On Tuesday, Sen. Elizabeth Warren (D-Mass.) did what she does best – cut through GOP financial bulls*#t like a hot knife through butter. This time the volunteer sacrificial lamb was Primerica President Peter Schneider, who was invited by Senate Republicans to testify against a new regulation that would protect people on the verge of retirement from bad investment advice from financial managers.
In Warren’s words, it is currently perfectly legal for “financial advisors to boost their own incomes by selling lousy products to their clients. According to the best available data, data not paid for by the industry, this bad advice costs Americans about 17 billion dollars a year.” If the Obama administration and Elizabeth Warren have their way, that kind of sketchy advice will soon be illegal.
The current financial retirement crisis in a nutshell
Often depending on the financial situation of the person in question, retirement can be anything from a wonderful time of things such as pursuing passions and perhaps spending time with family, to a time of extreme stress and hardship, or anywhere in between. Years ago, working hard for a good company included benefits that somewhat assured able-bodied individuals with a good work ethic, and access to basic opportunities, could retire in a reasonable amount of comfort. No, everything wasn’t perfect, but the average American didn’t have to become a financial wizard to properly plan for their later years. However, as the Harvard Business Review describes, there was a shift after the 2000’s dot-com crash that took liability away from businesses, and put it into the hand of the individuals.
The result was an acceleration of America’s shift away from defined-benefit (DB) pensions toward defined-contribution (DC) retirement plans, which transfer the investment risk from the company to the employee. Once an add-on to traditional retirement planning, DC plans—epitomized by the ubiquitous 401(k)—have now become the main vehicles for private retirement saving.
But although the move to defined-contribution plans arguably reduces the liabilities of business, it has, if anything, increased the likelihood of a major crisis down the line as the baby boomers retire. To begin with, putting relatively complex investment decisions in the hands of individuals with little or no financial expertise is problematic.
Enter the current situation. Millions of Americans are losing billions of dollars to unethical and hopefully soon to be illegal, business practices taking advantage of people’s lack of financial expertise.
The GOP selects Primerica, the epitome of the problem, as their spokesperson.
What kind of shady practices by what kind of companies?
No need to look further than Primerica, the very company whose executive the GOP called on as their witness. Primera is basically set up like a pyramid scheme: accepting anyone who is willing to pay a fee (unlike other financial companies who hire a small, select group of experienced consultants), highly encouraging recruitment of friends and family through recruitment videos and seminars, making money off those recruits, and only the people at the top making any real money.
As stated by the Huffington Post:
Instead of pitching health supplements or beauty creams, Primerica’s 98,000-strong sales team hawks insurance, annuities and mutual funds. These “entrepreneurs” earn an average of $6,030 a year for their work. But the vast majority of Primerica representatives pay the company a sign-up fee and never make the team. More than 190,000 people signed up in 2014, slightly more than in the previous year.
Really? This is the kind of company the GOP puts up on a pedestal? I know financial advisors who take pride in all the people they have helped responsibly plan for retirement. The kind of people who wouldn’t advise clients in any move they wouldn’t make themselves, and have the financial knowledge and experience to make that mean something. Primerica doesn’t attract or hire those kinds of people.
How did they not see what came next?
The company’s questionable set-up is not the worst part though. Evidently, Primerica was involved in a scandal of the very kind that this regulation addresses. In Sen. Warren’s questioning of Primerica President Schneider, she references another Huffington Post article that details the 2012 allegations of 238 Florida firefighters, teachers and other public workers:
Even though the workers were near retirement, Primerica representatives encouraged them to ditch their government pension plans for much riskier government 401k accounts, which do not guarantee a minimum monthly payout in retirement. Dumping a pension plan for a 401k on the verge of retirement is frowned upon in the investment advice world. It needlessly jeopardizes retirement security, while offering little potential benefit.
When Warren brings this up, Schneider’s defense is that they weren’t actually clients. Of course, she won’t let this stand:
My question wasn’t how were you paid.” Warren insists, “My question is whether you think it is sound investment advice for public employees to move money out of their pensions and into riskier assets, with no guarantees, just before they retire.
Schneider continues to flounder, asserting it wasn’t found to be illegal. This causes Warren to point out that the whole point of the hearing is to decide if this kind of behavior should be illegal, and restate the original question. Schneider, continuing to grasp at ever-shortening straws, alleging that depending on the situation, such as the person being close to death, it could be sound advice.
I’m sorry.” interjects Warren, “Are you suggesting that these 238 people were weeks away from dying, and that’s why they all got this advice?
Still unable to answer the question, Schneider goes back to the “it wasn’t illegal” defense.
The reason for this run-around is no halfway competent financial manager could honestly say this wasn’t bad advice in almost any situation, and they all know it. Sen. Warren continues to prove her point that the assertion that “it is too expensive to provide people with sound financial advice is ridiculous.”
Featured Image: Screenshot via YouTube