The Need for a Consumer Financial Protection Agency

Lately I received some comments on two related old posts: $10,000 Lesson On Variable Universal Life (VUL) and What Is WFG and What Does It Do? I’m pretty sure most of you don’t monitor the comments on old posts like I do. I’m using these to lead a discussion on the need for a consumer financial protection agency.

From Jaymz on Variable Universal Life insurance (VUL):

"Oh yeah and idiots that think "no load funds" are the way to go, think about it real hard. The company charging the least amonut [sic] to manage your money is the best right. hahahahaha. If you were good at doing something would you charge the cheapest price? Hell no. Simply put the better portfolio managers are going to charge more, BECAUSE THEY GET HIGHER RETURNS, SO THE FEE IS WORTH IT BECAUSE YOUR NET GAIN IS HIGHER. No load funds typically track what the major indices do so they are easy to manage hence cheap. You get what you pay for."

From Lazyboy on World Financial Group (WFG), a company that sells VUL through a multi-level marketing program:

"You konw guys out there i’m a lazy boy as my name but i make around 100k a year can you do that? by just open your month and talk so you do ,cause you guy can do alot of reseach of a company why don’t you reseaching yourself to see you can find out thing you really are.
But anyway i know you can not do it because you guy are american not america
let me remind you guy what Obama said last year , what he did last year and what he promis last year now more than a year ready he still to trying to looking anther ex. to said why he can not done it .
Let me tell why, because me same as AMERICA PRESIDENT OF UNITED STATE only konw how to talk but DONT KNOW HOW TO WORK are you agree!"

I’m not making these up. They came from salespeople pushing VUL and from salespeople recruiting downlines for pushing VUL. There are several more like these in the WFG post.

I don’t know if I should laugh or cry. Obviously shenanigans like this are happening every day. People are sold a bill of goods because they don’t know better and because the salespeople are skillful. Now, should we protect people from such mishaps? If yes, how?

I touched upon this subject a little bit in a previous post Read the Contract and Protect the Consumer. I said there should be an independent body that puts a score on service contracts and that companies should be required to display such scores. I’ve seen letter grades in big bold letters in restaurant windows. Obviously it can be done.

There was a proposal in congress to create a consumer financial protection agency. I have not followed the politics closely but last I heard it was either dying or being watered down. Even at its full scale, I think the proposed agency only puts out more required disclosures and maybe enforces a minimal standard.

I don’t think disclosure-based consumer protection is working, as evidenced by the sales of inappropriate products to consumers who can’t tell a good product from a bad one. Your thoughts?

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Comments

  1. says

    The repeal of the Glass Stegall Act was a terrible mistake. There are too many uninformed and misinformed buyers and sellers. The bulk of the population can not be trusted to govern themselves. I know about the invisible hand and everything but it’s not currently working.

  2. Ace says

    You’re right that far too many idiots get conned into losing money and making their advisor rich. But I just don’t think government can efficiently protect people from themselves in this instance. Take for example the brilliant legislation from about ten years ago meant to ensure that companies don’t sell our private information to the highest bidder. Now, we all get yearly mailings from our bank, credit card, etc., telling us in about 20 pages of fine print legaleese that they promise not to sell our info (unless they really want to). Do you read your annual privacy policy disclosure statement? Do you think most Americans do? Do you think they’d understand it if they did?

    I’m in favor of legislating a requirement that all companies offer at least a few inexpensive mutual fund options to their 401k participants. Beyond that, I’m afraid that we have to live with the fact that people have been buying snake oil for centuries, and will certainly continue to do so. Hopefully a few will tune it to intelligent and honest financial gurus like yourself and avoid some of the more damaging traps.

  3. Edwin says

    I don’t think those restaurant grades work very well, check out these sneaky bastards:

    http://failblog.org/2008/10/20/sneaky-restaurant-fail/

    Well back to the real subject, yes the current system can protect consumers it just requires a few things: 1) consumer must be knowledgeable 2) consumer must understand basic finance and 3) consumer must be able to actively identify scams.

    Unfortunately, I find that all three of those tend to be false. It’s argued that people have all the tools necessary to protect themselves. But if they never bother using them, should we punish them by allowing them to be victimized? It’s not a matter of their choice and desire to participate in these things, its a matter of them being tricked by clever marketing and sales tactics because they don’t know better (and why should they?).

    I agree there should be a consumer financial protection agency. But the folks who screw people over and thus have money, use that money to convince lawmakers that a consumer financial protection agency is a bad thing. It’s too bad regular consumers don’t have that type of money to throw around and get things passed in their favor.

  4. JimC says

    The more I read about the salespeople working in the financial industry the more I am reminded of an old joke from the Information Technology industry where I used to work:

    Q: What is the difference between a used car salesperson and a computer salesperson?

    A: The used car salesperson KNOWS he/she is lying to you.

  5. Zak says

    Hi TFB,

    Listen I’m with you on the fact that there is a lot of swindling and shenanigans that goes on in this industry and that it would be great if we could find a way to put measures in place (not sure how, but if it was possible) to simply stop the lying to investors by shady insurance salespeople.

    That being said, I am a little disappointed how on the VUL forum we haven’t seen much of a response from you to some of the valid points that have been raised. You say in your WFG article:

    “The insurance agents all argue that VUL policies are good for some people. I’m sure. Those some people are like needles in a haystack, when the entire haystack is sold VUL policies.”

    I’d like to hear some feedback on why you think these fits are so rare. There are plenty of 30 to 45 year olds out there who are maxing out their 401(k)’s. More than enough for advisors to be helping. And yes, there are many alternatives available for specialized tax treatment: UIT’s, tax-sensitive separate accounts, drilling partnerships, you name it. But the fact remains that life insurance (not just VUL’s) can be a very good vehicle for those people.

    I’ve analyzed these things mathematically to death using a number of different assumptions about long/short cap gains rates, average portfolio turnover, future tax fluctuations as alternatives for a taxable side account. With the right set of assumptions (i.e. someone in the 33 or 35% tax brackets maxing out their 401k), they can be a really great piece of the pie!

    You said in your VUL post:

    “All in all, VUL work extremely well for certain people.” I can’t disagree with that. That number of certain people pales in comparison to the number of people who are sold VUL though.

    That seems like one of the most reasonable comments you made. It doesn’t just come off as wildly jaded against insurance agents. Anyways, I kind of lost my train of thought there. My point is that rather than just responding with a list of “fees and high charges and surrender traps and black holes” it would be nice to see some more balance in the original articles that you write. You can still make statements about your dislike for people in the industry as well as the fact that you think this vehicle is highly misused, while still presenting a fair counter-argument as to when it might make sense. The argument that life insurance as an investment has survived on sales tactics alone is B.S. There has to be some inherent value or it would not be used anymore. Insurance agents aren’t that smart.

    On an unrelated note, you might enjoy this article: http://www.fa-mag.com/component/content/article/7-news/5272.html?Itemid=44

  6. says

    Zak – Thank you for your detailed comments. I think we agree that the number of people who are a good fit for VUL is a small percentage of the number of people who are sold VUL. While you are looking at people who are a good fit, I’m looking at the bigger population.

    According to a study I read, only 10% of the population max out their 401k and similar plans. Of that 10%, you also have to need permanent insurance (for estate tax or leaving money to heirs for example). That cuts down the 10% further. It can still be a large absolute number, but it’s small relative to the general population.

    WFG targets “middle-income individuals and families who are typically overlooked by the financial industry.” That’s not the profile you are talking about. It’s as bad a match as it can get.

  7. Jacques Boutet says

    It goes without saying that getting flamed is an occupational hazard in the blogosphere. I would not be offended to learn that you monitored and screened-out such rants. It is certainly your hard-earned prerogative!

    That said, these two posts remind me that, for most of us, management of our “vast fortunes” (to riff on Andrew Tobias) is a relationship business. There is simply not enough time and too much information “out there” for most of us thoroughly and rationally manage our portfolios. I don’t recall the site that had/has a column titled “betting on the jockey” that analyzed mutual fund managers along with their funds, but the concept resonates with me. At the end of the day, most of our choices are effectively votes in a representative democracy that (ostensibly) rules the financial marketplace (ha!).

    Despite my own penchant for chasing performance, I urge all investing newbies to build up “gigantic” positions in a total stock market index fund (retirement and nonretirement accounts) and total bond market index fund (retirement accounts only). Then, and only then, start chasing performance, juicy dividends, hot sectors, exotic products, and all that Vegas-type stuff to which we are inexorably (and humanly) attracted. Great advice to ignore. I more or less did.

    What I have enjoyed (and suffered) over the years are the relationships I’ve encountered in the business. From the consistent charm of the service rep at the Schwab branch office in my town to e-mailing with Bob Sullivan when he was just getting SATMX going.

    I won’t dwell on the all that I’ve learned (and tried to forget) during the past two market crashes. Suffice it say that most of us are better at sensing honesty, integrity and transparency in our relationships, rather than trying to read the ever-ethereal, ambiguous and maddening messages that market is sending us. It’s hard to imagine that the desperate and venal attitudes displayed by these two posters would not become obvious, even in a long-distance digital “relationship”.

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