Broker-dealers and financial advisers are taking action against The Hartford Financial Services Group Inc. in response to a letter the firm sent to their clients that entices them to swap their variable annuities for a replacement — one that advisers say actually strips away generous guarantees.
“We instructed them [The Hartford] to cease and desist,” said Scott Stolz, president of Raymond James Financial Inc.'s insurance group. Mr. Stolz said he spoke with executives at the insurer last week after an adviser notified the broker-dealer about the letter, which was sent to clients Aug. 23 and obtained by
InvestmentNews.
“The [Raymond James] home office wasn't aware of the fact that these mailings went out, and we called [The Hartford] to inquire on what was going on,” Mr. Stolz said.
Executives at Commonwealth Financial Network also contacted representatives at The Hartford last week to express their frustration about the letters, according to Commonwealth's compliance chief, Paul Tolley.
“We told them what we expect from a partner,” said Mr. Tolley. “We told them that we want any future communications about the internal exchange program suppressed with respect to Commonwealth advisers and their clients.”
A similar letter was sent simultaneously to the clients' advisers, along with a list of clients who would be receiving it.
(Click here for more excerpts from the letter sent to advisers.)
The letter has infuriated advisers, who said that, besides the fact that they weren't given any advanced warning, they didn't get a chance to discuss it with their clients.
What is worse, several said, is that the VA exchange is a raw deal for many clients, who would give up some retirement income guaranteed under the old contract.
“Clients don't understand. They get this letter that says this exchange is good, and they want to do it,” said Kevin VanDyke, president of Bloomfield Hills Financial. He has 30 Hartford contracts on his books, and all those clients received the letter.
“If what the advisers say is true, then this is an unfair and deceptive practice: You can't tell people that this is more favorable when, in fact, the client is losing some valuable benefits,” said consumer advocate Birny Birnbaum, executive director of the Center for Economic Justice.
“Basically, companies made promises that were too costly for them to keep,” he said. “So I understand why they've stopped selling variable annuities, or why they would like to see if they could move people out of those products.”
In the letter, The Hartford informed clients of its “Personal Retirement Manager Exchange Program Opportunity,” which would allow them to trade their old contracts for a new variable annuity.
The letter said that the new annuity had “new features” not available at the time clients purchased their earlier contracts. The letter also said the new variable annuity is available only to those who meet “certain eligibility requirements.”
Barbara Roper, director of investor protection at the Consumer Federation of America, raised concerns about the wording of the letter.
“It's not the worst thing I've ever seen, since it does send them to the financial adviser to determine whether the exchange would be a good deal for them,” she said. “But the wording about "new features' being available does imply that this is a better product ... If they know they are sending the letter to customers who are better off under their current contract, that's a pretty questionable practice.”
The Hartford declined to provide the number of letters that had been distributed to clients, but noted that the letters to advisers had been delayed.
“Although we received a relatively small number of complaints from advisers, we recognize the timing of the communication may have created confusion,” David Potter, a spokesman for The Hartford, wrote in an e-mail.
Many advisers contacted for interviews said the letter has forced them to re-evaluate their relationships with The Hartford. They have also been scrambling to notify their broker-dealers of the letters and doing damage control with clients.
“Barring them [The Hartford] being a little more contrite, it will affect our marketing, selling and using Hartford contracts in the future,” said Austin A. Frye, an adviser at Frye Financial Center. “This is a disappointing development.”
Ten clients at Mr. Frye's firm had received the letter, making him and other advisers there “more skeptical” of The Hartford, he said.
That opinion resonated with other advisers.
“I'm going to use more caution with them than I did before,” said Marie Johnson, a branch manager and financial adviser for Raymond James Financial Services Inc. A “handful” of clients have called or faxed her copies of the letter; she said that she notified Raymond James when a client sent along a copy of the letter, close to two weeks ago.
“It really makes me feel bad that [The Hartford] would even suggest it,” Ms. Johnson said.
But advisers' anger at The Hartford goes beyond the fact that the insurer went directly to the clients. Some reps worried that the letter would provide competing brokers an opportunity to get the client's business.
“Many clients have more than one broker, so what if they take the letter and go next door?” asked one adviser who asked not to be identified. That adviser has more than 100 clients with old Hartford annuities, amounting to about $15 million in assets.
“What Hartford is doing is taking that distribution system they paid dearly for and they're throwing it out the door,” said Michael P. Black, an adviser with Michael Phillips Black Wealth Management.
He said that he would notify his broker-dealer, ProEquities Inc., about the letter.
And though some advisers feared that The Hartford had violated privacy rules by directly contacting clients, Amy Lynch, president of FrontLine Compliance, said that it was unlikely.
“The holder of the annuity is considered to be a client of The Hartford, and they have access to the clients' information through the application,” she said. “They're trying to market a new product and they have every right to do that.”
But experts vary on whether the letter runs afoul of securities laws and suitability rules that the Financial Industry Regulatory Authority Inc. imposes on its members.
“It smacks of them making a recommendation for a securities transaction,” said Carrie Wisniewski, president of BD Compliance Associates Inc. “There's no boilerplate in the letter that says that this isn't an offer to sell or exchange securities.”
Ms. Wisniewski said that The Hartford should have sent the letter to the advisers first and given them lead time before contacting clients.
But the fact that the letter tells clients to contact their adviser to determine if they are eligible to participate in the exchange lets The Hartford off the hook for suitability, Ms. Lynch said.
The Hartford, once a top player in the VA arena, was known for offering generous living benefits. But the carrier — and many other insurers — didn't properly hedge those benefits against equity market volatility and interest rate risk, so during and following the 2008 downturn, the company experienced steep losses.
Clients still won, however. Even though their account values plummeted, their living and death benefits were worth far more than the actual variable annuity.
As a result, many advisers want their clients to stay with their old products, some of which provided upwards of 5% in guaranteed withdrawal benefits.
Meanwhile, the new product doesn't have these benefits — nor does it pose the same level of risk to The Hartford — and clients would lose access to their old guarantees if they swapped.
One of Ms. Johnson's clients has a VA account value of $148,000, a death benefit of $215,000 and a living benefit called “Principal First” that had allowed clients to withdraw as much as 7% of their premiums.
She said she asked The Hartford's sales service desk whether these benefits would carry over into the new product. They wouldn't.
“I told my client it wouldn't be in his benefit to move the money. What he has is superior to the new product,” Ms. Johnson said.
“He said, "That's what I have you for,'” she said.
E-mail Darla Mercado at dmercado@investmentnews.com.
