by John Darer CLU ChFC CSSC RSP CLTC
FINRA and the SEC’s Office of Investor Education and Advocacy issued an Investor Alert to inform anyone considering selling their rights to an income stream—or investing in someone else’s income stream (including pensions and structured settlements)—of the risks involved and to urge investors to proceed with caution.
This is surely a sign that the under scrutinized marketplace is on the government's radar. It's about time.
Warnings for Sellers of Income Streams
FINRA and the SEC warn that transaction costs—"including brokerage commissions, legal and notary fees, and administrative charges—can be high. You will need to think about how to replace the cash flow your pension or structured settlement income provides, especially if you depend on that income stream to pay monthly or other expenses. Furthermore, be aware that some salespeople can be aggressive or persuasive when trying to get you to sell your income stream and, in some cases, there may be outright fraud". (emphasis ours)
FINRA and the SEC state that before selling away an income stream you currently receive, ask the following questions:
- Is the transaction legal? Federal law may restrict or prohibit retirees from “assigning” their pension to someone else.1 Furthermore, the secondary sale of a structured settlement often must be approved by a court... Before selling your pension or structured settlement, you may wish to ask your pension administrator what restrictions may apply, (as to the structured settlement) review the terms of your settlement or consult an attorney.
- Is the transaction worth the cost? Find the discount rate that the factoring company has applied to your income stream to arrive at the lump-sum amount. This is in essence the interest rate that is used to bring the future dollars you will receive from your pension into today’s present value. The larger the discount rate applied to your pension payments, the lower its value in today's dollars. So, if the factoring company is using a high discount rate, you can expect to receive a lower lump sum. Compare this rate to alternatives such as a bank loan or other options that may be less costly. You should also take into account commissions, fees, and other administrative costs.
- What is the reputation of the company offering the lump sum? Check the factoring company’s record with the Better Business Bureau, and research the firm on the Internet and with a financial professional. What complaints have been filed against the company? Were complaints resolved to the customers’ satisfaction [ Comment: Somewhere down the road you will read more about specific individuals, company or companies in the secondary market that have been faking BBB profiles, faking complaints, faking favorable comments about their company via social media, using fake identities. We encourage those who have any knowledge of these practices to consider blowing the whistle before it is too late]
- Will the factoring company require life insurance? When you sell your pension, or even a portion of your pension payments, the factoring company may require you to purchase a life insurance policy. They may require you to name the factoring company, or the investor buying the income stream from them, as the beneficiary of the policy. Should you die before all payments you assigned to the factoring company have been received, funds will be paid out from the life insurance policy to cover any remaining balance. Keep in mind that purchasing a life insurance policy will add to your transaction expenses and reduce your payout.
- What are the tax consequences? The lump-sum payment you collect may be taxable. Discuss the tax implications of any transaction you are considering with a tax professional. [Comment: Generally transactions that meet IRC 5891 criteria are not taxable. Trying to sell a structure that represents taxable damages willl result in a taxable lump sum. A pension is a whole other "animal".
- Does the sale fit your longer-term financial goals? While you may feel you need money now, take time to evaluate your financial objectives down the road. It can be helpful to work with a financial professional who will not receive compensation from, or will not otherwise be involved in, the transaction. You may find that there are other alternatives to deal with your immediate needs. Don’t necessarily take the first offer that comes your way.
Warnings for Buyers of Income Streams (Investors)
- These products are often mislabeled as annuities. They are not annuities. Don't be fooled.
- These products can be expensive. You may encounter commissions of 7 percent or higher.
- Pension and structured settlement income-stream products may or may not be securities and likely are not registered with the SEC. As such, reliable information about these products may be difficult to find and resolving disputes should an investment go sour may also be difficult. (emphasis ours ) [ Comment: Some companies register domains anonymously, use IP anonymizers to communicate with you by email, the people who are communicating with may be using an alias and their only US contact may be a mailbox]
- These products are illiquid, which means that they could be difficult to sell. In the event you need money and want to sell the product, you might not be able to do so or you may only be able to do so at a loss.
- Your "rights" to the income stream you purchased could face legal challenges. It may not be legal to purchase someone’s pension. And it may be difficult to legally force the original owner of a pension or structured settlement to forward or assign their income to a factoring company or investor.
"Heard" at the bar at the last NASP annual meeting..."So the cop pulls over "the fictitious character" for "traveling at an excessive discount rate" and asks for his license; and the Factor says " Sorry bub, no license required..ha-ha-ha!"
Given these risks and complexities, ask the following questions before you invest:
- Is the financial professional selling the product registered with a state or federal regulator or with FINRA? Use the resources below to check the registration status of the salesperson.
- Visit the SEC's Investment Adviser Public Disclosure (IAPD) website.
- Visit FINRA BrokerCheck or call FINRA toll-free at (800) 289-9999.
- Contact your state securities regulator.
- Contact your state's insurance commission by visiting the website of the National Association of Insurance Commissioners or calling toll-free (866) 470-6242.
- How is the salesperson being compensated? Ask the salesperson how he is compensated and how this impacts the purported rate of return.
- Is the salesperson authorized to sell this product? If registered, ask if the salesperson’s compliance department has reviewed the product and allows it to be sold
I think the agenda for November's NASP annual meeting may need to be amended.
I will repeat again, it has amazed me that you need a license to get married, sell real estate, cut hair, cut nails, give massages, run a brothel (in Nevada) and to place the vehicles that cash flow purchasers are attempting to buy the rights to, but there is no clear requirement to have one to be able to sell or provide advice cocerning the disposition of the rights to these assets. Is a change in the offing?
Click here to go to the full FINRA/ SEC Joint Alert on buying and selling income streams.
No copyright claimed in governmental works.
Cash Now Pusher's Hitting the LTD Market April 29, 2013
The Mailbox Economy| How Does It Benefit Structured Settlement Sellers? April 12, 2013