An Employment Scam in the Financial Services Industry
A Warning for Recent College Grads and Others New to the Financial Services Industry

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Starting Out : "If I work hard, I'll make it!"

What a fantastic opportunity!

There are several ways you'll hear about this "job" opportunity. You may answer an ad from job search media, hear about it at a job fair (often on a college campus), or be called out of the blue by someone who found your resume on a job search site. In any case, it often sounds quite fantastic.

  • "Seeking Elite Individuals to Earn a Six-Figure Income -- Limitless Potential. No experience necessary."

Ok, the above ad may not get too many replies, since most of us are now wary enough to identify it as one of those too-good-to-be-true scams. Scammers know this and have moved towards more reasonable sounding ads:

  • "Management Trainee. Expanding financial services firm immediately seeks career minded individuals for comprehensive training program. Individualized, long-term growth plan allows trainees to earn while they learn to manage their own branch in 2 years. $50,000 first-year management income."
    (Once again, I made that ad up. Any resemblance to someone's actual ad is purely coincidental.)

That's more like it! It sounds great to a new grad who can expect less than $25,000/year for most jobs with no experience, and a career changer might still find it reasonable.

Unfortunately, the scammer's target market of recruits consists of just that -- new college graduates with perhaps only a few years of general work experience and career changers who haven't previously worked in the financial services industry. In the past, there would be a "group" interview during which these "elite individuals" were surprised to find themselves as part of a cattle call for a "business presentation". The faces around them were overwhelmingly young and fresh. Managers would be quick to tell recruits that the ad mentioned the low end of what they could expect to make. Some managers would boast about their own six-figure incomes (highly doubtful) and how they were now living the good life (also highly doubtful), or they trotted out the obligatory "star performer" to heap accolades on the firm's training and compensation programs. They may proudly brag about the firm's inclusion in prestigious "lists" such as The Inc. or Fortune 500, or a high rating in A.M. Best if in the insurance industry. (These claims may be true, but when you see how they've done it the "prestige" unravels quickly.)

Scammers are now more careful to avoid projecting such an image (they might leave the cattle-call till a second or third interview or "orientation"), but the representations remain the same: The firm helps the rep make a lot more money than he should reasonably expect given his background, managers up the lines get their overrides on these sales, top brass makes its share, and everybody's happy.

It's a win-win situation, right? Not at a scammer firm. The inexperienced rep is instead set up to fail while the firm profits and hides its tracks. The only currently illegal employment-related point that I know of that can be sued for is deceptive advertising, so scammer firms make sure that misrepresentations are verbal:

Commissions: Make a lot of money! Some managers may make the income represented, but it may also be that very few make it to management, and those that do may earn significantly less than represented.

Though some scammers may still advertise the "six-figure income" hook up front, the trend has moved towards introducing it later, during the interview process, and then only verbally. The execution of this deception is very careful and deliberate. The reason has to do with legalities -- if the rep does not make the advertised income range, he may have a case for suing for false advertising.

It should also be noted that scammer firms used to deliberately advertise the job as a "full-time employee" position with a salary (+ commission, usually) with benefits when in fact a) it is a full-commission, non-salaried independent contractor position, usually misclassifying the employee to his detriment; b) any "salary" is actually a draw, or loan that must be repaid to the firm out of the rep's future earnings; and c) all benefits (and all other "business" expenses!) are to be borne by the rep, not the firm. There are often criteria for getting benefits that few reps ever meet and maintain, such as a certain level of earnings; benefits are not earned under the usual meaning of 'employee' wherein you obtain them automatically after a certain period of employment. This is false advertising as well, though I still see it done sometimes.

Another fact that may be hidden or denied altogether is that the position involves sales, a position many experienced job hunters will know to avoid. The job may be listed under the 'financial services' category, though it shouldn't be; many job search media do require sales jobs to be listed in the 'sales' section. Some firms may advertise that the position involves no sales or telemarketing, but that is just a flat-out lie. You will not make your money simply handing out advice! You will make it by selling financial products (and usually recruiting others to do the same).

So in the "realistic" ad above, note that the $50K/year first-year income is management income, not the first-year income for an average rep. Also note that the "earn-while-you-learn" phrase applies to your pre-management phase and carries the implication that the firm is devoted to helping you earn while grooming you for management.

At the interview, the true average incomes of the firm's reps as stated in the firm's corporate literature may be withheld unless the applicant is smart enough to ask for it, so the inexperienced rep must rely on what the interviewer represents to him. Additionally, employee turnover figures, which are invariably very high at scammer firms, may be withheld or expressly lied about in order to promote a false image of the training program's success rate. So while the firm's corporate literature states that the average rep is expected to make $12,000 or less in his first year, the rep verbally hears that "the average rep in the industry makes over $100,000 a year" and "the firm is committed to getting you there." This misrepresentation is no accident.

The Non-Compete Agreement: We'll take your money. Also factored into the possibility of lawsuits is the Non-Compete Agreement (or Non-Solicitation Agreement) that a rep must sign upon employment. Reputable firms have these agreements for the purpose of preventing departing reps from stealing clients and benefiting a rival firm, and that's reasonable when the firm has invested heavily in providing those reps with the leads to obtain those sales. The usual requirements are that clients obtained during the rep's tenure are property of the firm, and he may not solicit those clients again for a period of a year or so after he leaves. It may provide that the rep can continue receiving commissions generated on those sales for up to a year, or it may explicitly state that the rep gives up the right to those commission trails once he leaves. At a scammer firm, the rep is very likely to shoulder all work associated with obtaining his own clients with little investment by the firm, so why should the rep agree to leave behind the commission trails on all his hard work? And of course there is nothing in writing informing the rep that he will be providing his own leads.

The aggregate commission trails lost through these reps' ignorance can run into millions of dollars that continue to benefit the firm once reps have left. Managers don't have much reason to complain -- instead of receiving overrides on those commissions, now they can receive the full commissions, and they're already recruiting the next group to exploit.

Handicapping Earning Capacity: We'll take your money. Redistributing the above commission trails in retro is one way of keeping managers down the line motivated at the expense of the reps who leave. The other method involves taking the full commission up front before they leave. Scammer firms may use a rep's lack of knowledge about industry licensing to further cripple him. They may verbally discourage the rep from obtaining an insurance license once he starts, instead telling him to master securities sales first. The real money is not in securities but in insurance, which has a higher payout and pays the above commission trail over a portion of the life of the policy. (An insurance license is important as well for the client -- his needs will likely not center around securities alone.) To this end, these firms may verbally encourage reps without insurance licenses to take along a manager who is licensed to sell insurance products when a client shows a need for it. Since the rep cannot legally earn any commissions from an insurance transaction without an insurance license, the full sale must in reality fall to the manager, even if the manager has verbally agreed to split the commission. Again, nothing's in writing.

Also handicapping a rep's earning capacity is the lead generation method mentioned above, that of marketing to friends and family. This method, heavily promoted by many scammer firms, is also heavily flawed, as you'll see later. And... nothing about the firm's use of it is in writing.

It is worth mentioning here that managers at scammer firms cannot be roundly denounced. Remember, they were usually as ignorant at the start as those they're now recruiting and are only the more successful victims of the scam. By the time they reach management, they're often desperate, not the power earners they thought they'd be.

The scammer firm has carefully factored in the possibility of lawsuits for these verbal deceptions. If the now-broke ex-rep can scrape enough together to sue for fraud, the scammer's defense is its written literature, which it will claim was all presented to the recruit so that he made an informed decision.

Regrettably, the scammer firm's true commitment lies in profiting from a steady stream of recruits who will pay an inflated fee just to get trained, will generate some sales before their "natural market" (friends and family) dries up, and will leave behind the commission-generating clientele that they struggled to establish when they fail. Deception is the key -- let's face it, few of us would pay hundreds if not thousands of dollars to get a $12,000/year job with no reasonable chance to advance.

Ok, so the unsophisticated and inexperienced rep is blissfully unaware of the above pitfalls before he's even started, and he's ready to go. The training program itself is about to cost him a wad of money, and his earning capacity is about to be further compromised by the firm's flawed method of lead generation, but first... he's about to start his own "business"!

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