Posts

ADVISOR ALERT: Identity Thieves May Be Targeting Your Annuity Clients

Insurance regulators in several states have issued warnings regarding attempted looting of annuity accounts. If you sell such products, warn your clients now to carefully review their insurer statements going forward.

Earlier this year, officials at the Nebraska Department of Insurance, along with the Kansas Insurance Department, warned that they had received reports of identity thieves attempting to withdraw money from consumer accounts in their states. Ken Selzer, the Kansas insurance commissioner, revealed last fall that attempts had been made to access annuities at four different insurance companies domiciled in his state.

What’s alarming about these actions is that the fraudsters contacted the insurers for redemptions using actual consumer names, dates of birth, Social Security Numbers, and account numbers. According to Selzer, one of the four attempts was successful, costing one insurer several thousand dollars.

In Nebraska, criminals tried several times to withdraw funds from annuity contracts held by state residents, without the contract owners’ knowledge. Fortunately, the insurer involved was able to detect the fraud, block the transactions, and issue a public alert.

In Colorado, Michael Conway, interim Insurance Commissioner, issued a consumer alert about similar attempts in his state. “This is another area where people need to be on their guard,” said Conway. “Identity theft can cost thousands and shatter lives. Consumers should pay attention to all correspondence about their annuities and be sure that account balances and personal information are correct.”

The Colorado Division of Insurance also warned consumers that being aware of such scams is important, but not enough. They should contact their companies and ask what is being done to prevent large-scale breaches like those seen in the news. They should also ask about protections that can prevent access to their individual accounts and what steps policyholders and account holders should take to add additional security to those accounts.

Warning your clients about fake annuity disbursements is just one thing to discuss with your clients about securing their money. Another is how to prevent identity theft for all of their financial accounts, credit cards, and the like.  To that end, members of the National Ethics Association, sponsor of EOforLess.com, should consider purchasing NEA’s consumer booklet “Identity Theft Prevention” for all of their clients. The brochure is available for a nominal cost at ethics.net.

FINRA Shows Regulatory Hand: Brokers, Pay Heed or Watch Out!

One of the benefits of working in financial services is that regulatory agencies are usually transparent about their concerns. They communicate well in advance when they’re about to crack down on something, giving agents, advisors, and brokers more than enough time to respond. FINRA is an excellent case in point.

In early January 2018, the securities self-regulatory organization released its annual Regulatory and Examination Priorities Letter, which tells member firms and registered representatives what it intends to focus on during the year. The letter, in effect, is a great resource for resolving compliance issues before FINRA gets involved.  It also helps firm executives prepare for their FINRA examinations.

The regulator’s 2018 letter was wide-ranging. FINRA announced it will focus its efforts on fraud, high-risk firms and brokers, and operational and financial risks, including technology governance, cybersecurity, and market regulations. Other priorities will include:

  • Sales practice risks, especially recommendations of complex products to unsophisticated, vulnerable investors;
  • Protection of customer assets and the accuracy of firm’s financial data; and
  • Market integrity, including best execution, manipulation across markets and products, and fixed-income data integrity.

In the body of the letter, FINRA provided further details on each regulatory concern. Several that bear a strong relationship to broker sales activities follow.

Fraud: FINRA announced that once again, fraud will be a high enforcement priority. These include activities such as insider trading, microcap pump-and-dump schemes, issuer fraud, and Ponzi-type schemes. Also, a focus will be continuing to identify cases of potential insider trading, which FINRA refers to the U.S. Securities and Exchange Commissions (SEC). Reining in scams targeting senior investors will receive a strong emphasis, as well.

High-Risk Firms and Brokers: FINRA will focus on protecting investors from firms and brokers that take advantage of their customers. Specifically, it will look at practices such as hiring, supervision of high-risk brokers, supervision of point-of-sale activities, and branch inspection programs. Also a focus will be sales of advanced securities products to unsophisticated investors.

Sales Practice Risks: This is an especially wide-ranging area. In 2018, FINRA says it will pay serious attention to suitability violations, especially to the business practices and processes that produce suitable sales. Suitability in the context of employer-sponsored retirement plans and IRA rollovers will be hot-button issues too, as will be sales of initial coin offerings, cryptocurrencies, the use of margin loans in the sales process, and proper use of securities-backed lines of credit.

Cybersecurity: 2018 will continue to see high FINRA involvement in protecting customer assets and information against hacking and other cyber-crimes. As in prior years, FINRA will continue to evaluate the effectiveness of firms’ cybersecurity protocols—specifically their preparedness, technical defenses, and resiliency measures.

To further help member firms and their brokers, FINRA released a Report on FINRA Examination Findings. Based on what it finds when it visits firms at least once every four years, this document can also be a helpful resource in assuring firm compliance with FINRA rules in 2018 and beyond.

For further information about FINRA’s 2018 priorities, please visit its website here.

Continue to keep up to date with ethical practices by reading the latest news on  National Ethics AssociationFor information on affordable E&O insurance for low-risk insurance agents, investment advisors, and real estate broker/owners, please visit EOforLess.com.

­A Cautionary Tale: After 50+ Disclosure Events, Rogue Broker Finally Gets the Boot

For years, we’ve been preaching to financial professionals about the importance of keeping their compliance records free of black marks. Our argument: that all it takes is one bad disclosure to besmirch your record. And now that sanction reports live forever on the Internet, one event can make it impossible to generate new business . . . for years, if not decades, to come.

However, sometimes we run across news that makes us question this advice. For instance, Financial Advisor IQ recently reported the case of a renegade broker who racked up more than 50 disclosure events over a 14-year-time period, all easily found on his FINRA BrokerCheck record. The fact that the broker operated beyond the regulatory pale for years makes one question whether government agencies are capable of protecting consumers against rogue advisors. In this particular case, the answer, apparently, is no.

The more you learn about this broker’s track record, the more shocking his story becomes. According to Financial Advisor IQ, FINRA recently threw Anthony Diaz, a Pennsylvania broker last registered with IBN Financial Services, Inc., out of the business. But it took him repeatedly selling unsuitable securities to at least 17 clients since 2000 for FINRA to act. To its credit, FINRA ordered him to refund $4.3 million to his clients, including $1 million in compensatory damages, $2.9 million in punitive awards, and $413,000 in legal fees. But it tolerated his behavior for years.

Over the course of his career, Diaz repeatedly made inappropriate recommendations. He pushed clients to make variable annuity exchanges with no reasonable basis. He misrepresented products to clients. He lied about their net worth so he could sell them alternative investments. He deceived his product firms and broker-dealers. He falsified signatures on annuity applications. He also got embroiled in numerous client disputes, including a 2017 complaint alleging he made poor recommendations, had a client sign a blank form, and put false information on their documents.

During his career, Diaz worked for 11 different securities firms and was fired from five of them. Apparently, the broker-dealers didn’t care about his atrocious disclosure history; they were more impressed with his sizable client list. And regulators only got serious about policing him over the last couple years, when FINRA finally barred him and the New Jersey and Pennsylvania securities agencies pulled his license.

But think about the impact he had on those 17 clients—how much they must have worried about losing their money, how aggravated they were filing FINRA claims, how much they shelled out in legal fees. If regulators had done their jobs years ago, clients could have entirely avoided this nightmare.

Now, surely the broker-dealers and the clients themselves share culpability. Why did firms keep hiring and firing this guy? And why did consumers retain the guy when even a cursory BrokerCheck read would have revealed his true nature? His track record should have disqualified him from holding even a janitorial position in the securities business.

So what are the lessons learned from the Diaz case?

  • First, if you’re insurance licensed and refer clients to a broker to purchase securities, please do careful due diligence on that person. Eliminate those with anything more than a trivial complaint in their past. And given the number of brokers who have flawless records, perhaps adopt a zero-tolerance posture regarding customer disputes.
  • Second, encourage your friends, family members, and colleagues to do serious research on potential brokers. The BrokerCheck system is user-friendly. There’s absolutely no excuse for a consumer not to do a deep dive into a broker’s compliance history to see if the person is trustworthy.
  • Third, if you’re securities licensed, supplement your BrokerCheck file with other sources of information your prospects might find useful. For example, give your prospects access to a comprehensive background check on you, available through the National Ethics Association. Also, consider joining the Better Business Bureau. And as long as you don’t have an investment-advisory license, give your prospects the names of several clients who can vouch for your integrity.
  • Finally, as disappointing as the Diaz story is, it highlights the tremendous opportunities financial professionals with clean records have. With so many ethically flawed competitors in the marketplace, those committed to doing business ethically and legally will have a huge competitive advantage over the unethical bottom-feeders. When consumers finish checking you out, they will know you’re the real deal—a financial professional who will serve their best interests and in whom they can place their trust.

To read more about ethical business practices, visit the Ethics Center at the National Ethics Association, sponsor of EOforLess. 

Principled Selling: Why Insurance Professionals Need a Personal Ethics Code

The demands placed on life, health, P&C agents, and investment advisors can be intense. But even worse, they can be in conflict with each other. Your client may want you to do something that your agent or company prohibits. You may wish to do something that ill serves a client. Or your FMO, broker-dealer, or RIA may want you to sell something that you believe will harm a client. How do you resolve all these conflicts? By creating a personal ethics code and committing it to paper.

Having your own ethics code means you’ll know what you stand for. It will remind you of the values and principles you hold dear so that when caught in an ethical dilemma, you’ll have guidance for resolving it. Don’t think for a minute that your ethics code should be a long, complex document. Or that it should be full of legalese or tedious information. Instead, it should be short, high-level, but deeply inspirational.

Now, you may be thinking,

“Why do I need an ethics code when I already do what my compliance department requires?”

That’s a great question, which gets at the difference between compliance guidelines and ethical values. Compliance guidelines are the black-and-white legal requirements you must follow in order to stay in business. They are rules-based and have sanctions attached if you violate them.

Ethics refer to the personal values you bring to your business career. They aren’t the rules a third party demands you follow. Rather, they are the values you voluntarily adhere to because they’re meaningful to you.  And since there isn’t a compliance rule for every contingency, ethical values help guide you in the gray areas between legal requirements.

In fact, we’d argue that the most effective and successful financial professionals combine compliance rigor with ethical principles to create a highly professional operation. Since many agents and advisors are content to just follow the regulations pertaining to their license, those who integrate their ethical values into their business models almost always will achieve a competitive edge.

Now, what should your ethics code look like in terms of format? We hesitate to provide firm guidelines because it should be something that’s deeply meaningful and relevant to you. Printing it on an index card, as a PowerPoint slide or on a sheet of 8 x 10 glossy paper that you put in a frame are all possibilities. The point is, your code should be whatever will be most useful and motivating to you. And if it’s in a form that you can share with clients and colleagues, all the better.

How do you develop this document? Again, that’s a deeply personal matter. But consider following this process:

First, do some brainstorming around the ethical principles that have resonated with you over the years. Uncover them by . . .

  • Writing down the values and principles that make you feel good about your work.
  • Defining the qualities that have allowed you to outshine others in your market.
  • Thinking about your favorite motivational writers, leaders, or philosophers and write down any of their teachings that have stayed with you for years.
  • Considering the teachings or your faith community (if any) relating to how to treat your fellow man.
  • Recalling the life lessons your parents gave you and that you’ve given to your own children.

Second, review your master values list and circle those that have persisted longest, meant the most to you, had the broadest application, and helped you resolve ethical dilemmas in the past. Select perhaps 10 of these statements and type them up on a single sheet of paper.

Third, share your list with four to five people with whom you are extremely close, including work colleagues, friends, and family members. Ask them what they think of your list. Have them pick out the top three or four ethical values that speak most powerfully to them and that reflect your unique character.

Fourth, capture the principles that were selected most often and put them on a single sheet of paper, index card, or however you’d like to format it.

Fifth, let this list “germinate” for a few weeks. Then revisit it to see if you still like the items it includes. Eliminate those that have lost potency for you, and add others that have come to mind since the prior exercise.

Sixth, compile your final ethical principles list and format it as your official Ethics Code. Phrase each statement in the form of a manifesto or a “This I Believe” so that you and the people reading them will know you stand for these things.

Seventh, print out your code in a format that promotes sharing, that’s visible to you throughout your work day, and that makes you feel really good.

Now that you have an Ethics Code, refer to it frequently when faced with difficult business decisions. Always ask yourself whether a potential action tracks with or violates your Code. Then make the appropriate call consistent with your code.

Finally, congratulate yourself for having developed a tool that the vast majority of your competitors lack . . . a highly motivating Ethics Code that will help you become an admired and successful financial professional. It will also discourage unhappy clients from suing you and making you use your E&O insurance. Sounds like a win-win, right?