Quotas tied to benefits irk advisers

NEW YORK — Some insurers are taking away their advisers’ group health insurance and other employment benefits if proprietary-product quotas aren’t met, advisers say. The life insurance industry uses quotas — euphemistically called “validating your contract,” said Chris Cooper, president of Chris Cooper & Co. Inc. in Toledo, Ohio, which manages $200 million. “What this means is that you will produce X amount of first-year commissions or you will not have health insurance,” he said. Coverage is dropped not only for the adviser — who is considered a “statutory employee” of the company — but for the adviser’s spouse and children, Mr. Cooper added. “NASD rules ban quotas, as well as steering clients to certain products,” said Jason Doss, a securities attorney with the Atlanta law firm Page Perry LLC. The rules apply to investment products — including variable annuities and variable life insurance — but not to those insurance products that have no investment component, he added. A phone call to NASD seeking comment had not been returned by press time. Some advisers are forced to “do whatever it takes” to meet the quotas — including “improper placements of insurance and annuity contracts,” Mr. Cooper said. “Lincoln Financial Advisors Corp. has a quota of $50,000 gross direct commissions per year on its proprietary products in order [for an adviser] to remain eligible for group health,” said an adviser in California, who asked not to be identified. He manages $40 million in client assets and used to work for the Fort Wayne, Ind.-based firm, a subsidiary of Lincoln National Corp. of Philadelphia. There usually was a Lincoln product that satisfied his clients’ needs, so the adviser seldom considered outside products. But he noted that there was a temptation for newer advisers to favor Lincoln in order to retain their benefits. Lincoln would also not count adviser income from non-proprietary sales when calculating income on which 401(k) matching contributions were based, the adviser added. “Outside-product sales were considered [Internal Revenue Code Section] 1099 [independent-contractor] income, whereas proprietary sales were W-2 [employment income].” All of Lincoln’s distribution models “are committed to an open- architecture platform and offer flexibility in the mix of cash compensation, support services and access to benefits that are designed to be competitive within the industry,” said company spokesman Jeff VanPelt. AXA Financial Inc.’s contract sets a “hurdle” of 40,000 production credits, said a former AXA adviser in Oklahoma, who asked not to be identified. Non-proprietary-product sales garner only about half the credits, the adviser said. If the hurdle isn’t met, “you get kicked off the group insurance and thrown into [Consolidated Omnibus Budget Reconciliation Act] coverage — and you lose your group life and disability,” the adviser said. Also lost are 401(k) matches and the right to contribute to employee savings plans, he said. Although AXA has an “open” platform, the New York company makes sure that outside products don’t compete heavily with its variable annuities, the adviser added. AXA declined to comment. Other advisers have complained. “Only one-half of the outside [mutual] funds compensation is counted towards our contract continuation — a necessity to keeping our benefits,” John Forney, a principal of Forney Financial Solutions LLC in Altoona, Pa., said about an insurance firm for which he once worked. He described the company as “a top 10 insurance company.” The benefits subject to forfeiture included a pension plan, and health, disability and life insurance, Mr. Forney said. “I was at MetLife [Inc.] for a year, and they did not want their people selling outside products,” said Keith Singer, president of Keith Singer Wealth Management in Plantation, Fla., which has $35 million in assets under management. The New York-based company would pay lower commissions, end benefit plan participation and fire people for failing to meet proprietary-product quotas, he added. This year, MetLife was sued in a federal court in Oklahoma for causing financial loss to a client class by coercing advisers to favor proprietary mutual funds and life insurance by providing better compensation and benefits for making such sales (InvestmentNews, Feb. 19). “We don’t comment on our compensation and benefit programs for our financial services representatives,” said MetLife spokeswoman Holly Sheffer. Advisers also mentioned John Hancock Life Insurance Co. in Boston, MassMutual Financial Group in Springfield, Mass., and Prudential Financial Inc. in Newark, N.J., as insurers that use benefits as leverage to encourage proprietary sales. Those insurers didn’t respond to requests for comment. The advisers agree that part of the problem is that many of the insurers historically have used “career agents” and provided them with only one set of products, and can’t easily adjust to an open-architecture system. “For some advisers, health insurance is a bigger incentive than trips to Rio [de Janeiro, Brazil], extra commission income or plaques and trophies,” Mr. Cooper said.