— That night, like most nights, Phillip J. Cannella
III warned that the financial world was at the brink of
a massive meltdown, one that would wipe out savings and
about to enter a horrible period, crash followed by
recovery, followed by inflation," the insurance
agent said last fall, pacing excitedly in front of
nearly 100 retirees and middle-aged guests at the
Springfield Country Club in suburban Philadelphia,
enticed by the promise of a free dinner.
he asked for a show of hands of who lost money in the
2008 financial crash, about half raised theirs. "It’s
going to be a world collapse, economically
speaking," Cannella warned them. "You need to
plan for this storm coming. You need to be in a vehicle
that’s not going to sink when Wall Street sinks."
Wall Street is the problem, Cannella believes he has the
solution: fixed index annuities, a popular but complex
insurance product known for lucrative commissions and
of these lightly regulated investments have surged since
the 2008 financial crash, when mom-and-pop investors saw
the stocks and mutual funds they counted on for
retirement plummet in value. Seizing opportunity,
insurance agents began pitching these annuities on cable
TV and radio infomercials, telling seniors how to
protect their savings with investments reassuringly
described as "risk free" and "no
in most states, sales agents aren’t required to
disclose their commissions, typically 6 to 10 percent,
that insurance carriers pay them for putting retirees’
money into these long-term investments. Seniors also can
face huge penalties for early withdrawals for unexpected
medical bills or other emergencies.
Insurance Commissioner Dave Jones, who oversees the
nation’s biggest insurance market, urged caution:
"We’ve seen people being sold annuities that are
entirely unsuitable because of their age, because of
their financial circumstances. … It’s an area of
increasing complexity, a population that is extremely
vulnerable, and one in which there is a lot of room for
U.S. Department of Labor, which has oversight of
retirement plans, became alarmed about insurance agents
and investment brokers pushing clients into
inappropriate retirement investments with high or
undisclosed commissions. These practices, it estimated,
cost retirees $17 billion a year in excess fees.
department crafted a regulation, set to take effect in
April, that would require financial advisers to put
their clients’ interests first when selling
investments for retirement. Known as the "fiduciary
rule," it was the first federal regulation of
its potential for curtailing high-commission insurance
sales, Cannella said, the rule was "going to knock
out half" of the agents selling annuities.
in February, President Trump, by an executive order,
halted the long-debated regulatory change and called for
another review. The insurance and investment industry
had fought the new rule for years and hope the new
administration can kill the Obama-era reform.
so, sales of insurance products will remain overseen
primarily by state regulators, unlike sales of stocks
and mutual funds, which have some federal consumer
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Pennsylvania, investors have poured billions of dollars
into fixed index annuities over the last decade just as
the state Insurance Department has been slashing its
staff. It has 225 employees, slightly more than half its
2006 workforce of 414.
staffers in the department who look into consumer
complaints have been saddled with the highest annual
caseloads in the nation. In 2014, each consumer staffer
on average had 655 complaints — more than three times
the national average, according to a Philadelphia
Inquirer analysis of insurance-industry data. (Their New
Jersey counterparts had a caseload of 163.)
whether the department could keep up with its thousands
of annual consumer complaints, spokesman Ronald G. Ruman
said the agency has enough staff to be "fully able
to do the job needed to enforce our laws and protect
protection for seniors has become all the more important
because of a tectonic shift in how Americans prepare for
their retirement. Today, old-standby pension plans —
in which the employer provides a fixed monthly payout
for life — are offered by only 5 percent of Fortune
500 companies, down from 50 percent in 1998, according
to a recent study.
planning is now more do-it-yourself, with some turning
to fixed index annuities. They’re marketed as a way to
give investors a portion of the stock-market gains while
protecting against market downturns. But they’re hard
to understand for most investors. The "fixed"
part of the annuity is this: The company will set a
minimum rate of return on money invested, often about 1
to 2 percent a year over the term of the contract, often
six to 17 years.
"index" part is tied to the S&P 500 or
another well-known market index, and can provide an
upswing of several more percentage points, depending on
how the stock market performs. But the insurance company
typically caps how much of the upswings an investor
those who find comfort in a minimum guaranteed return,
even if small, and strict control on their money, some
experts say putting a portion of savings in index
annuities can be a good choice. But Barbara Roper,
director of investor protection at the nonprofit
Consumer Federation of America, said "absent real
reforms … just stay away."
61, founder of the First Senior Financial Group, is
something of a Philly-area celebrity. He hosts an
hour-long paid radio infomercial every Saturday and
Sunday on 1210 AM, the Philadelphia affiliate of CBS. He
says he spends as much as $2 million a year on
advertising, a lot of it airing on cable TV news shows.
His company, headed by his wife, Joann Small, writes
$100 million in contracts annually taking in $6 million
to $8 million in commissions, he said. He also is
licensed to sell insurance in Florida.
am the expert on fixed index annuities. No one knows
more because I’ve taken the time to care and
learn," he said. But he doesn’t call them
annuities at his presentations. He prefers to describe
them as "crash-proof" investments, "like
a magical mutual fund."
portrays himself as a lone, fearless advocate for
seniors, unafraid to reveal harsh truths about Wall
Street, willing to sacrifice everything to its
counterattacks. Stock brokers compete with insurance
agents for retirement investments, and Cannella
criticizes them. But his characterizations are harsh:
greedy, corrupt, the enemy. As a result, he said in an
interview, his competitors are responsible for numerous
complaints against him with state regulators. (The
Pennsylvania Insurance Department doesn’t reveal or
discuss consumer complaints. In contrast, consumer
complaints about stockbrokers are publicly searchable in
the national BrokerCheck database.)
of his clients, Cannella said, are even worried that he’s
putting himself in harm’s way for exposing "the
atrocities on Wall Street."
I get picked off for doing something great nationally, I’m
OK with that," he said. "Isn’t that how
Martin Luther King died? They all died for a cause, and
the cause still survives. … So, I’m not afraid to
is important to understand, he said, is that his product
is safer than stocks and can earn bigger returns. At the
Springfield Country Club last fall, he showed the crowd
a version of a promotional chart that insurance agents
across the country use to push fixed index annuities.
Annuities, Cannella told his audience, out-performed the
stock market "every year."
chart, by industry giant American Equity Investment Life
Insurance Co., shows one of its fixed index annuities
outperforming the S&P 500 index from 1998 to 2015.
But there was a major omission:
Cannella and other agents don’t mention is the S&P
500 returns on the chart do not include reinvested
dividends. With dividends included, the stock market’s
aggregate return handily outperformed Cannella’s
favorite annuity product over the same period.
later why he used a chart without telling his audience
that stock dividends aren’t included, Cannella said he
was using insurance company marketing material, all of
which is approved by the Pennsylvania Insurance
Department. Ruman, the department spokesman, said
promotional materials get vetted and approved if the
agency has received a complaint about them. He couldn’t
confirm whether the department received a complaint
about such a chart.
also said customers of First Senior Financial are
protected because insurance agents are held to a higher
standard than Wall Street demands.
professionals in our insurance industry must operate
under a fiduciary duty," he said in an interview.
"There is no fiduciary duty with Wall Street."
federal law, only Registered Investment Advisers, who
typically charge clients hourly fees for advice and file
annual compliance documents with the federal Securities
and Exchange Commission, have a fiduciary duty —
putting a client’s interest ahead of earning a bigger
commission. Cannella does not have to offer the best
deal for consumers; his obligation is to sell products
that are "suitable" for the consumer. The
suitability standard varies state to state. In contrast,
stockbrokers are governed by a national standard.
of the Consumer Federation of America says
"suitable" is a low standard for the financial
industry. In her view, it offers the public little
protection. "Suitability lets you recommend the
worst of all suitable options," she said.
seller remains free to recommend the one most profitable
to him or her, rather than the one best for you."
STORY CAN END HERE)
has critics dating to the 1990s — when the
Pennsylvania Insurance Department fined him $10,000 and
suspended his license for three months. It accused him
of improper sales of health insurance policies to the
elderly. The department said he had been involved in
"misrepresenting the benefits and coverage of the
policies being sold" and selling "duplicate
coverage to persons in excess of 60 years of age."
said the case was ginned up by his competitors and was
unsubstantiated. He said he paid the fine and accepted
the suspension without admitting wrongdoing because he
was a young insurance agent, supporting a family, and
was financially unable to face a drawn-out court battle.
brother-in-law, who worked for him for about a year,
once described the company’s sales tactics at its
theme was very consistently gloom and doom, and the
market is going to crash and bad things are going to
happen," Stephen M. Fine, after he left the
company, said in a deposition filed in a lawsuit First
Senior brought against a former accountant. "Wall
Street is bad and everything about Wall Street is bad
and only we’re good."
said the company sought to invest as much of the clients’
money as possible. "We want to make sure that we
leave the least amount of money on the table and we get
— garner back the highest commissions to us,"
an interview, Cannella disputed that his firm put the
totality of its clients’ savings in annuities. He
provided account statements for a dozen clients that
showed his company invested no more than 80 percent in
annuities. As for his brother-in-law, Cannella said he
fired him and disputes his account.
recently, the family of suburban Philadelphia resident
Kay Guzman, 68 at the time, complained she was
inappropriately persuaded to cash out a long-held $1
million insurance policy to buy fixed index annuities.
When Guzman realized the mistake, she said in court
records, she couldn’t get a new life insurance policy
because she was a cancer survivor. She sued Cannella,
First Senior and others.
said competitors may have convinced Guzman she could
make money by filing suit. Both parties said they expect
to settle soon.
does have many clients who swear by him. Stephen Desirey,
69, and his wife are satisfied with the fixed index
annuities they purchased. "If an individual is
looking for a safe place to hold extra retirement funds
that they believe will not be needed until after the
next 10 years, they are terrific vs. the alternative
risk," he said in an interview.
claims on Cannella’s website raise questions. Cannella
says many of his clients got "double-digit
returns" on their investments with First Senior.
Below the photo of John J. Wallin, now 83, a retired
Philadelphia Electric manager, the text read: "8.3
percent 1 YEAR AVG."
said he never earned anything near 8.3 percent since he
put $300,000 in the annuity in 2014. He’s gotten 4 to
5 percent a year, a return he’s happy with.
difference appears to be in the way Cannella’s firm
calculates the returns. Wallin’s 10-year contract came
with a 10 percent first-year bonus from the insurance
company. Cannella said his company includes the one-time
bonus to help investors "get out of the gate"
and his figures are accurate.
fixed index annuity matures when he’s 90 but will be
transferred without penalty to his wife if he dies
before then. More important, he said, none of the
principal will be lost if the stock market drops.
photo of John Vitko, who invested in a 15-year contract
in 2013, appears above the words "6.2 percent 2
66, a former salesman in Northeast Philadelphia, said he
made 1.5 percent in interest the first year for one
annuity, then about 1 percent for a while, and 1.75
percent last year. He said Cannella’s firm added some
of the bonus to come up with the 6.2 percent figure.
"It’s really not all earnings," he said.
just pray I made the right decision."