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It was a cautionary tale of cold corporate risk analysis meets cynical legal strategy. In the 1970s, Ford Motor Company realised its Pinto car could kill if its fuel tank ruptured. Instead of fixing the problem — which according to a memo would have cost $137m — the company reasoned its liabilities from personal injury lawsuits would cost far less. It was more expensive to fix the problem, Ford reasoned, than to deal with potential lawsuits.
Lawyer Dennis Concilla would love to uncover a “Pinto Memo” for his present case against an insurance company which last year pulled financial support for one of its products. He wants to know whether the company has a spreadsheet which shows the potential cost of litigation from affected investors and advisers would be less than the cost of fulfilling its obligations.
In September 2018, Ohio National told broker-dealers it was terminating its variable annuities selling agreements and would no longer pay trailing commissions, paid over the lifetime of an investment plan, for annuities currently in the accounts of brokerage clients.
Ohio National had $23bn in annuity assets as of last year.
Comparison with the Pinto case might seem to some to be overdramatic. No lives are at stake and the alleged damages in the Ohio National lawsuits are suffered by financial advisers and investors rather than the general public.
But if the plaintiff lawyers involved in more than 10 cases against Ohio National uncover a cost-benefit analysis — akin to Ford’s Pinto memo — they believe they could collectively secure hundreds of millions for their clients.
“It’s bad for investors. It can leave them without continuing advice from their adviser on the selection of subaccounts, when to start drawing funds, and whether to annuitise or accept an offer from the company to cash in,” says Mr Concilla, who runs law firm Carlile, Patchen & Murphy’s securities litigation and regulation practice.
Ohio National disagrees that the action harms investors: “We have continued to allow all advisers to access their clients’ contract information so they can continue to service and support them,” according to a spokesperson for the company. The insurer would not be drawn on whether it had anticipated retaliatory litigation when it stopped paying trailing commissions, nor whether such considerations factored into its decision.
Financial advice companies which have so far filed suits against Ohio National include UBS’s American wealth management business, the Royal Bank of Canada, hybrid broker-dealer LaSalle Street Financial, Arkansas-based Veritas Independent Partners, national adviser group Commonwealth Financial Network, and a number of individual LPL Financial advisers from across the country — including Mr Concilla’s client in Ohio.
Adviser network Cetera Financial has also filed an arbitration claim against the insurer with the country’s broker-dealer self-regulator, the Financial Industry Regulatory Authority.
In its complaint, Veritas contends that tens of millions of dollars in commissions are owed to broker-dealers because Ohio National allegedly tried to “skirt” its commission obligations and “devised a scheme” to save money it owed by passing the buck to advisers. Geoff Moul, a partner at law firm Murray Murphy Moul & Basil which is representing Veritas, says: “The contract unequivocally imposes an obligation on Ohio National to pay trail commissions. Hundreds of broker-dealers are affected by this.”
According to Mr Concilla: “This is a dangerous precedent, that a company can just decide down the road to stop paying trailing commissions.” He says he worries that, if Ohio National is successful, other variable annuity providers could follow suit.
He adds that the cases against Ohio National are playing out in court as straightforward contract disputes. Ohio National promised to pay brokers trailing commissions on the sale of certain variable annuities. By reneging, the company has breached that duty, he argues.
Ohio National says in its response there was no duty to begin with because individual brokers were not party to any contract. In an emailed statement, a spokesperson for Ohio National says the company has “fully honoured our contractual obligations”.
Since Ohio National terminated its sales agreements last year — which it insists it was permitted to do under the terms of the contracts — it asserts it is no longer obliged to pay trailing commissions.
Either way, the insurer’s actions — and subsequent litigation — has thrown into sharp focus how brokers are compensated for the advice they provide, and what can happen when they are not.
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