Wayne Christian figured the registered representatives of Center, a small town in eastern Texas, could use a business boost. He also thought its pension funds and endowments, which fund scholarships, needed some new investment options.
Wayne Christian figured the registered representatives of Center, a small town in eastern Texas, could use a business boost. He also thought its pension funds and endowments, which fund scholarships, needed some new investment options.
So Mr. Christian, a member of the Texas House of Representatives, decided to kill two birds with one stone. He proposed a bill that would allow public funds to purchase annuities.
"There are professionals licensed and certified by the state, and they should be available to be part of the local consideration for investment," Mr. Christian said when he proposed the draft bill at an Aug. 18 meeting of the Committee on State Affairs.
There was just one problem. Mr. Christian is the owner of Wayne Christian Financial Services, located in Center and part of Woodbury (Minn.) Financial Services Inc., a broker-dealer subsidiary of The Hartford (Conn.) Financial Services Inc.
CONFLICT OF INTEREST?
"The first thing here is the obvious conflict of interest," said G.M. Livingston III, an adviser with Livingston Financial Planning Inc. in Santa Rosa Beach, Fla. The firm doesn't manage assets but does planning on an hourly basis. "If Colonel Sanders is proposing something, then the chickens need to be worried."
That concern was also echoed by Kenneth Price, a financial planner with Austin (Texas) Asset Management, which manages $380 million.
"There could be a conflict of interest here," he said. "Obviously, there could be the intent of creating a market for services."
Mr. Price, also president of the Austin chapter of the Financial Planning Association, said he had not heard of the bill until asked about it by a reporter.
Mr. Christian said that he was aware of the appearance of the conflict of interest, and that even though he wrote the initial bill, he might not write its next iteration, and that he won't vote on it if he's not permitted to do so.
If the bill became law, representatives who are insurance- and securities-licensed would benefit, though he wouldn't, Mr. Christian said.
"I wouldn't benefit because that's not my business; my market is individual clients, and I've never had a government contract in my life," he said.
Plus, he argued, it makes sense that people who draft legislation for a particular sector be involved in that sector.
For example, "you couldn't have someone on the banking committee who isn't a banker." he said. "That would be irrational."
Regardless, state regulations may limit Mr. Christian's involvement with the bill because, theoretically, his firm could sell the annuities. As a result, he might not be able to author the bill when it returns for further consideration, even though he was the chairman of an interim study on the proposal.
Mr. Christian first got the idea, he said, because he was concerned that pension funds were stuck in local banks, making only certificate-of-deposit rates of return.
Among some of the large state funds that he referred to in the proposal was the Teacher Retirement System of Texas, a $107.5 billion fund that is invested in a mix of equities, stable value assets and real estate, and the Texas Municipal Retirement System, a $13.8 billion fund that is almost entirely invested in fixed-income instruments and intends to raise its participation in equities by the end of the year.
Others, including M. Ray Perryman, founder and president of The Perryman Group, a Waco, Texas, economic research firm, supported the argument that the public funds had better earning potential.
"We have a lot of funds that invest in low-risk items for very long periods of time, and when you do that, you're sacrificing return," he said.
However, given a wider scope of investment options, including venture capital and annuities, public funds would have a better chance at growing.
"The bill proposed that we limit this to long-term dollars — five year deposits and up — and that they be invested according to prudent investment standards," Mr. Christian said. Aside from cash and mutual funds, insurance products would also be a choice for those who manage the public funds.
Mr. Christian also said the proposal would encourage local business, as well as create opportunities in Austin, where the proposed legislation has received "virtually no cooperation" from the financial services industry.
Both the Austin and Dallas-Forth Worth chapters of the Denver-based FPA have said that they are unfamiliar with the proposal, but some questioned what fiduciary duty registered reps and insurance agents would owe to the public funds and their contributors — the taxpayers.
"Registered reps need only to look at suitability, and I don't believe that someone who sells insurance even has to consider suitability when they sell a product to a client," said Holly H. Moore, an adviser at South Texas Money Management Ltd. in Austin. The firm manages $1.6 billion.
From a planning perspective, the bill made little sense, Mr. Livingston said. Tax-deferred growth within an annuity may be a plus for an individual buying the product, but there's already tax deferral within a retirement fund.
Additionally, any promise of higher return would require higher levels of risk — and more money.
"You get into a situation where people need to understand that the annuities are expensive products and that the fees aren't transparent," Mr. Livingston said.
POTENTIAL RETURNS
However, the option of having an annuity should be one that is left open, particularly if liquidity isn't an issue, as the annuity may provide a higher guaranteed return than a CD or money market fund, said Eric Sawyer, director of financial planning at ConfidentVision in Dallas, which manages $50 million.
"Certainly having a death benefit or a tax deferral isn't something that any government entity would need to have or need to pay for," he said. "If there's no legitimate purpose, which would be transparent in most places, it's a horrible decision to make."
It would be obvious if a government authority decided to buy an annuity that is bringing in the same rate of return as a certificate of deposit, and that would raise a red flag, he said.
However, it is better to have the choice of investing in an annuity than to have a blanket restriction on the vehicle. "I prefer my government has all prudent options available to potentially increase returns on the money it has, without risk of loss, rather than increase our taxes," Mr. Sawyer said.
In the meantime, Mr. Christian's committee will file a report to the speaker of the Texas House, Tom Craddick, on whether further changes need to be made to the proposed bill — and whether he will write it.
That is expected before January. Despite the lack of involvement the proposal has received from local planning associations, Mr. Christian has only positive expectations for the outcome.
"Most of the testimony [at the last committee meeting] was positive," he said. "If nothing else, it's good for us to have a review and make sure that we are meeting the prudent investment standards."
E-mail Darla Mercado at dmercado@investmentnews.com.
