"Undercover" Broker Tests Reveal Dubious Annuity Sales Practices And Overly Conservative Allocations

Friday, January 06, 2012 08:41

Tags: broker-dealers

Consumer Reports staffers recently went undercover to see which national advisory firms gave them the best advice. The results skewed toward unassuming mid-market operations -- and a few of the conclusions were surprising.

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The undercover reporters gave their highest marks to USAA, Scottrade, and Vanguard.


Weighing customer service and the quality of advice, they were less impressed with the wirehouse firms but conceded that their experience there was "fairly" satisfying.


Given Consumer Reports' traditionally mass-market, value-conscious orientation, it's interesting to note that they weren't impressed with the white-glove treatment that Morgan Stanley and Merrill Lynch pride themselves on handing out.


They also seem a bit disappointed that the advisors at these firms did not suggest anything especially innovative or groundbreaking for their dummy "portfolios."


Bank advisors are getting the worst of it here. Consumer Reports wasn't happy that one of its undercover "investors" would have been tossed into a generic portfolio of balanced funds at JPMorgan Chase, or that one of its "pre-retirees" would have gotten an allocation of just 50% to equities.


Since we don't know all the details of the fake scenarios, we can't judge whether the advisors did anything unsuitable. The pre-retiree, for example, reportedly claimed a "generous" pension on top of his $1 million nest egg, so the advisors may have actually been doing the right thing by concentrating on market risk and not inflation risk.


On the other hand, the story of how Citi offered another reporter an annuity on first meeting has got to raise eyebrows with investors and regulators alike.


The problem here, of course, is that the reporters came in forewarned and with third-party advice. Most prospects don't know nearly that much about what to avoid and where the red flags are.


But the complaints about generic portfolios seem a little star-struck. What would they have said if they were offered a core index fund and some bonds?



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