Amid a historic boom for annuities, regulators are signaling to financial advisors that the pension-like products are just like any other investment when it comes to disclosing conflicts of interest.
The Securities and Exchange Commission
Payouts to advisors who sell annuities, complex insurance products that typically provide guaranteed income, typically range from 1% to 10%,
Annuities are basically insurance, not an investment security like a mutual fund. Still,
While the regulator has brought cases over annuities in recent years, the charges haven't involved breaches of an advisor's fiduciary duty. That obligation, the highest standard of client care and one borne by Cutter, requires advisors to always put their clients' interests ahead of their own and not engage in conflicts of interest.
Instead, the SEC's annuities cases have centered on antifraud provisions.
Bill Singer, a securities lawyer and the author of the
Singer called SEC cases involving annuities and independent advisors "very rare."
"Annuities are not the sort of exotic products that typically get advisors in trouble," he said. "This is not an overconcentration in crypto or tech funds. It's an annuity. It's warm milk. This is not a sexy product. But when you put every client into it and you're getting 6% to 7%, you had better come up with a good explanation of why you are doing it."
Cutter was a "pure" fiduciary, with a license to sell insurance; he did not have a broker license. Brokers are held to a lesser standard of client care, Regulation Best Interest, in which they must recommend investments that are merely in a client's "best interest" and generally disclose conflicts of interests, not actually avoid them.
The SEC said Cutter also used an affiliate, Cutterinsure, to pocket more than $1.1 million in fees paid by unnamed insurance and investment companies in return for marketing their products to clients. Cutter is accused of moving investors out of lower-fee annuities charging 1% or 2% commissions
"Cutter and CFG breached their fiduciary duties to never place their own interest ahead of their clients' interests, to disclose all material conflicts of interest, and to obtain clients' informed consent to those conflicts before proceeding," the SEC said in papers filed in a Boston federal court.
The regulator is seeking to have Cutter disgorge any ill-gotten gains and pay a civil penalty.
Ian Roffman, a lawyer at Nutter McClennen & Fish in Boston who represents Cutter and his firm, said his client did nothing wrong.
"CFG has always disclosed to its customers that it sells insurance products and that (it) receives compensation for doing that, and it follows insurance industry standard practices for its sales and its disclosures," Roffman wrote in an email.
Who's regulating the henhouse?
Roffman's argument is based in part on questions of whether the SEC is overstepping its jurisdictional boundaries. The insurance industry is generally regulated at the state level.
"This case is about trying to hold CFG to a standard above and beyond what is required of the industry in terms of disclosure," Roffman said. "It's ultimately using CFG, a small family-run business, as a means to get a toehold into regulating the insurance industry."
The SEC allegations against Cutter are grounded in the Investment Advisers Act of 1940 that regulates investment advisors, not in the separate body of rules making up insurance law. Court papers allege that, from 2014 to 2021, Cutter received at least 1,567 hours of free marketing and $470,000 from a firm the SEC identified only as "Company B."
"These services were valued at more than $148,000 — a substantial benefit to the Defendants that created a conflict of interest to use Company B to purchase annuity products for the Defendants' advisory clients," the SEC contends. "In breach of their fiduciary duty, Defendants never disclosed this conflict to their advisory clients."
The SEC's complaint doesn't name the insurance firm Cutter was working with, referring to it only as "Insurance Company A." In recommending this firm's annuities, according to the regulator, Cutter sometimes put incorrect financial information on clients' applications to improve their chances of being accepted. For investors whose money he moved out of cheaper annuities and reinvested in high-fee alternatives, he also failed to disclose severance fees, court papers allege.
Singer noted that Cutter and Cutter Financial Group advertised to clients that their primary source of income was fees of 1.5% to 2% charged on the total assets they had under management. Those assets, according to the firm's
"But when you are charging a 1% or 2% management fee and you are offered a 7% commission, that's a temptation," Singer said. "How is that not a conflict?
The annuity alternative
The case against Cutter comes at a time when many investors have begun to see annuities as a stable alternative to the volatile stock market. Sales of the products reached a historic high of more than $310.6 billion in 2022, according to
Fixed index annuities like the ones Cutter was recommending generally track the performance of a stock market index like the S&P 500 or the Nasdaq Composite. Investments in these products hit $21.9 billion the fourth quarter of 2022, according to LIMRA. Sales of all fixed-rate annuities meanwhile reached $37.5 billion in the same period, showing a 241% increase year-over-year.
Variable annuities were less popular. Their sales hit $12.6 billion, down 42% year-over-year.
Todd Giesing, the assistant vice president of annuity research at LIMRA, an industry-funded trade group for insurers, said annuities became popular as inflation, economic uncertainty and rising interest rates hammered stock and bond markets last year.
"Investors often look for some downside protection when the market is a little shaky," Giesing said.
Retail investors can buy annuities through banks, insurance companies, broker-dealers and advisors. Giesing said he had no specific figures tracking how much of the business now comes from RIAs.
Annuities, long a subject of controversy in the planning world, generally come in
Annuity purchasers can either invest their savings in one lump sum or pay annual premiums. The money is then invested in corporate bonds, mutual funds and other securities whose returns are later used for payouts. Besides pension-like payments, annuities often offer the benefit of tax-deferred income growth, meaning no taxes are owed on the dollars put in them until they're withdrawn.
