Reg BI and Slimy annuity sales

Reg BI and Slimy annuity sales

I want to give you the background of this annuity sale so you can understand how slimy it was and how damaged the customer is.

Importantly, this would not have been an actionable case under suitability, however, under the Reg BI disclosure rules, we feel this is highly likely. Clearly, so does opposing counsel. Once again, you make the call.

The Registered Rep (RR) is dual-hatted. She is a Fiduciary in the advisory account and a broker in the brokerage account. Reg BI upgraded the brokerage accounts but the industry has ignored it. This customer got burned. She put in $293,000 in 2021 and has $320k today. In a 70/30 portfolio, she would have about $420,000 today.  She is out approximately $100,000. Cetera made $29,500 in upfront commissions and about 2% annually from money management and annuity fees- about 30,000 in fees- so Cetera made about $50,000. That is more than the customer made- Lets look at the slimy sales process.    

The RR told the client that she was a Fiduciary and that this annuity was under the "fiduciary contract." Many customers, especially retirees, have read about financial services and know enough to ask if the RR is a Fiduciary. The RR was either deceptive or lying. She was a Fiduciary in the advisory account, but sold the annuity in the brokerage account. Cetera did not have systems set up to supervise this common trick.

One reason that Reg BI was passed is a customer would meet a wealth manager who was wearing two hats: Hat A was in the advisory account and the wealth manager has a legal responsibility of being a fiduciary. Hat A was broker in the brokerage account with only a responsibility of suitable. The customer never knew when the wealth manager switched hats. This case goes directly to that "deceptive switch"- and Reg BI now protects the customers in brokerage accounts-if the industry was listening.

It was a switch from an older annuity. That is a bit slimy itself but Cetera approved it. Why not put it in a 70/30 portfolio? It couldn't be the commission!? The RR and Cetera were paid about 10% to sell this new annuity. The customer had no idea and 4-5 years later when the performance was terrible and the customer read the Reg BI rules and found out Cetera was in violation, the customer called Allianz to check out the annuity. The Allianz rep looked up the brokers sales and said...whoa....this broker has sold a lot of this annuity." Cetera got paid extra to promote this annuity. The RR received trips and possibly bonuses to promote this annuity. We don't have all the details but we will ask for them in Discovery. After the client found out about the trips, she realized she was paying for her brokers trips- that did not go over so well.

The RR never told the client how much she was making. She never told her that she got bonuses and trips. Before Reg BI that was still slimy, but legal. Before Reg BI Cetera and the broker could rely that somewhere in the documents were enough details that they complied with "reasonably disclose." The RR knows that the client doesn't have the time, inclination or legal expertise to read the prospectus or OM. The RR knows she can make 10% by switching an annuity and that is all she cares about.

Reg BI requires the broker to give the client ALL material information that the retail customer thinks is important. It has to be given in a "full and fair" way. The information has to be "sufficiently specific" so that the customer can understand what is going on and make an informed decision. The person who decides if it was "full and fair" and covered ALL important information and allowed the customer to make an "informed decision." is.......the RETAIL CUSTOMER. After all, she is the one taking the risk. The RR knows that if she told the customer how much she (THE RR) was making, the customer would never buy it. The RR would actually never even go there, because no one tells a customer that they are making a 10% commission.

The FINRA 2026 regulatory oversight report specifically talk to this specific issue.

Firms are required to tell the customers about any payments they get from the product provider.

https://www.finra.org/rules-guidance/guidance/reports/2026-finra-annual-regulatory-oversight-report/reg-bi-form-crs

Failure to Comply With Disclosure Obligation:

• Not providing retail customers with “full and fair” disclosures of all material facts related to the scope and terms of their relationship with these retail customers or related to conflicts of interest that are associated with the recommendation, including:

  • material fees received as a result of recommendations made (e.g., revenue sharing, or other payments received from product providers or issuers

Below is the page with the sales charge of $24,225.00. Looks clear, right. However, what happened is the broker told the client to come in and sign the paperwork. Cetera designed the paperwork to help with the deception. The broker never showed this page. The broker showed the next page with the signature and said "sign here". Cetera also hid that they made an additional approximately $5,000 from Allianz. This was all fine - but slimy- when the rule was "reasonably disclose" and brokerage accounts were not under Reg BI.

Since 2020, however the burden is on the broker to get an informed decision. You need to tell each client enough information and repeat it until you are sure they understand everything important and that you are receiving an informed decision. That is actually easy. "Are you okay with me and Cetera making 10% on this? We will also charge you 2% annually." We all know retail customers don't read the docs. They certainly don't ask questions. It isn't classy to ask your broker how much they are making. (If a customer asks questions, it helps the broker fulfill their obligation to get an informed decision- but if they don't ask, the obligation is still on the broker to shout out all the details until the customer has had time to think about it and make an informed decision)

The prior disclosure standard of reasonably disclose let the industry put the burden on the retail customer. ("Hey, we disclosed it, it is your problem for not asking questions.) The disclosure standard now is that RR has to be sure the customer is making a decision with all the material information. The RR can't take an order unless they are sure the customer is making an informed decision. This puts the burden on the RR. The RR has to be sure the customer is aware of all the 10% commission, extra trips, and any bonuses- and anything else the customer would consider important. It is these conflicts that damage customers. If the broker is getting 10%, how much money can the customer possibly make?

Again, the customer thinks their advisor is telling them everything important- this customer asked about compensation and the RR said she was a Fiduciary and Cetera- who knows this going on every day- let it happen. The entire reason for Reg BI is a customer trusted his RR, then things went bad, then the customer called an attorney who told them the truth. Then the customer said to the RR- "you lied to me" - then the trusted RR said, hey it was disclosed- good luck buddy!! The customer thinks- what do you mean disclosed, I trusted you to tell me anything that matters, I didn't read those docs, you know that. In arbitration, that customer faced an uphill battle. The new disclosure rules changed this dynamic. It changes it to what the customer actually thinks is going on.

This is where we have a huge conflict - and we see the power of Reg BI. The customers always thought there were getting all the important information. The industry and the RR always knew they were leaving important information out. However, the RR told the customers - "you can trust me, I would put my mother in this investment". Now, the industry has to tell the customers what the customers thought they were getting all along- all important information in a way that they can process it.

It make so much sense- but it will crush sales and force the industry to cut fees and give more away to the customers if they want the customers to invest.

Retail customers don't read docs. They don't read the car lease or the phone contract. They don't read the waiver at the trampoline park for their kids. A neighbor got a certified letter when they were a accidentally a few months late on their car payment. The company (NISSAN) sent it certified. They know customers don't read mail. Big companies know when it is important, they have to do something to get the customers attention. The water company in out town had a person come to collect late payments from multiple people. No one pays attention to the water bill. The guy came to the door with identification and said you owe this or we are turning off the water. The water company didn't rely on letters which get tossed. Big companies know that when it is important, they have to get the customers attention in a way that matters. Under Reg BI, that is called "full and fair"- It has to be fair and tell all the information. It is simple and common sense and it helps retail customers.

I can't stress how the new disclosure rule protects customers. This is why the industry is ignoring it.

Here is page 3 with the client signature highlighted in yellow. How thoughtful of the broker to make it easy for the client to sign. What customer service!! Reg BI requires an informed decision. In this case, we know the broker and Cetera were afraid to tell the customer how much they were making. Hiding the amount of the commission proves that both the RR and Cetera know the commission amount is scary/important to a customer and would be a deal breaker. If the RR wasn't afraid of the customer finding out about the commission, the RR would have said I am making 10% on this.

In this case, the retail customer is furious. If she had known there was a 10% commission and bonuses like trips, she would have said no. This is a clear violation of the disclosure prong of Reg BI. It is also way up there on the slime factor.

Here is another page with the deferred sales charge. It doesn't show the upfront sales charge, but it does show pretty high numbers and is the kind of thing that would get a customer to ask question?- Are you getting paid 8.5%... no, we are getting 10%. This page also is designed without a signature on it and the broker never showed this page to the customer. We are going to ask in Discovery how this form was upgraded from before Reg BI to after Reg BI.

Here is another signature page - highlighted in yellow again. Customers don't read the contents, they see the yellow, take 3 seconds and sign. If they don't trust the RR, they wouldn't be there.

Below the broker is required to say she explained the material features and costs to the client- whatever they are . It doesn't say she has to attest that she told the customer what she was paid. However, Reg BI requires that because it is important to the retail customer.

Cetera has to upgrade their supervision and make sure the RR received an informed decision. It doesn't say that. By requiring the broker to receive an informed decision, it puts the burden on the broker to tell the customer how much she is making and what the ongoing fees are and how this investment will make money. We will find out in discovery why the investment did so poorly when the market did great.

New York State rules and disclosure below.

Let's talk about this. NY State has not upgraded their policies since Reg BI started. The customer signed this page below but didn't read it and is certainly not going to ask such an offensive question as "how much are you making?". The RR knows that which is why she chose to sell this annuity to this customer.

The industry used to be able to point at the language below and say in an arbitration, "it says right here that Cetera is getting paid-you have to ask"- Since Cetera fulfilled their obligation of "reasonably disclose", customers used to be stuck.

Now, a customer says back, I don't have to read every or any word of your stupid documents. I signed it. That doesn't mean an informed decision. It is not in the same hemisphere as an informed decision. You and I both know you put the documents in front of me and other retail customers and we sign it or glance at it and sign it. We don't think about it because we trust you. If we didn't trust you, we wouldn't be working with you.

Maybe I did read it and I felt it was not classy to ask what you are getting paid. Maybe I read it and since you told me this was under the Fiduciary contract, I took your word that this was only being charged a 50 basis point AUM fee for as long as I decide to pay you- because I had no idea this was going into the brokerage account and not the advisory account.

It doesn't matter. Since you are getting a huge commission, you need to tell me that verbally. So I get it. The burden is on you to make sure I know what your incentives are. That is important to me. You can't put on a piece of paper that you are being paid. I know you are being paid- just not anywhere to tune of 10%. What you did was not "full and fair." It was not "sufficiently specific." The person who decides if it was full and fair and sufficiently specific is me- the retail customer.

You violated the disclosure prong of Reg BI, therefore you violated Reg BI. (If a RR violates any prong of Reg BI, they violate Reg BI.) Because Cetera's attorneys helped you, I believe your violation is very close to intentional.

We are not yet arguing scienter which is intent to manipulate or defraud, but it certainly violates FINRA's rule of high standards. Scienter is a very serious charge and I mostly am bringing it up to ask a reader what they think. (Scienter only requires deliberate indifference or reckless disregard. You make the call.)