What the SEC, FINRA, Shapiro and Obama have to do with "protect my principal"Article added by Steven Delaney on January 26, 2009
Steven Delaney

Steven Delaney

Chalfont, PA

Joined: November 15, 2007

Quite often, investors ask their financial advisors to protect their principal or preserve their capital. But, realistically, this would amount to not having any money in the market. This couldn't be what the investor meant... could it?

Should the average client's portfolio be reviewed, they may appear to be well-diversified, but they are in the stock market just the same. They are "invested" in the market via a mix of mutual funds, ETFs and possibly, variable annuities. Some would say that with such diversification --a mix of stock funds, investment-grade bond funds and the living benefits associated with VAs -- folks "should/should've been fine." By definition, investments go up and down with the economy, and furthermore, with investments, the individual bears the risk, so the market ups are diminished by costs, fees, spreads and loads. Losses in the stock market are exacerbated by these same risks.

At this point we all know the outcome: Consumers lost principal and their capital was not preserved. The word "fine" doesn't mean safe -- it doesn't equate to "protect one's principal" and doesn't amount to "capital preservation." And, while diversification will mitigate risk, that does not necessarily equate to a safe investment.

Here is the systemic problem: FINRA, under the guise of "Investor Alerts," proposes to be an advocate, a defender of consumer/investor rights. My opinion (along with many others), however, is that they are in no small way responsible for all this financial failure and for the individual losses suffered by average investors.

It all trickles down from above, and FINRA, along with essential financial marketing myth-builders, are setting consumers up for failure, setting false expectations and steering everyone into the market under almost any financial condition. Consider an advertisement by "Company X," who advertises that they provide "A disciplined approach to long term investing." Who comes up with this stuff? And why? Look around at the people you want to work with -- people you know -- and ask, "Who has made money in investing? How much have you put in and how much is it all worth today?" The answers shouldn't be surprising.

All of these companies and snappy slogans are full of it. Even the pros have lost their shirts and the advisors who took the time to work things out -- really work things out by asking the right questions and forcing their client to provide real answers -- will continue to be trusted by their clients.

In reality, the market wants your money -- just like a casino. We should not believe everything we hear; rather, we should think and learn for ourselves. We should be skeptical of those who told us to buy and hold -- yet another myth.

Ignorance is still no excuse. Per the original Rule 151, the difference between an investment vehicle and an insurance product is that when an individual bears the sole risk of the share market, it's an investment.

Faulty directives, however, play a large role in this debacle and FINRA is culpable, as they falsely claim in Investor Alerts that "you can mitigate market risk, but you cannot avoid market risk." As everyone knows, this simply isn't true because you can easily avoid market risk by accepting moderation, remaining conservative and purchasing savings, insurance and safe-money products. Everyone now understands that annuities can be excellent products for many reasons: the first being safety (the way you protect your principal), and the second also being safety (the way you protect your interest on that principal).

In a rational world, we normally would prefer to buy things on sale than pay full price -- and we would rarely consider "paying a premium" for a particular item. Why is it we do not apply these basic market instincts when it comes to managing our assets? Could online discount brokerage firms have something to do with it, as they will let us lose as much as we like for just $7 a trade? Could our advisors have something to do with it, as they instruct us to buy more and more and hold on like Warren Buffet? Buffet is phenomenal, but he's not always on the money. The difference is he can afford to lose... can everyone else say that?

A new foundation

In light of the fact that almost every product in the financial universe has taken a hit -- except for the rare bet a hedge fund manager made, which likely propelled him or her to financial analyst stardom -- consider, once again, that fixed and fixed-indexed annuities, boring as they may be, are playing an increasingly important role in the life of retirees and those approaching retirement.

Life is constantly changing, but every once in a while a sea change, like the Great Depression, comes along and people change their behavior for the rest of their life, which will be longer than anyone thought. People will now do different things with their money: They will buy annuities; dependable, safe, "liquid enough" annuities. I am essentially asserting that going forward, the foundation of a financial plan may forever include annuities. Not only when people are older, but also when they are maturing and begin to realize the need for principal and capital preservation. Instead of annuities being thought of in a negative light (because this is how advisors are raised), they will be seen in a new, positive light. And, if you don't offer annuities, you may be seen in a negative light as a "stockbroker" or "securities rep" -- and people may not trust you. People are going to change who they work with and why they work with them.

When it comes to deccumulation, forget about it; your clients will want some of their money in annuities. This guarantees that, in retirement, they receive a safe, steady income stream from a financial instrument they can actually count on to help them meet their goals.

Getting back to "principal protection" and "capital preservation," are these really "specific instructions" that would hold up in a court of law? Remember, with FINRA, there is no court of law unless fraud, negligence or that sort of thing becomes an issue. Many believe "the deck may be stacked" against the consumer, as FINRA places forced arbitration upon the consumer when there is a complaint. For those who are unaware, arbitration clauses are part of what the consumer signs. Oftentimes, the consumer does not do well in arbitration because even if the consumer wins, they may get back very little.

One important issue overlooked by many is the fact that broker/dealers force a minimum sales requirement, or minimum gross dealer concession (GDC). This minimum GDC requirement is necessary in the eyes of the B/D because a rep also represents the firm and the possibility of being fined by FINRA. Fines could possibly stack up to tens of thousands of dollars for failing to advertise correctly. If a rep doesn't sell enough securities and if the B/D does not make enough commission on said rep's sales, the rep is not worth the business risk. This is what people are talking about when they say FINRA and overregulation has ruined the business. The bottom line is that when it comes to holding a securities license (so the investor can gamble in the share markets and the rep can get paid for taking his or her bet), reps must sell a certain amount of speculative financial instruments -- securities -- in order to keep their job.

In regard to the future, if nothing else, the financial planning process is getting some religion, as they say. People are going to be scared straight; they will be quite careful with their clients -- if their clients remain their clients. Financial planners and advisors, insurance agents and registered reps will not be able to operate per the agenda-driven instructions of their former self-regulatory organization (SRO): FINRA.

Now, I bring Barack Obama into this article for good reason, as he may have unknowingly chosen the leader of the wolf pack -- Mary Shapiro -- to watch over all of us sheep. How systemic is our problem? Obama has many advisors, but unfortunately, he is looking to the same old sources. Therefore, why shouldn't we expect more of the same?

In essence, it can be demonstrated that the self-regulatory organization FINRA has only protected itself in the pursuit of perpetual power and member profits -- money. Now, in my opinion, the results are disastrous due to negligence and deliberate omission of material facts on a systematic basis. This represents the evolution of a process by which many profit at the expense of the American consumer -- a wonderful business for a time when all would profit, but the risk would be assumed by the lowest man on the totem pole: the consumer. Essentially, one could construe the industry advice (the industry-speak authorized by FINRA, permitted or regulated by the SEC), misinformation, and possible even lies propagated by the people at the top are all just efforts devised so an industry can make perpetual profits.

As a case in point, if the consumer believes he or she was taken advantage of and they attempt to file suit against an advisor, the broker/dealer or even FINRA, he can't. FINRA has protected the industry and insulated the SRO's member broker/dealers and thus, the advisor against the charge of malpractice. If you do not have a case of fraud or negligence, you cannot sue. The plaintiff's attorney will now claim negligence or fraud. That is what Jeffery Sonn, who will represent many of the people who lost money thanks to Bernard Maddoff, will do.

Alarmingly, the architects of all of this "quasi-malpractice" have been ordained by the SEC to police the financial services industry. In fact, many industry professionals perceive FINRA -- by its very nature -- to be corrupt. The system is cancerous and in need of life-saving surgery. I don't think many producers would argue that the first thing we need to do is always put the consumer's needs first, do away with mandatory arbitration and go from there. Perhaps we should take away the financial planning process currently in use and start fresh. We as an industry could then start with a consumer interest questionnaire. This would be preferable to a financial profile, where the consumer and advisor come face to face with reality by asking hard questions; determining not only what the consumer has in terms of real assets, but also how much the consumer really wants to protect; how much they really want to risk and how much they can really afford to lose; and how much income they will need in retirement.

Understand that most financial advisors are above all this talk of fraud and negligence; they diversified their clients' assets and always put the consumer first. They've been able to deal with minimum GDCs, cranky B/Ds and their compliance officers, and have treated their customers as they would like to be treated -- fairly and with respect. Their clients actually understood the spectrum of risk and return due to the professional, caring approach their advisors have taken. These advisors took a smart, practical approach to caring for their client's assets and let people know what they truly believe about the financial instruments that lie along the spectrum of risk and return. These advisors have always provided their clients with real options -- all options that made sense for the client... including annuities.

Having said that, the outside world does not understand that many registered reps are not so fortunate and may be held captive, either literally or from a practical perspective. This would mean that they are forbidden to show their clients (by their broker/dealer and/or FINRA) some of the products that would have protected their principal, preserved their capital and, furthermore, protected their interest and/or locked-in their gains. Some advisors were prevented from offering these financial products by their immediate employer, their career company or their B/D, who may have been influenced by a fear of fines from the regulator -- FINRA. Therefore, they were prevented from protecting the client, and subsequently prevented from upholding a natural fiduciary responsibility.

Consumers and advisors have been preached to from the sermon that was prepared by the securities industry. Many in the securities industry actually believe it's always a good time to buy and, with the brilliant concept of dollar-cost averaging, you can't go wrong. Just keep on buying and then hold. And, if the market goes down, buy more shares at a lower cost. Remember, the market always comes back and, overall, you should average 10 percent. Surely this idea came from somewhere before it was sold to registered reps and captive advisors and promulgated to the masses. But wait: Don't forget about suitability, and you better not forget to read every Investor Alert FINRA sends out (and they send them out every three days in an effort to keep the consumer and suitability at the forefront of their concerns).

Upon closer investigation, this is, perhaps, one big web of legal deception. Compliance officers, acting under the directives of FINRA and their B/D, quiver at the thought of FINRA fines. Imagine what goes on inside the heads of the principals or the compliance officers: "We had better do what they say if we know what is good for us. If FINRA says be leery of FIAs, we better steer clear of them. After all, I don't know if we should supervise FIAs as securities because, at the time of 05-50, they didn't know if they were securities, so we better supervise them as if they were. And now, with 151A and that "more likely than not test," everything is a security, or could be -- even if there is no risk of loss to the consumer. Don't forget that many years ago, the NASD (now FINRA) got the SEC to classify CDs as securities -- unless they were sold directly by a bank. This got advisors thinking, "I better treat these things like they are securities if I know what is good for me; especially if I don't want to be put out of business." It's like the Mafia, yet not as nice. It's extortion, yet it's somehow legal.

We all believe that financial advisors must protect the client's assets, hopes and dreams. FINRA, however, may not be in the business of protecting hopes and dreams. They may have promulgated material that may have promoted a false sense of security. They went so far with 05-50 as to set up a barrier for the entry of safer, more practical products into the portfolios of their advisors, for which they had no oversight. Well, that's my opinion, at least.

They purported to intentionally stifle sales of fixed-indexed annuities (which we are now forced to call them) -- a fixed insurance product. This may have been done for no other reason but to stifle competition and enhance member profits, scaring people into keeping all client assets in market-sensitive investments. If this is true, their constituents could continue business as usual and collect asset fees, regardless of whether or not the consumer makes or loses money. And FINRA could continue to fine its constituents and send out many more Investor Alerts. But let's look at what they may have done; just look at what is left of America's savings.

For example, when a client says, "I want you to protect me and my family by protecting my assets" -- and in this case the advisor only offers financial products where the value can go up and down -- the advisor will prescribe the wrong product, and the client could die, financially. But if a doctor does this sort of thing, he may be guilty of malpractice. If a doctor prescribes the wrong medication, his client could flat-line. Isn't that what happened to client accounts everywhere? They flat-lined, and are worth no more now than they were 10 years ago, and many are worth substantially less.

Would a hospital that was purposely designed to take a relatively healthy person (one who requires monitoring of a particular health risk), and place this person at risk of flat-lining? I am not here condemning the independent advisor, and, most of the time, not the broker/dealer. Perhaps it's the source -- the medical director or the hospital who is putting the organization before the patient. Or perhaps it's FINRA.

We are all doing our part. I have encouraged the insurance industry to adopt a consumer protection model and I am sure others have, as well. Take a look at the consumer protection model below. As straight-forward as it appears, why would this not be a good thing? Perhaps because if it was put before the consumer, it may lead to less money going into the market.

Today's material advocates the use of a "Consumer Protection Model."

"The Educational Disclosure for Consumers, Regarding Investing and Saving for Retirement"
Are you aware of the effects of:
    1. Market risk
    2. Time horizons
    3. Costs, fees, expenses
    4. Simple, compound and triple compound interest
    5. "The practical math associated with investing versus savings"
    6. The effect of taxation on Social Security Benefits
    7. How all of these issues affect retirement income
The proposed Consumer Protection Model has been created by Steven S. Delaney of American Annuity Advocates. It is not a model of any federal or state agency, it has been designed to educate the public, in an effort to help consumers make informed decisions.

Mary Shapiro, CEO of FINRA, warns investors that "tough financial times don't necessarily justify resorting to risky ways to make ends meet." She didn't really say what you just read, did she? Really? Shapiro's organization has perhaps played a significant role in the demise of American savings and is in no small way responsible for America being in such dire straits. What kind of a bedside manner is this? Where is the compassion, the responsibility? People are trying to make ends meet and they're desperate enough that they may have to dip into what little savings they have left. Don't make them feel worse about it -- have some compassion, don't chastise them.

In the quote above, Mary Shapiro illustrated how deep this problem runs, but she just doesn't get it. Her organization is very much party to the problem; the "quasi corruption." The fact that the CEO of FINRA had the nerve to say what she did is pure hypocrisy. Barack Obama's choice leads me to believe that he does not know what he does not know. Fine. Who does? But please, Barack, take some time to reframe the situation, talk to Iowa Insurance Commissioner Susan Voss and Wisconsin Insurance Commissioner Sean Dilwig and enhance your perspective. The insurance industry needs to remain separate, and thus promote healthy competition in the marketplace and preserve jobs and opportunities. The insurance industry gives people options with which they can actually keep their money safe. The securities industry cannot, as is the nature of investing.

The securities industry needs to be dismantled and reconfigured, with new instruction manuals that detail (in full disclosure) what they and their products are all about. Additionally and just as importantly, this industry must delineate that insurance products are different. There are savings products by which you actually can protect your savings, your principal and interest, as well as lock in gains. With fixed-indexed annuities, on the other hand, none of which lie in separate accounts but in the general ledgers of the insurance company; where the insurance company bears the risk, not the insured. The state insurance departments regulate these insurance products and do an excellent job at safeguarding the consumer, as the consumer has not lost a dime with annuities -- and that's the truth.

I hope we are having an impact. FINRA may be guilty of giving directives that caused the American people to lose their life savings. They may have instructed their reps to sell products that favored the securities industry's profits, and they may have discouraged the sale of safer insurance products, primarily annuities, for the same reasons: profit and power.

FINRA ensured that the SEC bestow it with the ultimate name for an SRO: the Financial Industry Regulatory Authority. Wow. Does that sound like the all-knowing and all-powerful Oz, or what? And we all know how that story turns out: ultimately, the Wizard of Oz was just an ordinary man who had been deceiving people all along. We really have to stop paying attention to the man behind the curtain: He just makes stuff up.

FINRA regulates the people in the financial services industry, or at least they are supposed to regulate the industry. The fact that Mary Shapiro is expressing such deep concern over investors (who may attempt to cope with rocky economic conditions by putting their most valuable assets at risk), is absolute hypocrisy -- and painful, in my opinion. Mrs. Shapiro, have you considered that your organization may be both directly and indirectly responsible for the demise of the American retirement; that FINRA is precisely the reason Americans are in this mess?

I have a challenge for FINRA: Are you now willing to include a consumer interest questionnaire as part of the planning process? If you say no, you are implying that you are not willing to change your ways, that is, you wish to remain with the status quo; you want all registered reps to offer the American people only a limited number of products (investment-only products, of course, which are subject to market risk, plus costs, loads, fees and spreads). If the answer is yes, you are now willing to acknowledge responsibility for not having offered or promoted both investment and savings products that actually protect principal, interest and capital.

Furthermore, FINRA, I would like you to acknowledge the absurdity of trying to force insurance agents to obtain a securities license -- these agents want no part of the investment world's speculative nature, the gambling... they don't want to sell securities -- period. They just don't want to be part of that world. You see, they only wish to specialize in insurance products. If all products, investments and savings/insurance products require a securities license (which requires an appointment with a broker/dealer, which, in turn, requires a minimum sales quota in securities sales) and these folks don't sell enough securities because their clients are not gamblers, then they're out of business.

In a recent Forbes article, David Dreman goes out on a limb to name names. In essence, he brings up special interests, the investment community and the question of who will make big money when the government/Hank Paulsen, (with the power to do anything he likes) buys back mortgages at prices that exceed their current liquidation values. Will the special interest groups and investment community (Paulson's cronies) make windfall profits when these mortgages, now insured by the government, are repackaged and re-sold? Of course. And, they will receive a 1 percent fee for selling a mortgage-backed security with no risk, as it is now insured by the federal government. Further, Dremon questions the tippy top of our financial industry himself -- Paulson. Consider that Paulson is likely to allow a handful of firms to execute the mortgage buybacks for this fee of 1 percent, which will total billions of dollars in profits. Will Goldman Sachs -- Paulson's old firm -- be one of the designated firms?

How systemic are our problems, the bias toward the market, the protectionist stance against the insurance industry and our product, the fixed-indexed annuity? If I hear from FINRA, Mary Shapiro or Barak Obama, I will be quick to let all of you know. I hope you all see this as proactive, grassroots, industry-supporting dialogue. We are all in this together, and mine is but one opinion.

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