talkative. His wife, seated nearby, is younger and quieter.
I ask if she is retired like her husband.
“No, I’m a financial adviser. I help people make good plans for retirement,” she says. Then she returns to her Kindle.
I ask her husband whether Paris is their destination or just a stop on the way to somewhere else, as it was for me.
“No, Paris is it. We’re going on a Viking Cruise, Paris to Normandy. Eight days. We do things like this every year. The trips are free, incentives from the company my wife works for. She’s one of the top sales people, so she usually wins a trip like this early in the year,” he answered.
If you’ve ever seen the sponsorship promos of Viking Cruises on PBS, just before “Downton Abbey,” you’ve got an idea. Rather posh. Indeed, rates for this cruise in September range from $3,256 per person for a standard room to $6,652 per person for a “Veranda Suite.” And, yes, the reward also included round-trip airfare. So we’re talking, all in, at least $9,000.
The company she worked for also provided generous commissions, as most insurance companies do. And every dime of that money eventually comes out of the savings of the people they counsel on making “good plans for retirement.”
This is business as usual in the insurance industry. Skeptics should read a recent report from Senator Elizabeth Warren’s investigation into its common perks and giveaways.
Now let’s consider some numbers. According to the Bureau of Labor Statistics there were some 443,400 people working as insurance sales agents in 2012, all of whom might like a trip to Paris enough to sell you the product that will get them there fast.
The 2014 annual report for the Financial Industry Regulatory Authority (FINRA) notes that it oversees 636,707 stockbrokers. They may also be influenced by sales incentives. So what it all comes down to is that savers face an army of more than one million people who call themselves “advisers” but are primarily motivated by commissions, perks and sales incentives.
Both groups operate under the vague “suitability” principle— that they will sell investments that are “suitable” for their clients. And they have fought being required to act as fiduciaries year after year, after year, after year. Why? Simple. A fiduciary swears to act in the best interest of the client and to put the clients’ interest before their own. That’s a pretty high standard. It does not include free trips to Paris.
The number of Registered Investment Adviser firms— those required by the SEC to perform to a fiduciary standard— is about 11,000. So do the math. There are about 100 people who live by commissions and sales incentives for every person who has sworn to live to the fiduciary standard. Those aren’t good odds.
I’m not saying that the public faces an army of 1.1 million money-grubbing dolts without scruples of any kind. I’ve known good people on both the brokerage and insurance sides. But it’s still a numbers and behaviors problem. The odds that a person will meet one of the really good people are small. The odds that a person will meet one of the really bad people are also small.
The trouble is that both the brokerage and insurance industries have business models that require sticking the consumer with high costs. In brokerage it’s called “yield-to-broker.” And the target is about 2 percent— from your money. These days that doesn’t leave a lot of room for the “yield-to-saver.”
Insurance is not much different. People forget that the insurance industry is an intermediary. Like banks, they gather money from savers and put it to work, usually as large investments. So their goal, just like our banks, is to keep their cost of funds as low as possible so they can both compete for investments and earn the profit they seek.
Trouble is, your return and their cost of funds are the same thing.