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Most agents are professional, honest people. But watch out for those who will sell you coverage you wouldn't wish on anyone.
By Liz Pulliam Weston
Many years of covering the insurance industry have convinced me of two things:
A smart, conscientious insurance agent can be a valuable addition to many people's financial team of advisers. And a bad agent can deplete your wealth quicker than the most efficient cat burglar.
Unfortunately, it's the bad agents who have been in the news a lot in the past few years. Among the misdeeds:
- Promissory-note scams. Hundreds of agents were caught up in enforcement actions by 28 states, the Securities and Exchange Commission and the North American Securities Administrators Association for selling so-called promissory notes to investors. Typically touted as low-risk and conservative, the investments were actually high risk and often fraudulent. Regulators estimate that investors lost hundreds of millions of dollars.
- Illegal investment sales. Arizona regulators accused nine insurance agents of selling unregistered securities, including promissory notes, viatical settlement policies and interests in ATM machines. Investor losses were estimated at more than $12 million. The Arizona Corporation Commission's Securities Division said the sweep was prompted by "growing concerns about cross-over abuses in the insurance and securities industries." In another action, Florida regulators levied similar charges against eight insurance agents who sold "certificates of grantor" contracts issued by a company that promised returns of 9.25% to 15% for one- to 10-year investments. A related SEC filing charged that money from new investors was used to pay bogus returns to earlier investors in a classic Ponzi scheme. Investors lost an estimated $17 million.
- Affinity fraud. In Kansas, an insurance agent pleaded guilty to fraud charges after persuading at least 10 investors, including members of his church, to invest nearly $200,000 with him. The agent used the money to pay personal expenses, including payments in a bankruptcy plan. Targeting members of one's own religion or ethnic group is known as affinity fraud.
These examples don't include more routine insurance frauds, such as selling phony policies or pocketing policyholders' premiums. And they don't even touch on sales of legal but unsuitable investments -- such as saddling elderly investors with high-risk, high-cost annuities. (See "Beware of the annuity salesman's scare tactics" for more.)
But these cases do point up why it's smart to be careful when an investment-touting insurance agent heads your way. Even if you're not susceptible, you might want to keep an eye on the people in your life who are, such as elderly relatives who have close, personal relationships with their agents.
Why the focus on insurance agents?
- Agents have a built-in customer base. Scam artists have figured out, regulators say, that many agents have large, loyal customer bases -- and that these agents can be lured to tap these customers when the commissions being offered are high enough. Insurance agents typically know details about their customers' financial lives that allow them to tailor their sales pitches, and they may have built up trust and rapport with these clients over many years.
- Many investors are looking for yield and safety. At the same time, the incomes and wealth of the most vulnerable people -- senior citizens -- have climbed in recent years. Because of the huge drop in interest rates since 2000, lower yields on legitimate investments have left many seniors vulnerable to pitches for "safe, high-return" alternatives, said fraud expert Marty Nevrla. "There's an increasing senior-citizen base who has the cash," said Nevrla, director of insurance fraud for the Arkansas Insurance Department and a member of the anti-fraud task force run by the National Association of Insurance Commissioners. "The promoters . . . know the money is out there even more than it ever has been in the past."
- Many agents lack financial sophistication. The promoters typically tout their schemes, including high commission rates, to agents who then push the "investments" on their clients. Unfortunately, the vast majority of insurance agents lack training in evaluating investments. That is apparently why so many couldn't figure out that "safe" and "high return" are mutually exclusive.
Regulators and insurance insiders say such a lack of financial sophistication means the agent is sometimes a victim along with the client. Many of the agents involved in the promissory-notes scams, regulators say, thought the investments were legitimate and lost their own money as well as that of their customers.
"If you don't know what you're doing, it's easy to get taken in," said Dave Evans, a certified financial planner and vice president of retirement for the Independent Insurance Agents & Brokers of America, a trade group that represents 300,000 property and casualty agents and their employees.
Add to that the fact that more than half of the nation's 3.2 million agents are independent, Nevrla said. That means they are not regularly audited or reviewed by the companies whose products they sell. And state regulators don't have the resources to chase after any more than the most outrageous agents.
"They're floating around out there basically unsupervised," Nevrla said.
So how can you avoid getting scammed? The easiest course is not to buy investments from an insurance agent, but that may be tarnishing the whole for the actions of a few.
If approached about an investment, keep these things in mind:
- Don't buy investments from someone who isn't licensed to sell them. Fraudsters often claim their investments aren't really securities. That's baloney. At the very least, your agent should have securities licenses if he or she is selling anything but insurance, Nevrla said, and the investment itself should be registered with the SEC or your state's securities regulator.
- Call your state insurance and securities regulators. Describe the investment to them and ask if they've heard of it, says Gary Sanders, associate general counsel for the National Association of Insurance and Financial Advisors, a trade group that represents 70,000 agents and planners. Regulators won't have heard of every new scam, of course, but you might avoid getting bitten by one that's been around awhile.
- Ask what the agent will get paid, and how that compensation compares to the other products she sells. A reputable agent will talk to you about her commissions, Sanders says, and give you some idea of how much she'll earn on a sale. Evasiveness on this issue should be a warning sign.
- Make sure your agent has some credentials. If your agent is offering financial-planning advice, and you're not getting a second opinion from an independent adviser, then make sure your agent has some designations to show he's done more than study a sales brochure. A ChFC (chartered financial consultant) is good, and so is a CFP (certified financial planner) designation. Both require extensive study and rigorous testing in all facets of financial planning, not just insurance.
- Gray hair is good. Avoid anyone who hasn't been in the business at least two years, Evans said. I like to deal with agents who have been around 10 years or more. Building up a good reputation in a community takes time, and an established agent usually thinks twice before risking her good name. This doesn't guarantee integrity -- most of the agents in the Arizona sweep were in their 50s and 60s, for example -- but your chances of harm are usually greater with an upstart who has little to lose.
- Demand to know the downside. There's an old tune that advises listeners to "Ac-cent-uate the positive, e-lim-inate the negative." That's basically the insurance agent's siren song. Agents know that dwelling on an investment's drawbacks can kill a sale, so they might not even bring up negatives -- even when they're supposed to. So you have to ask, and keep asking until you get answers that make sense. Every investment has its risks and its drawbacks. Know those specifics before you invest.
- Look for the deep-pocketed third party. Any investment your agent is pitching should be backed by a big-name third party, such as a well-known bank, brokerage or insurance company, Evans advises. Again, this won't eliminate all possibility of fraud -- well-known banks and brokerages can be scammed, too. But at least you'll have somebody with deep pockets to sue.
By the way, don't just take the word of the agent or promoter that a big name is involved. Call up the institution independently and ask.
The last word
Finally, and most importantly: Give the investment the sniff test. A high commission might interfere with your agent's nasal functions, but it shouldn't affect yours.
"If it looks better than anything you can get anywhere else, and it's being touted as safe, the red flags should go up," Sanders said. "The rules of the market are like the rules of physics. They don't change."
In other words, if it sounds too good to be true . . . well, you know the rest. Or, at least, you should.
Columns by Liz Pulliam Weston, the Web's most-read personal finance writer, appear every Monday and Thursday, exclusively on MSN Money.
