Compliance February 15, 2007

NASD Charges Prudential Brokers with Aiding Deceptive Market Timing

The National Association of Securities Dealers (NASD) has charged two former Prudential Securities Inc. (PSI), brokers in Utah for aiding a hedge fund manager’s deceptive practices to market time through variable annuities.
Reported by

According to a press release, the agency alleges that Jeffrey Doerr and David Corn helped Paul Saunders, a hedge fund manager and Chairman, CEO and majority owner of James River Capital Corporation of Richmond, Virginia, skirt insurance company restrictions on market timing.

NASD alleges that the two brokers helped Saunders bring in approximately $5.2 million in profits by executing an estimated 900 variable annuity sub-account exchanges between 2001 and 2003 that violated insurance restrictions or limitations. Doerr and Corn reaped $45,000 each in commissions.

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

Particularly, NASD claims that the two opened 20 brokerage accounts for Saunders at PSI between 2000 and 2003 in the names of numerous limited partnerships that had the same beneficial owners as his market timing hedge fund. The agency says Doerr and Corn knew or should have known that Saunders would use these accounts for market timing and that the partnerships had the same beneficial owners.

Doerr and Corn helped Saunders, who it fined $2.25 million in October 2006, to evade the insurance company restrictions against market timing by using four separate broker identification numbers. After an insurance company placed a restriction on one account, Doerr and Corn would open a new one with a different number.

NASD also charged the brokers’ branch manager, Darrel Trost, with failing to supervise their activities.

In Practice February 15, 2007

Traditional Retirement Products Being 'Phased' Out

New retirement income products must emerge to fit new retirement models.
Reported by

So said Stephen Mitchell, director of Investor Education and Planning Tools at Merrill Lynch, at the Managing Retirement Income conference in Boston this week. Unfortunately, advisers and those in the financial services industry are not focused on the new model of retirement. In order to succeed in serving the Baby Boomers, advisers must understand the challenges of the new retirement model and design products for that space, Mitchell asserted.

In the future, “we will see advisers sitting across from clients asking if they know what job they’d like to have after retirement,” Mitchell said. Studies have shown that people want to “phase” gradually into retirement (see Workers Plan to “Downshift” Into Retirement), and are interested in pursuing new jobs and starting their own companies (see Workplace Pressures Creating New Generation of Entrepreneurship). In fact, Mitchell said, many of today’s retirees are working, on average about 20 hours per week.

For more stories like this, sign up for the PLANADVISERdash daily newsletter.

New Models

“The old models need to morph to reflect the new retirement,” Mitchell said. There is an opportunity for advisers in this area, but even if people look to professionals for help, Mitchell said, the consumer has control over who he chooses to work with, so the adviser needs to be able to address the customers’ needs.

Customers should be viewed as consumers, not investors, according to Zvi Bodie, a professor at the Boston University School of Management. Consumers do not want to become educated about investing; they just want security in their old age. Brodie claims that rather than learning about something and making a decision, they just want to have someone tell them what product is best. “If these products are going to be sold,” Bodie said, “it should be like trying to sell me a home video system. I don’t want to learn, I just want a product that works.” From a consumer standpoint, there isn’t much better than a DB (defined benefit) pension plan you don’t have to think about, he said.

Industry Myopia

“Because we, in this industry, find this stuff fascinating,’ he said, “we think other people do too – they don’t.” Therefore, it is important to understand the market, which is people who essentially want to maintain their standard of living in retirement, he commented.

Key considerations will include understanding the target audience and what their expected patterns of income will be. The challenges in developing new products are that any lifetime income protection is very interest-rate sensitive, Mitchell said, and the high anti-selection bias makes insurance very inefficient.

Bodie agreed that insurance is inefficient; in principle, he said, insurance should be much cheaper than investing because while insurance pays $1 in certain circumstances, an investment pays $1 all the time.

“Can we make retirement cheaper?” he asked. “Not only can we, we have to,” he answered. There have been huge advances in modern financial technology. The financial services industry can use this technology to create customized products; there should be more of this being done for consumers, instead of just offering packaged products.

«