Why you need to protect yourself instead of thinking regulators will protect you
Ric Edelman: It's Thursday, March 30th, and I want to tell you about Jeffrey Cutter. He's a financial advisor in Massachusetts. He operates his own firm called Cutter Financial Group, and he manages about $134 million for about 400 clients since 2014. For the past nine years, Jeffrey Cutter has been selling annuities to his clients, and he never told them that he's been collecting commissions of 7% to 8%. All this in addition to the 2% annual fee that he and his firm charged. All this, is according to the Securities and Exchange Commission, which has just filed a lawsuit against him.
According to the SEC, Jeffrey Cutter would tell his clients to buy an annuity. He'd collect a 7% or 8% commission, and later he would tell his clients to sell the annuity that he previously told them to buy and to buy a new annuity so he could collect yet another commission of 7% or 8%. The SEC says Cutter has earned more than $9.3 million since 2014 from these annuity commissions. He also got almost $150,000 in free marketing services from the annuity industry. They obviously love the fact that he's selling their products so much. All told, the SEC, says Jeffrey Cutter and his firm violated four sections of the Investment Advisers Act of 1940, and the SEC is thus suing him to stop him from doing this anymore and to recover the commissions that he's earned, along with interest and penalties.
Now, I'm not going to defend Jeffrey Cutter here or his actions, but there is something terribly wrong with this entire story. Look, you know that I've been on the bandwagon against annuities for decades. They are overpriced, underperforming products. Too often people don't understand their complexity. They don't understand the lack of liquidity and surrender charges. They don't understand the fee schedule. They don't understand the limited income. They don't understand the adverse tax implications and estate planning implications.
A lot of it has to do with disclosure. That's one of the issues the SEC has with Jeffrey Cutter. They're not simply alleging that he collected the commissions. They're alleging that he failed to disclose that he was collecting commissions. I'm not going to defend Jeffrey Cutter. What I am going to say that what's terribly wrong with this story is not merely the fact that Jeffrey Cutter earned nearly $9.5 million or so in annuity commissions on an undisclosed basis, while he is a so-called registered investment adviser, someone who is legally obligated to serve his clients best interests as a fiduciary. You've got a question whether these annuities were in anybody's best interests other than Jeffrey Cutter's himself. No, I'm not going to defend Jeffrey Cutter.
I'm not going to delve into the issues of what he did. What's really wrong with this story is not merely Jeffrey Cutter. What's wrong with the story is the SEC itself. Why? Not for going after Jeffrey Cutter for being so improper in his behavior. And it's not the fact that Jeffrey Cutter sold high commission annuity products. It's the fact that the SEC allowed these annuity products to be available in the marketplace in the first place. That's the problem I have.
Here's the issue. Why is the SEC engaging in regulation by enforcement? If what Jeffrey Cutter did is so egregious, selling his clients an annuity that earns him a 7% or 8% commission, why doesn't the SEC simply prohibit these annuities from being on the market in the first place? Wouldn't that just solve the problem? We wouldn't have to go to the Jeffrey Cutters of the industry one at a time after the fact, looking for who's selling what. Why don't we just prohibit the annuity industry from selling products that offer these egregious compensation programs to advisors? I mean, there are plenty of annuity products in the industry that don't have any commissions at all. Others have very low commissions. Why is the SEC approving products that have such a high level of commission? That entices financial advisors to look beyond what's in the best interest of their clients, to focus instead on their own best interests. I mean, think about it.
You're an insurance agent, you're a stockbroker, you're an investment advisor. You want to recommend an annuity to your client. Which annuity will you recommend? The one that has zero commission or the one that has an 8% commission? The SEC should simply eliminate the availability of products that have egregious, outsized, overpriced expenses, including big fat commissions. I'm not saying that they shouldn't be going after Jeffrey Cutter, but why aren't they also going after the annuity company that made that product available?
Think about that and be cautious when you're dealing with products. Don't assume that merely because your advisor recommends it, that it's therefore the lowest price or the best performing or the lowest risk or the most suitable product for you. Get a second opinion to help reduce the risk that you're being bamboozled. A bamboozlement that is brought to you in part by the SEC itself.
Hey, I want to make sure you're listening to Jean's podcast every Thursday. Self-Care with Jean Edelman. You can follow Jean as well on Twitter, Instagram and YouTube. The link to her podcast today and her social media pages is in today's show notes.