The Glenn Neasham story: A 30,000 foot perspective
By Charles H. Green
Trusted Advisor Associates
The average citizen in the street probably finds it intuitively unjust that someone would sell a high commission annuity to an 83-year-old woman.
On the other hand, most readers of this website probably find the Glenn Neasham case to be a shocking miscarriage of justice, fairness and common sense.
What explains such an enormous variation in the perception of facts that are themselves not in dispute?
I should say up front that I am not an expert in annuities, or even in the insurance industry. I’m also mindful this may be one of ProducersWeb’s more unpopular posts.
On the other hand, I do know something about business models, business relationships, and particularly about trusted business relationships. I would like to suggest a perspective by which all parties can understand each other.
Whom do we trust?
Many factors determine whom society views as trustworthy. Some of them are personal: I want to focus not on those, but only on industry-structure factors. There are five structural issues that affect whether society views a business as trustworthy or suspicious.
1. Relationship versus transaction.
Does business get done as a stand alone transaction, or in the context of a larger relationship? Transactional businesses include buying baseball tickets, a hamburger while on a vacation trip, or 100 shares of stock. Relationship businesses include hairdressers, local restaurants, or management consulting.
Society tends to look more askance at transactional businesses. The reason is easy to see: unscrupulous people can take advantage of others more easily in a hit-and-run, one-off transaction. Relationship businesses tend to stay around, and therefore succeed or fail on their ability to prove dependable over time.
2. High ticket items vs. low ticket items.
The more money at stake, the more society will look over the salesman's shoulder to make sure things are being done right. The sale of automobiles gets more scrutiny than the sale of toy cars. There is simply more at stake in high-ticket items for the customer.
3. The timing of value transfer.
In some businesses, value is transferred instantly and completely from the seller to the customer — for example, buying a car.
In other businesses, the transfer of value is gradual and over time. Consulting assignments, construction contracts, and venture capital financing are all businesses where value is transferred gradually. At any point in time, either party can call a halt, and each is liable not for the full amount contracted, but just for what has been accrued.
The faster and more completely value is transferred, the more society has an interest in making sure the power of the seller isn’t used to abuse. The executive search industry has a policy of offering x-month guarantees; the auto industry didn’t have such a policy, which helps explain why lemon laws got passed. 4. Secondary market.
Sometimes it’s easy and cheap to re-sell what you bought; stocks are a great example. There’s also eBay and second-hand stores, Where there is no secondary market, the buyer has a much greater risk; there’s a reason hedge fund positions aren’t open to everyone. Society is more concerned about cases where there is no easily available market recourse to buyers.
Insurance is a complex product for most consumers. Annuities, much less variable annuities, are even more so. Society tends to be more concerned with potential abuse with complex products, because of the greater possibilities for abuse by sellers.
What about annuities?
An indexed annuity like the Allianz MasterDex 10 has the following characteristics:
1. It is typically bought as a transaction — not frequently and in a relationship
2. It is a high-ticket item; $175,000 in the Neasham case
3. The value transfer, as I understand it, is almost entirely immediate. Neasham’s $14,000 commission doesn’t have to wait until contract completion (unlike some businesses, e.g., consulting, where commissions accrue as value is paid for). I don’t know for a fact, but I’d be surprised if Allianz has to wait years to recover value. In such cases, just like a vehicle purchase, the car depreciates when you drive it off the lot, and the loss is fully paid for by the customer.
4. There is some secondary market for some annuities. Depending on how illiquid that market is, and how much of a discount the buyer would have to take, society will be comfortable with market forces — or not.
5. It is about as complex a retail financial product as one can buy.
In short, this is exactly the kind of product that a seller should expect to be zealously watched over, frequently criticized, and regulated at the drop of a hat. It should come as no surprise that, outside the insurance industry, such a sale is viewed with great suspicion.
Even in the financial community, we hear quotes like this from Motley Fool’s Matt Koppenheffer, a former investment banker and private equity associate:
"When we look at the case of Glenn Neasham, the question shouldn't just be whether Allianz's MasterDex 10 was appropriate for Fran Schuber — obviously it wasn't — but rather, whether these types of financial products are appropriate at all for the mass market that they're aimed at."
The point I’m trying to raise is not whether Motley Fool is right or not – it’s that Koppenheffer’s perspective is both predictable and mainstream. Society watches out for people in positions of potential abuse. What can be done?
Let’s all agree there is a place for products like this. What can a responsible agent do to reduce risk for all concerned? Here are a few ideas:
1. Don’t build a business on it. Making a product like this the mainstay of your business is inviting suspicion; it’s like reporting $10,000 in income from tips alone, living in a mansion and sending copies of it all to the IRS. Let your business reflect the broader needs of your clientele.
2. Always start with the customer. Does your customer pay your commission and guarantee the seller’s profit right up front? Does your client know that? As in plain English, “know?” Can they articulate for themselves why it’s worth the risk to them? Are they aware of the payback time?
3. The ultimate grandmother test: Would you let another agent sell this product to your grandmother and tell her you were completely in favor of it? What if you were the heir? Is everyone involved OK with this sale?
4. Don’t spend too much energy complaining about laws. Saying “but it’s not illegal” is the first refuge of the unethical. An industry operating in this corner of the market had better figure out how to be very ethical, or society will quickly make it become very legal. Trying to prevent such laws being passed makes you look even worse.
5. Don’t rely on tick-box compliance. Many of the complaints raised by Neasham’s fans are that he followed the rules, and therefore shouldn’t be held accountable. Unfortunately, life in a complex society cannot be fully proscribed by procedures. The fact that social outrage is predictable should suggest that indignation is misplaced — regulators can’t repeal human nature, nor should you expect them to protect you against it.
Maybe one way to sum it up is to suggest that agents borrow a page from another model: the concept of a trusted advisor. A trusted advisor always has the client’s best interests at heart. I am not sure I’ve heard any of Neasham’s defenders use that argument in his favor.