ELITE ADVISOR BEST PRACTICES
The Bizarre Case of The People of the State of California v. Glenn Neasham - Part Two
Second in a series about cognitive impairment in older clients
By Richard M. Weber
- The imposition of new suitability rules for annuity sales, the existence of financial elder abuse statutes in some states and the threat of a jail sentence for a misstep, may well keep advisors from working with clients over the age of 65.
- Few, if any, advisors can reasonably be expected to determine a client’s mental competence.
- Consumers will also suffer if the Neasham case is upheld.
As we discussed in the previous installment of this series about financial elder abuse, no legal case against an insurance agent (Glenn Neasham) has evoked so many concerns about standards of care, ethical selling/advising and an advisor’s responsibility to determine a client’s mental competence or face criminal prosecution.
The Neasham case involved the recommendation that the local prosecuting district attorney should file criminal charges in an almost unprecedented action by CA DOI, and this was pursued without a customer complaint. Further, shortly after the verdict was entered against Neasham, CA DOI compelled revocation of the agent’s insurance license.
Also it is important to appreciate that the case against Neasham wasn’t really about whether or not Ms. Schuber was ultimately a victim of financial elder abuse. The question—never addressed or satisfactorily answered by the prosecution—is “Was she competent at the time she purchased the annuity, and should Neasham—with no training or ability to appreciate the subtle symptoms—have nonetheless been able to detect that she was not competent (and therefore not sold the annuity in the first place)?”
The jury concurred with the allegation of financial elder abuse to find Neasham guilty on one count of felony theft—the theft being the inability to immediately have access to all of the investment she made in the annuity. If the decision is not ultimately reversed by the appellate court, this might inspire those of us who are over age 65 to consider after-sale claims for restitution on the claim that we were taken advantage of in a moment of confusion and befuddlement when buying such items as a car, a cellphone or even an all-expenses-paid trip around the world.
Go Directly to Jail; Do Not Pass Go; Do Not Collect $200
Setting aside any judgments that some commentators have made regarding the agent and his alleged marketing practices (which in any case were not introduced as evidence in the trial—nor relevant since Ms. Schuber was referred to Neasham by an existing client), this case presents some enormously negative implications for insurance agents, registered representatives, financial planners—and indeed any professional who does business with or who provides advice to individuals age 65 or over. The three core issues here are:
1. SUITABILITY. While there were no CA DOI suitability regulations at the time of the annuity purchase described herein, California and approximately 20 other states have since adopted rules attempting to define an agent’s duties to “… consider in annuity product recommendations” the client’s:
- Annual income
- Financial situation and needs, including the financial resources used for the funding of the annuity
- Financial experience
- Financial objectives
- Intended use of the annuity
- Financial time horizon
- Existing assets, including investment and life insurance holdings
- Liquidity needs
- Liquid net worth
- Risk tolerance
- Tax status
OK—that’s good! But this is a list of 12 issues that we should take into account when recommending an annuity product—and by extension when rendering fee-based advice including legal and accounting advice by individuals so licensed. What we’re left wondering is: So what is a suitable product as a result of assessing these issues?
And if I am to be held to a standard higher than suitability (suitability is the current standard for registered representatives not otherwise considered to be fiduciaries because of their professional designations, professional affiliations or statute), what would be the difference between a product recommendation I would make as suitable and one that I would make if held to a “client’s interest above my own” (otherwise called fiduciary) standard?
2. COGNITIVE ABILITY. Let’s face it, we start to decline physically by our early 20s, and virtually everyone over the age of 55 has been confronted by an “it’s on the tip of my tongue” inability to recall names and words, not to mention the infamously misplaced car keys. (A doctor acquaintance of mine recently suggested that losing the car keys is not indicative of cognitive impairment. But once the keys are found, the inability to remember what the keys are for suggests more than just “he’s getting older!”)
Neurologists have the trained ability to infer early-onset dementia, Alzheimer’s and other mental impairments. And they still don’t get it right 100 percent of the time. Further, early cognitive impairment can be tricky—apparent to the untrained eye under certain circumstances but just as possibly not apparent in a given moment, hour, or day or in a session with a financial advisor.
Currently there are no statutory requirements for an insurance agent or financial advisor to “test” a client or prospect, nor would it in most cases be appropriate to attempt to do so. And because it hasn’t been considered in regulation or statute, there are no “safe harbors” that would set a minimum standard for an advisor for which there would not be a retrospective determination that the advisor should be pursued for criminal negligence or theft.
3. SURRENDER CHARGES AND FELONY THEFT. At least in California, failure to discern cognitive impairment can lead to criminal prosecution and time in jail if there is more than $950 at issue in the financial elder abuse allegation. Surrender charges are an almost ubiquitous feature of deferred annuities and flexible premium life insurance. Charges typically pro-ratably diminish over a specified period of years and protect the insurance company from loss, especially because commissions, expenses, premium taxes, DAC taxes and other expenses are most significant in the year in which the policy is issued. Having a diminishing schedule of surrender charges also allows the insurance company to invest “long” for higher potential portfolio income—which in turn allows the insurance company to offer bonus interest features (as existed in the subject annuity of this case) and optimize the crediting features of the annuity of life policy.
To place an agent or advisor at risk with respect to working with clients age 65 or older without appropriate safe harbors and other protection for consumer and agent alike may lead to agents and advisors not pursuing this client demographic—to the disadvantage of those very consumers who could benefit the most from protection and the guaranteed provisions of life insurance and annuity products.