Striking parallels exist between controversy of broker compensation in the life settlement market and the controversy surrounding it in the structured settlement factoring market. A number if issues raised in the Complaint in the matter of " The People of the State of New York by ELIOT SPITZER Attorney General of The State of New York v Coventry First, LLC et al. should be sending chills down the backs of "structured settlement factoring vig takers".
The Complaint makes it clear that The State (New York) has an interest in economic health and well-being of those who reside or transact business within its borders. In addition the state has an interest in ensuring that the marketplace for insurance policies, securities and other financial products functions honestly and fairly with respect to all who participate in it.
Brokers owe a fiduciary duty to their client, the Seller.
The Complaint (referring to Coventry) states that "while the Broker may profess to represent the client, in many cases the Broker conceals its conflict of interest and hides the fact that the Broker and the Seller are competing for a slice of Coventry's gross offer. Coventry benefits on this scheme by obtaining lower prices for policies it purchases and by creating incentives for brokers to steer business to it". Download Coventry_complaint.pdf
Holding that thought, now let's jump over to the structured settlement factoring industry. What's the difference conceptually, other than the transfer of the right to receive periodic payments instead of the right to receive a life insurance death benefit? In some cases the structured settlement broker, settlement planner or financial planner conceals its conflict of interest and hides the fact that the Broker and the Seller are competing for a slice of the factoring company's gross offer. The factoring company benefits by this scheme by obtaining lower prices for structured settlement payment rights that it purchases and by creating incentives for brokers to steer business to it.
If a structured settlement broker who makes an affirmative representation to the client that he or she will get "the best deal" for them, then refers business to a factoring company, does he or she not have a fiduciary duty to the Seller (just like the life settlement broker)? If the referring broker takes a commission, does the referring broker deserve to be paid a large fee for a referral to a funding source? How about the referring broker referring to another broker who, unknown to the first referring broker, only deals with a single funding source? What representations has the first referring broker made to the client concerning the service provided?
If disclosed, the compensation could only be deemed to be compensation for the service the client expects through the first referring broker's sales promotion (or otherwise) to be provided. If the referral is directly (or indirectly) to a single funding source has the referring broker adequately discharged his/her fiduciary duty to the client?
In the example used in the Coventry Complaint at para. 49 it states that in many cases the seller is never informed about the mechanics of the gross offer, and so never learns the full amount that Coventry was willing to pay for the policy or the amount of compensation taken by the Broker. Now imagine that as a structured settlement factoring transaction referred to a factoring broker with a single funding source. Is it all getting clearer now?