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Money, May 2000 (coauthor: Pat Regnier)

A MONEY INVESTIGATION: HUBERT THE GREAT

Hubert Humphrey wants to sell Middle America loads of gimmicky, high-cost investments through an army of part-time brokers. The scary part: It’s working.

Head north from Atlanta to the high-tech suburb of Duluth, Ga., where the roads are lined with glassy office parks and drive-through Starbucks, and you’ll come to the headquarters of World Marketing Alliance. Outside, massive granite columns suggest a corporate Greek temple. Inside, there’s a life-size statue of Alexander the Great. It stands in WMA’s museum, surrounded by a glittering collection of swords, helmets and jewelry displayed as incentive prizes for the company’s brokers.

Yet the most impressive relic sits upstairs in the CEO’s office: Hubert Humphrey. No, not that Hubert Humphrey. This H.H. is one of the last great door-to-door salesmen, and he runs what may be the most unusual brokerage in America. It’s certainly one of the fastest growing. With thousands of representatives nationwide, WMA peddles costly and complex packages of insurance and mutual funds much the way Amway sells soap. But how WMA runs its pyramid-style sales structure (Humphrey prefers to call it “the magic of compound recruiting”) is drawing scrutiny from regulators and generating claims of fraud from investors.

Six feet tall and 200 pounds, with green eyes and winking smile, Humphrey is the kind of guy who puts his arm around you to bring you into his confidence. He wears custom-made suits, a gold Rolex and a Super Bowl-size ring with 10 diamonds circling the rim. Everything about him flashes success and leadership — he’s the Sun God of salesmanship — and you feel compelled to listen as he explains his fascination with Alexander, the young Macedonian who in the fourth century B.C. conquered the entire civilized world. Humphrey once read a now-out-of-print book called The Alexander Complex, which imagined what the military master might be like as a 20th-century businessman. “His company, Alexander Inc., would be a giant-type company and would dwarf everything,” Humphrey says. “Now Alexander Inc. — that’s my kind of company. We’ve been looking to be the modern-day Alexanders who go out and conquer the future.”

You’ve probably never heard of WMA. It doesn’t advertise, and its 1,500 or so branches tend to be tiny outfits that don’t encourage walk-in business. But the nine-year-old company already has an army of 63,000 people pushing mortgages, credit cards and, more recently, Internet service. Its brokerage subsidiary, WMA Securities, has at least 10,700 licensed reps who can sell mutual funds. That makes WMA the fourth-largest brokerage force in the country, behind Citigroup (parent of Primerica and Salomon Smith Barney), Merrill Lynch and Morgan Stanley Dean Witter, and ahead of such names as PaineWebber, American Express and Edward Jones. Let Wall Street chase the haves; WMA pursues the have-nots — the 52% of Americans who, so many years into this bull market, still don’t own stocks, either directly or through mutual funds and retirement plans. These folks need financial help, and WMA is one of the few willing to sell it to them. For a steep price.

If you have been approached by a WMA broker, he likely was a neighbor or a member of your church, perhaps a cousin or brother-in-law. He’s paid strictly from commission. Odds are he works from home, and often with his wife, since the company encourages spouses to work as teams. (As Humphrey’s wife Norma says in a recruiting video: “First God, then our family, then our business.”) What he usually wants to sell you is a hard-to-understand and fee-laden insurance-and-investment combination called variable universal life, or VUL. But it’s also just possible he’s hawking something worse. Over the past five years, dozens of WMA brokers have been caught selling fraudulent investments to unwitting customers. Humphrey and his right-hand man, WMA Securities president Barry Clause, say the company had no idea these scams were happening. But their very defense — ignorance — is part of the problem. Under WMA’s compensation model, brokers earn commissions on the sales made by brokers they’ve recruited, and drawing more and more salespeople into this pyramid is the key to making real money. Lately, WMA has been forced to improve its control over the fast-growing sales staff in the wake of lawsuits, arbitrations and a multimillion-dollar settlement involving rogue brokers. “When you see a repeated pattern of incidents, that is a red flag of structural problems within the firm,” says Brad Skolnik, Indiana’s securities commissioner. Says Alabama’s Joe Borg: “There are things they ought to be cleaning up.” WMA, adds another regulator, is “Amway from hell.”

Humphrey makes no apologies for the way he does business. In his mind, he’s saving legions of underinsured Americans from their own unreasonable fear of investment risks. “Like any crusader, any pioneer-type company, we’re controversial,” he says. And he’s proud that many of his brokers never would be hired by the likes of Merrill Lynch. After all, the 58-year-old is a college dropout who started his career as railroad conductor No. 42818. “For a long time, I thought maybe I was the only guy — the only one — who was frustrated in life, that I was the only one who wanted to be somebody. Now I realize there’s a large congregation, that everybody wants to do it. I learned the dream-selling business.”

***

Alexander the Great’s mentor was Aristotle. Hubert Humphrey’s was Art “Coach” Williams. A high school football coach in Columbus, Ga., Williams became a pariah in the life insurance business in the 1970s when he set up a pyramid-style company, A.L. Williams, that shunned the whole life or cash-value insurance policies sold by the industry’s big players. Instead, the battle cry of Williams and his “termites” — as the sales crew was dubbed — was “buy term and invest the difference.” Good idea: Term insurance doesn’t last forever, but it’s cheaper than whole life and most people don’t really need insurance into their dotage. Bad execution: A.L. Williams’ policies were expensive by term standards, and too many customers failed to invest the difference.

Like most recruits, Humphrey heard of A.L. Williams by chance, when an acquaintance from his Mormon church sold him term insurance. He was ripe for recruiting. Born in Macon to a family of modest means, Humphrey was bright enough to get into Georgia Tech but left when Norma became pregnant with the first of their four children. Seventeen years later, he was still riding the rails. Norma wasn’t happy. (“I was raised in a railroad family,” she explains today. “I never wanted Hubert to work on the railroad.”) Nor was Humphrey. For years he tried to make a go with Amway, which he now calls “a fun way to make no money.”

With A.L. Williams, something clicked. Humphrey boasts he was making six figures by the end of his first year. Though it took him five tries to pass the exam for securities supervisors, he was catapulted to national sales director by 1978. It’s easy to see why: Humphrey is the sort of salesman who sucks you in and wears you down. “Hubert is a triathlete between his nose and his chin,” says Rich Thawley, who joined A.L. Williams from the San Jose State athletic department and whose pyramid at WMA now includes a third of the firm’s licensed reps.

At the peak of his career at Williams, Humphrey had as many as 50,000 people under him and, by his account, was taking home more than $3 million a year. He brought sons Jody and Jeffrey into the business and talked future son-in-law John Benham into skipping college to join. When Benham came to pick up Humphrey’s daughter for a date, Humphrey handed him a computer printout showing a figure: $60,000. “He said, ‘This is how much money I made last month,’” Benham recalls. “I said, ‘No, you mean last year, right?’ And he said, ‘No, I mean last month.’”

Flaunting wealth is still a part of Humphrey’s sales technique. In 1990, the Humphreys moved into a 37,000-square-foot spread in the exclusive Buckhead section of Atlanta. It had marble columns in the foyer and an indoor basketball court and — to the deep annoyance of more genteel neighbors — Humphrey regularly invited crowds of Williams agents to show off the fruits of success. “We did it all very tastefully,” says Norma. “We brought buses in.” Former neighbor David Flowerree waged a zoning battle against the Humphreys’ efforts to build a full-size gymnasium. “It was,” he says, “like a flying saucer landed in our backyard.” (The Humphreys have since downsized to 18,000 square feet on the Chattahoochie River near Duluth.)

Humphrey had it all. But in 1989, Coach Williams cashed out and sold the company to Primerica, now part of Citigroup. Primerica was eager to keep Humphrey and his troops — renamed Alexander Inc. — and no less a figure than Sandy Weill, chief executive of the parent company, appeared in a 1991 recruiting video for the Alexander Inc. group, saying, “Hubert, God bless you.” But Humphrey soon became irked by Primerica’s clampdown on commissions from insurance policies. “It was obvious to me,” he recalls, “I was going to live a very frustrated life.”

He left in 1991 to set up World Marketing Alliance. Joining him from what he now calls “the practice company” were top agent-recruiters like Thawley and Monte Holm, a former construction worker in Las Vegas. Humphrey and his crew began trumpeting a new product: variable universal life. At the time, VUL was fairly exotic stuff, representing less than 9% of the life insurance market. It was essentially a cash-value policy with a mutual fund on top, where money not needed to pay for the insurance part of the package went into stock and bond portfolios. “Peanut butter with a chocolate wrapper,” Humphrey says. Just when the ‘90s bull market was beginning in earnest, he jumped in — and won big-time.

***

To sell VUL, Humphrey had to scrap the “buy term and invest the difference” pitch. This wasn’t easy. Humphrey’s older son, Jody, who worked for A.L. Williams and is now a leading WMA agent, jokes that “we thought anything that had a cash value was the Antichrist.” Then again, variable life allowed WMA to get in on the growing mutual fund craze without having to give up the generous up-front commissions offered by insurance companies. Unlike load mutual funds, which compensate brokers in single-digit percentages, insurers forward well over 100% of a policy’s first-year premium to the sales force. That means big numbers even from small-time premium payments. And that, in turn, is ideal for a pyramid: It’s easier to entice recruits and to pay all the different levels of people. At WMA, those commissions get split between the actual seller of the product and everyone in the so-called up line — the person who recruited him, the person who recruited that person, and so on and so on, all the way up to Humphrey’s privately held WMA Agency. On the average premium (about $1,850), a broker three levels away from the salesperson in the field would get $240.50 — not bad for essentially doing nothing. And at WMA, some brokers can keep getting payments even after leaving the firm. Heck, heirs can continue receiving the money even after a broker dies.

But are VULs a good product for Middle America? It depends what you mean by good. For someone with too little insurance and no investments, it’s better than nothing. And remember: WMA actively targets investors who not only don’t have traditional brokers but also lack the financial confidence to dial Vanguard’s 800 number and invest in a mutual fund on their own.

The trouble with VULs is that they are laden with a baffling array of costs. “Pricing is complicated and hard to compare,” explains Jason Zucker, a Banc of America Securities analyst who covers Aegon, the Dutch parent of WMA’s most popular VUL provider, Western Reserve. “What is important to the client is the relationship with the agent.” The Western Reserve policy that WMA typically sells charges up to 6% on premiums. In addition to the actual cost of the insurance, there’s a 0.9% annual fee for something that’s called mortality-and-expense risk, as well as nickel-and-dime administrative costs. Then there are the surrender charges if you let the policy lapse. Humphrey likes to call VUL “prepackaged discipline,” something many investors desperately need. Yet a large number of people fail to live up to this discipline. In fact, up to 15% of cash-value buyers nationwide give up their policies by the second year, and Western Reserve executives say WMA’s clients are “in line” with that average. Too bad: Surrendering in the first year means losing most or all of the money that you paid in.

Variable life does have one big advantage. You can borrow against the cash value of your policy at a low rate, essentially allowing for tax-free withdrawals on your investment. But there is a danger most people don’t see. Your tax protection could disappear if you run out of money to continue paying for the policy — and you might end up with an IRS bill for money you’ve already spent. A simpler way for regular folks to get similar tax protection is to, ahem, buy term and invest the rest through a Roth IRA, which is available to people with adjusted gross incomes of as much as $150,000. “VUL is a good product for someone with a lot of money to use as a tax advantage,” says Tom Rosche, a former WMA rep in Wisconsin. “But not for most of our customers.”

WMA sold about $200 million worth of variable life premiums in 1999 (on policies with a total face value of more than $12 billion), and its salespeople are largely responsible for making Western Reserve/Aegon the nation’s second largest writer of variable life policies. Other major insurers that count on the firm include Zurich Kemper and Pacific Life. WMA doesn’t sell just VULs, however. It also pushes variable annuities. And it generated some $400 million in new mutual fund sales last year, up 131% since 1998. IRAs were the growth engine there, and more than half of the funds were run either by Western Reserve’s Idex group or by American Skandia. In addition to their typical loads of 5% and more, both fund families are notable for their unusually high expense ratios, often on portfolios that are nearly clones of cheaper no-load funds. WMA dismisses criticism of these fees by citing the huge gains that the various VUL subaccounts and mutual funds — some run by growth-stock stars Janus and Marsico — have made in the past decade. The bull market, in other words, makes high costs insignificant. Yet how will WMA’s customers fare when this unprecedented rally ends?

***

Humphrey and his tight-knit group of early recruits are truly rich. Down the pyramid, though, is a different WMA. A recent recruiting meeting in New York City’s Chinatown might be described as a Tupperware party on steroids. Located in a “branch office” more akin to a union hall, the room is filled with stackable metal chairs and decked with WMA’s ubiquitous motivational plaques. The meeting starts at 7 p.m. with half an hour of chitchat. Songs such as “Eye of the Tiger” and “I’m So Excited” blare on the p.a. system. Next come the testimonials, designed to make you feel like you’re nothing but a wage slave. Pai-Yen Chung stands at the podium and tells how WMA “saved me from my job — or what we call ‘the Journey of the Broke.’” Chung then introduces the branch’s other “marketing directors” — cheers and high fives all around — and calls up current reps so they can receive their commission checks in front of all the fresh prospects. The newcomers are a cross section of New York’s struggling classes. Some are barely out of high school. Others are Caribbean or Russian immigrants. Many were plucked from the typical rep’s “warm market” — school, friends, family. One many says he was approached by an enthusiastic WMA-er while having lunch by himself on a park bench.

In his presentation for the first-time visitors, Chung skims lightly over the financials and investment details. He focuses instead on the commissions that new recruits can make just by bringing in a handful of people who make sales. The affable Chung shares Humphrey’s habit of rubbing his wealth in people’s faces. “Can anyone here afford to save $1,643.52 a month?” Chung asks, referring to the amount you would need to save in a 5% CD to become a millionaire in 30 years. “No? That’s too bad. Because my wife and I save that every week.”

If that’s true, Chung is the exception, not the rule. Most of the dozen WMA recruits interviewed independently by MONEY say they never earned anything like the riches dangled in front of them. Just making enough to go full time is evidently an enormous challenge. WMA awards rings to agents who gross $100,000 in a single year — hardly a princely sum after accounting for taxes, business expenses and funding your own health insurance and retirement plan. Execs at headquarters wear those big diamond-studded rings, but only 1,000 of the company’s nearly 11,000 licensed reps have them. Eric T. Harber of suburban Atlanta says he couldn’t come close to six figures, despite selling a fair volume of insurance — and he doesn’t know anyone who could. “It was a lesson learned,” says Harber, who has returned to more traditional insurance sales. “I never grasped their system of recruiting.”

***

While some brokers are reasonably sophisticated advisers, the need to feed the machine inevitably attracts people who are ignorant — or worse. At least seven WMA brokers and supervisors, for instance, sold more than $1.4 million worth of a fraudulent promissory note offering for First Lenders Indemnity Co., or FLIC, run by a convicted felon who called himself Jonathan Pierpont Boston. The notes bilked U.S. investors out of a total of $19 million until regulators halted the scam. WMA argues that it had no way of knowing its salespeople were selling the fake notes, but that defense hardly matters to clients who lost their retirement savings. Ohio stock cops began looking at “whether a case can be made for lack of supervision” by WMA itself, according to a 1998 e-mail circulated among state regulators. And in California, Anne Stone-Fischl recalls how her husband Richard was approached by WMA agent William Michael Pence, a Bible study acquaintance, and agreed to invest $43,000. When FLIC collapsed, the Fischls had to move into a mobile home. Despondent, Richard Fischl committed suicide several months later. “He trusted Mike,” Stone-Fischl, now 60, recalled in an emotional telephone interview days before her case against WMA was settled and sealed. “When you trust a broker and the firm behind it, what else is a layperson to do?” Pence says he believed the FLIC notes were aboveboard and even invested $31,000 in them.

Sloppy supervision really whacked the company in Arizona, where regulators in 1998 fined WMA $100,000 after its agents sold unregistered investments in viaticals (claims on the death benefits of terminally ill people) and fraudulent promissory notes. WMA also had to shell out $2 million to clients — “one of the largest cases a state has ever brought in terms of restitution,” says Arizona regulator Matthew Neubert. And WMA had to agree to beef up oversight of its far-flung sales operation — from a mere four compliance people watching thousands of brokers nationwide to 22. Says Neubert: “There was a basic failure to supervise.”

MONEY has found more failures — and worse stories — involving WMA brokers around the country:

Clause calls these cases “selling away” — jargon for marketing securities not authorized by the firm, whether fraudulent or not — and says WMA has no more than other brokerages. The company never benefited from these sales and has fired those it found to be responsible. “If you look at the size of our company, the number of reps and how geographically dispersed we are, we have a very, very low percentage of selling-away cases.”

But it is the severity of these cases that worries observers. “These brokers are like nomads, like traveling salesmen — they are not monitored,” says Kal Nekvasil, a Clearwater, Fla., attorney whose firm represents 47 investors with claims against WMA. The SEC is investigating, according to an agency letter obtained by MONEY. State regulators are circling too. “We have concerns about sales practices and the whole bit,” says Alabama securities chief Borg. In January, Massachusetts subpoenaed documents from WMA, and Secretary of State William Galvin tells MONEY that his investigation goes beyond the Royal Meridian scam and to the heart of the company’s sales tactics, compensation structure and broker oversight. His worry: “an apparent lack of supervision.”

***

Hubert Humphrey seems unfazed. “We’re not fearful of the regulatory environment,” he insists. “I don’t mean to flaunt that in front of regulators, but we can walk through a minefield because we know where the mines are.” A.L. Williams was investigated by countless regulators (include Barry Clause, when he worked for North Carolina’s insurance commission) but emerged unscathed. In fact, Humphrey plans to move into an even larger — and far less regulated — business.

WMA has launched the subtly named Zillionaire.com, a sister pyramid organization recently set up to sell Internet service to people who feel, as the company’s website puts it, “that the e-era is passing [them] by.” Like any dotcom, it’s waving the idea of stock options and an initial public offering as a recruiting lure. Zillionaire.com’s main product is a clunky Internet portal and a dial-up service called DotPlanet, which it hopes to sell to the unwired masses for $14.95 a month. You might think that it’s a bit late to be entering the Internet game, especially now that many Net services charge nothing. But WMA intends to take the same over-the-kitchen-table approach that it has used with insurance and mutual funds. The real beauty of Zillionaire.com is that it can attract tens of thousands of salespeople who could electronically feed new prospects for VUL and other financial services to WMA Securities’ registered sales force. Every DotPlanet subscriber — and the hope is there’ll be at least a million of them — will be contacted by a broker. “We just want to recruit the planet,” Humphrey says. He marvels at the scope of it all. “The Internet is a giant prospecting/harvesting machine.” Perhaps if you’re wise, you’ll stand out of its way.

SIDEBAR: “I trusted them”

WMA is a company built on neighbors selling to neighbors. Dolores Gibbons found out just how expensive one’s neighbors can be. An 83-year-old widow in Deerfield Beach, Fla., Gibbons says that she was ripped off by John Roberts Miller Jr., who lived next door with his wife Carol. Gibbons alleges in an ongoing arbitration against WMA that the Millers stole $125,000 from her. She thought the money was to go into a planned WMA public offering (which never happened) and a private mortgage on the Millers’ home. Court records show that the Millers accepted a check made out to them rather than the company. “I trusted them because I didn’t have anybody else,” she says.

Gibbons met Miller over the fence the very day in 1987 that she returned from her husband Philip’s funeral at Arlington National Cemetery. She invited the young couple to dinner. They later visited her in the hospital. Numerous financial discussions were held in her home. The fact that her husband had taken care of money matters until his death — and that her only son had died of cancer in 1996 — made her vulnerable. “They came in and walked off with the money,” she says. That isn’t all they walked off: Gibbons claims the Millers borrowed her heirloom silver—and never returned it.

John Miller, now 33, was no low-level broker. He joined WMA Securities in 1994 and soon oversaw two Florida branches. The University of Georgia alum started in Atlanta and got to know WMA’s top execs before moving to Florida. Indeed, he even appeared in a WMA video in the mid-1990s, telling potential recruits, “It’s given me the opportunity to do as much and to get as big as I’ve dreamed of.”

Gibbons’ case against WMA is pending. Miller’s days at WMA are over: He was fired in May 1999 for selling unapproved products and giving false information during an internal investigation. The Millers have returned to Atlanta, where they live in a run-down apartment complex and drive borrowed cars. They’ve filed for personal bankruptcy, listing $326,624 in debts (excluding Gibbons’ claim) and no investments. Where did Gibbons’ money go? Through an attorney, the Millers declined to comment. Bio photo