Michael Abraham

By Dave Lieber, Star Telegram

Sharon Brady realizes that she will never see the 16 percent annual return she was promised on her $50,000 investment. Worse, she realizes she may have lost most of her money.

“This actually makes you physically ill,” she says.

The retired Tarrant County sheriff’s deputy invested in what regulators describe as an alternative investment: life settlements. Her money was used to buy insurance policies of older adults who want to cash out and sell their benefits to investors. When the original policyholder dies, investors, who pay the premiums, reap the death benefits. The quicker the person dies, the greater the payoff.

As I reported in the spring, the company she invested with, Retirement Value Llc. of New Braunfels, has been shut down by the state. Now comes word from the court-appointed receiver that commissions paid to financial advisers and company officials were 30 percent.

Of $77 million raised in a year from 900 investors like Brady, about $10 million went to Retirement Value and $13 million went to sellers of the program. Brady says nobody told her commissions would be that high.

Fraud happens in all businesses at one time or another as do the incidence of high commissions.  The question of what is a high commission is open to debate but 30%+ is certainly way over the top, but it is the norm!  The real issue is that the regulations are not in place in all states but even where they are this level of cost /commission prevails and in most cases mistaken regulation actually legitimises it!  What do I mean? Well there are so many regulated levels, a referral agent, a life settlement agent, a broker and a provider and each of these requires to be paid and because of this chain of individuals the process is slowed  giving  more people more work to do and they therefore convince themselves they deserve the cash!

Commentary by Michael Abraham:

This is a case where the UK regulation of the secondary policy business really scores.  It´s a simple model and it creates transparency and competition and the broker/adviser earns 3 to 4% of invested dollars with the provider earning an average gross of circa 15% also of invested dollars a figure that creates a net profit of circa 5 – 7%. Still 20% but if you are not prepared to pay such amounts the market will not exist and then everybody loses – except of course the life insurance companies!

http://www.star-telegram.com/2010/08/26/2428028/grim-news-for-investors-in-some.html

Washington State: Life Settlement Investments May Be Securities

By Trevor Thomas, Life and health insurance

The Washington State Securities Division has issued an alert emphasizing that only licensed securities salespeople or broker-dealers can sell investments in life settlements.

Selling securities without a license is subject to criminal prosecution, division officials say.

Insured individuals use life settlement contracts to sell their policies.

In Washington, a security exists when an arrangement represents an investment of money in a common enterprise with the expectation of profits resulting primarily from the efforts of others. A life settlement investment often fits that definition, according to the division, which is part of the state’s Department of Financial Institutions.

Commentary by Michael Abraham:

Personally I think life settlements should be sold as securities not because they need to be but because we need some clarity!

http://www.lifeandhealthinsurancenews.com/News/2010/8/Pages/Washington-State-Life-Settlements-May-Be-Securities.aspx

Second-hand but first risk.

By Matthew Vincent, Financial Times

Trading in second-hand life insurance policies is expanding rapidly due to increased interest from banks and institutional investors, according to specialist brokers and fund managers. But independent financial advisers warn that this is still too risky an asset class for private investors to buy into.

Earlier this week, research commissioned by fund manager Managing Partners revealed that banks including HSBC, Credit Suisse, Citibank, and Allied Irish were now investing in traded life policy funds, or “life settlements”. These funds aim to generate returns by buying life insurance policies from older US citizens, maintaining the premiums on them, and receiving the proceeds when the policyholders die.

Commentary by Michael Abraham:

Some interesting comments in this article not least those of Adrian Lowcock´s – ‘if the products are as good as the sales literature, suggests then the commissions being paid wouldn’t need to be so high to incentivise people to sell,” argues Lowcock.   He is surely well aware that the smaller funds have always needed to deliver better value than their established larger cousins but are unable to do so until they have a track record, and they can´t get this until someone sells the product.  The large fund creates impetus by massive marketing spend, these costs all come from the fund.  The smaller fund pays that same marketing money directly to the broker and allows that broker to determine whether he keeps it or credits it to the investor  – some do, some don´t!

http://www.ft.com/cms/s/2/ff89b8e0-a182-11df-9656-00144feabdc0.html