One of the quickest ways to get regulators' attention these days is to single out retirees and seniors in your marketing initiatives.
Just ask Steve Yarn, an investment advisor who found out the hard way that securities regulators have almost unlimited interest in upholding the letter and spirit of the law when it comes to seniors. Yarn, who was mystery shopped by Maryland state regulators, discovered firsthand what I sensed myself when I looked into hanging out an investment advisor shingle in the state: Maryland is no-nonsense.
Yarn, the proprietor of Yarn & Company in Owings Mills, Md., runs seminars throughout the state targeting retirees and seniors who want to "make the most of their money." Back in 2002, two securities regulators posing as a couple went to Yarn as potential clients and took him up on his offer for a free consultation back at his office. There, Yarn showed them investment illustrations featuring an equity-indexed annuity product.
"That's where the problem began and it continued for about five years," says Yarn.
He maintains he did nothing out of the ordinary. Equity-indexed annuities have historically been viewed as annuity contracts that required only an insurance license to sell (which Yarn has). But the product also has mutual fund subaccounts, and Maryland regulators maintained that since Yarn was discussing the underlying securities he also therefore needed an advisor registration. This Yarn didn't have at the time. Having decided he didn't want to be affiliated with the securities industry or submit to securities regulation anymore, he had let his investment advisor registration lapse. (He's since reapplied for it, and it has been granted.)
Maryland's Division of Securities declined to comment on the case, which has since been settled. The SEC has taken up the gauntlet, and is trying to decide when equity-indexed annuities should be considered securities, but there hasn't been a ruling yet.
Yarn credits his attorney Brian S. Hamburger, managing director of MarketCounsel LLC in Englewood, N.J., as the person who unraveled the legal conundrum of state filings, claims and hearings that unfolded during those years.
What did Yarn learn? "I should have hired my lawyer before any of the problems started, and it would have been the best thing I could have done for my business," Yarn says. MarketCounsel offers ongoing compliance programs for both start-ups and mature advisory firms. Hamburger also offers individual counsel through the Hamburger Law Firm.
Yarn is not the only one interested in the over-50 market. Nearly one-third of all U.S. investors are between 50 and 64 years of age. Moreover, approximately 5 million senior citizens, whom the Securities and Exchange Commission report defines as individuals over the age of 50, succumb to financial abuse each year. Folks over 50 also hold 75% of the nation's financial assets, valued at some $16 trillion. Not surprisingly then, seniors accounted for 45% of all investor complaints, SEC Chairman Christopher Cox told regulators at the commission's open meeting on equity-indexed annuities in June. State regulators submitted testimony at the same meeting, showing that up to 65% of complaints, especially those pertaining to equity-indexed annuities, come from seniors.
"Advisors aren't walking away from the senior market. It's way too lucrative and too many people have their AARP card," says Hamburger. "But advisors really have to tighten the reins on the products and services they offer and how they offer them."
The thorniest issues arise when advisors offer seminars and free lunches to seniors. "They're under tremendous scrutiny," Hamburger says. "For some of these folks, it's how they've marketed to clients for years. They have a spotless regulatory record every step of the way. I've represented three advisors in the past several years who fit the profile of offering free-lunch seminars.
In Maryland, in particular, regulators sat through the seminar and went through all the motions to find out what the advisor's sales practices were all about.
"Frankly," says Hamburger in reference to Yarn's case, "it seemed like a sting operation on a guy who did nothing to warrant it. Once they were done with their Dateline NBC-type investigation, they sent a litany of filings and required my client to attend a hearing and provide on-the-record testimony. In one way or another, the client dealt with this case for five years, until we settled it last year."
His other advisor clients have been questioned by regulators even on the size of the font and fine print they use on their brochures-despite the fact that they used routine disclosure language on the bottom of advertisements, Hamburger says. (As someone who can't read this magazine most days without reading glasses, I can appreciate the nod to our aging population's daily challenges.) Advisors who have referred prospects to Web site presentations and disclosures, meanwhile, have received regulatory warnings. "They were told that seniors and retirees wouldn't use technology that way," Hamburger says.
What advisors needs to do is take inventory of the risks out there and try to quantify them, manage them and mitigate them, the veteran attorney says. "It may be as simple as managing your font size. It may be as simple as increasing the disclosures in client agreements. Or it may be that products and services need to be more tailored to the needs of your clients. If they're retirees, their needs should be served.
"After years in the business, I think most advisors do the very best they can by clients, but may not always think of every 't' to cross or 'i' to dot, which is where good legal advice comes in," Hamburger says. At the fringe, however, "are players who just shouldn't be working with seniors the way they do," he admits.
The fringe players, as Hamburger and regulators have found far too many times over the past few years, use suspect and meaningless senior credentials and high-pressure tactics to market products that are often unsuitable for seniors. In hundreds of regulatory sweeps conducted since 2005, the SEC, FINRA and the states have examined the marketing and sales tactics used on seniors and discovered a number of illegalities. There are even some areas that advisors may not think are problematic, until, of course, a team of regulators rolls into your office to conduct an audit.
Hamburger and others suggest more complaints are pouring into regulators' offices from seniors because of the high-profile press campaigns the AARP and state regulators have undertaken to coach seniors through the process of filing complaints. He says that regulators themselves are also taking a much harder look at practices directed at seniors and retirees.
I think regulators just simply follow the advisors and brokers who follow the money. And since retirees often have the most money, there is no end in sight to the scrutiny. FINRA conducted 100 examination sweeps into marketing practices targeting seniors in the past three years and still has 70 investigations open. The SEC plans to announce a number of regulatory initiatives at the upcoming Third Annual Seniors Summit, to be held at the commission's headquarters in Washington, D.C., at the end of September. Near and dear to SEC Chairman Cox's heart is the issue Mr. Yarn dealt with in Maryland-how should equity-indexed annuities be regulated? The SEC's pending rule should provide clarification about when an equity-indexed annuity should be considered a security for purposes of registration and regulation.
State securities regulators took up this challenge more than five years ago. And they have been successful in persuading Cox that the equity-indexed annuity product, long classified as an annuities contract without a need for securities regulation, is indeed a security that is being heavily sold to seniors and retirees, sometimes abusively. "Every investor deserves protection, none more so than the growing number of seniors who are depending on every dollar of their savings for a financially secure retirement," NASAA President Karen Tyler says. "Since first focusing a national spotlight on the dangers facing senior investors, including the inappropriate sale of equity-indexed annuities, state securities regulators have led a determined effort to protect this heavily targeted and vulnerable segment of the population through enforcement, investor education and rule-making."
If you adamantly think your clients-or their parents-are not buying equity-indexed annuities, I hate to break it to you, but you're wrong. More than $25 billion in equity-indexed annuities were sold in 2007, for a total of some $123 billion in total equity-indexed annuity investments. Someone is buying these products, which are heavily marketed to seniors. If you're not communicating some of the problems associated with these products, even in broad-brush terms, you may be doing clients and their elders a disservice. As part of a marketing plan to reach multiple-generation clients, ask this question in your newsletter: "Why would an 80-year-old want to buy a product with a 15-year surrender period that could cost her 20% of her investment and will likely not return principal?"