Variable Annuities

I believe Oscar Wilde once said, “To misrepresent one annuity may be regarded as a misfortune, to misrepresent two looks like carelessness.” What do you call it when you misrepresent 30% of your annuity sales? FINRA calls it negligence, or at least that’s what they called in their sanction of MetLife Securities, Inc.  In an investigation of MSI’s annuity business over a 6 year period, FINRA found that representatives of the company told clients that a new annuity would be cheaper than their old annuity and were incorrect 30% of the time. I recently purchased a new television and the salesperson at the store did encourage me to look at another model than the one I had in mind. Ultimately, it did come down to price. I didn’t have to ask which one was less expensive because the price tag was right there. I am willing to guess, though, that if I had asked, the salesman could have answered correctly. I bet, if asked regularly, he would be able answer that question correctly almost 100% of the time. There are a couple take-aways from this.  According the FINRA, the annuity replacements totaled $3 billion and generated $152 million in gross dealer commission across their 35,500 agents. I’ll do the math for you. That’s roughly 5% in commissions. One could draw the conclusion that the agents knew the new annuities were more expensive and simply lied to make the sale. FINRA decided that it was “negligent  material misrepresentation.” That means laziness or stupidity. So we know annuities are too complex for the client to figure out the fees (if it were easy they wouldn’t have to ask) and apparently, they are too complex for the people selling them to understand the fees. Wouldn’t it be nice for regulators to impose uniform and transparent fee disclosures across the industry

Self-Driving Cars

According to Kay Stepper, the head of automated driving units at Bosch, “Technologically, we will be ready for automated driving within the decade. But it will take the next decade to convince consumers.” As Bloomberg announced, Billions are Being Invested in a Robot that Americans Don’t Want. According to J.D. Power only 23% of baby boomers would trust self-driving technology. Younger drivers are more trusting but not much. 41% of GenXers and 56% of millennials would trust a self-driving car. Kelly Blue Book found similar results. In their study 75% of those surveyed said they didn’t think they would ever own a self-driving car. Clearly, trust is the biggest issue. Many different ideas have been proposed to build that trust in consumers, from test environments for potential buyers to separate highway lanes for automated drivers. All the ideas sound very expensive and time consuming. If I had to guess I would say the trust issue doesn’t stem from the unknowns of driverless cars but rather our distrust of known technology. Put differently, I have owned dishwashers that worked inconsistently. My wife can operate the television without issue 80% of the time. That’s not a critique of her, we just have too many remotes. I would be willing to assert that if we can build a driverless car we can make a remote that operates all the TV stuff. Let’s work on making current technology more consistent before we put our lives on the line. 

Our Global Economy

Over the past several years there have been numerous cases of companies using international tax laws to their advantage. I recently read about two cases that illustrate that while the US has made many advances in tax law to cut down on this arbitrage, other countries have not.  Barclays sold part of its business in Britain in exchange for some Blackrock stock for tax purposes. The stock went down and Barclays was able to capture the loss. Normally, when you sell a business for stock in a tax-free deal, you don’t get new basis and therefore would not be able to take a loss. Unless you route the deal through Luxemburg. Sure, one could argue that it would be better to get stock that goes up, but still a nice tax offset for Barclays. Essentially, they were able to sell a business unit for $15.2 billion and still take a tax loss. So far, they have faced no legal action. Elsewhere, when investors buy stock in a foreign business and that company pays a dividend there can be mandatory tax withholding on that dividend, say 15%. If the same investor moves said stock to a bank in the country where the company exists, the dividend gets paid to the bank without the withholding and subsequently forwarded to the investor along with the original stock for a small fee (ideally less than 15%). The country losing out on the taxes doesn’t love this, taxes levied on foreign investors is a great source of revenue. Of course, they can always change the laws. The US has already made such a change but countries like Germany (you know, where Luxemburg is) have not. On one hand, the deal can seem perfectly legal. On the other hand, you run the risk of new legislation. In the aforementioned transaction, Germany’s finance ministry deemed the trades illegitimate because of their tax avoidance and now the bank in question will close its dividend-arbitrage related business unit. 

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