Beware of the Non-Registered Security Label for Indexed Annuities

One of the side effects of the propaganda campaign the NASD is using against indexed annuities is an indirect means to discredit their validity in the financial marketplace. The way in which this is methodically being done will take some time, using several well planned steps. While reading an article on MSN online about the Top 10 investing scams, it became clear to me just how this discrediting scheme is playing out. The first steps have already been launched, as Glauber has started a “misuse of terms” that is trying to mislabel indexed annuities as investments or securities. I have rebutted this use of terms on technical grounds and the fact that these products are legally recognized as insurance products only. But the public misperception, when these incorrect labels are applied, is the side effect I want to warn you about. As the securities industry justifiably gets its own share of “bad press” for the illegal and unethical actions of a number of brokers, fund managers, brokerage houses, and major corporations, any connection to these negative practices can have devastating credibility consequences. The securities industry is beginning a public awareness campaign that is encouraging investors to make sure that both the investment products they purchase, as well as the brokers they use to purchase securities, are properly registered. As a basic fact, this is good advice; however, when you have mislead the public into thinking that indexed annuities are investments or securities, then the misapplication of this advice, in regards to a fixed or indexed annuity, falsely implies that both, this perfectly legitimate insurance product, and, the licensed insurance agents who sell it, must be bogus, and operating a scam of improperly selling non-registered products. We need to continue to insist that, in every mention, indexed annuities are properly identified as insurance products that are completely regulated under the authority of each state insurance department and have nothing to do with the SEC or the NASD.

Don’t Let the Number Fool You

There have been some articles written lately, where comparisons have been made between the potential returns with variable annuities as opposed to indexed annuities. The articles impressively show numbers, when, using a particular fund’s historic returns within a variable annuity, compared to an indexed annuity, which, simply uses the S&P 500 index variations, the client would have had a greater return in the variable annuity. The writer of one article attributes a big part of that difference to the lack of dividends being included in the indexes used to calculate indexed annuity interest credits. Of course, the author of that article is an agent who sells variable annuities, so his bias is very evident. I have done some comparisons myself in historical performances, and I am aware, that, for as many instances as you can find to support the return of variable accounts or mutual funds being superior, you can also come up with at least an equal number of situations that are reversed, and favor the indexed annuity. I have studied the difference that even the purchase date can have upon the potential return on anything tied to the market, including indexed annuities. Since the market moves constantly, having a purchase date on Monday can, over the life of the contract, have a different resulting return, than a purchase date of Thursday that same week. But the important point here is to remind those agents, who are recommending indexed annuities, NOT to get pulled into this kind of trickery, and don’t allow yourselves to fall into the trap, set by your competition, to attempt to equate variable and indexed annuities and thus, fight on their turf, under their terms. Remember, that indexed annuities are, first and foremost, “savings vehicles.” If you choose to take the perspective that they are intended to provide an alternative to the safety and security of bank CDs or government bonds, but with the potential of gaining a significantly greater return than those products, then you can free yourself from the arguments about performance comparisons to securities products. Every time you sell indexed annuities as an “investment” alternative, you set yourself, and your client, up for bottom line comparisons. And since we know that “figures fool and fools figure,” the competition will come up with some set of numbers that will try to discredit the value of your recommendation, if you are playing defense. Indexed annuities are a powerful and unique product, and when sold from an affirmative position of what they WILL provide a client who needs security with a respectable return, the consideration of securities products won’t even become an issue.

Where’s The Beef With Indexed Annuities?

Remember that the only real lasting criticism about Indexed Annuities is coming from a competing industry, the securities industry, and primarily the NASD, whose members have been losing ground, and substantial amounts of money under management, to the growing sales of fixed and indexed annuities. But in a future, that seems destined to remove the security of company pension plans from the retirement equation, it becomes apparent that there are few existing financial products that can offer the individual a similar level of retirement income guarantees and security. As workers nationwide are forced to take up the reigns and responsibility of their own retirement planning, let me remind consumers that it would be fair to say that there is nothing, other than fixed and indexed annuities, that even resembles something an individual can use to provide a guaranteed lifetime income, regardless of longevity, as pensions were originally intended to do. Besides the contractual guarantees, since fixed and indexed annuities are insurance products, they enjoy a level of safety unlike anything else. The insurance industry has proven to be financially resilient through the worst economic times this country has ever seen. Since insurance products are basically contractual promises, the industry has one of the best independent financial review systems of any industry in the country. Moody’s, Weiss, S&P, A.M Best, and Fitch, annually do thorough reviews of each company’s financial ability to pay claims and make their results readily available to the public. Add to that, the need and desire for successful insurance companies to maintain and diligently protect the public confidence, the industry has shown itself strong in taking care of itself, with a history of financially sound companies taking over weak or distressed companies, and assuming all existing contracts, thus protecting the policy holders from loss. This practice has produced a track record of security for fixed annuity holders in America that is spotless. But if all that were still to fail, each state insurance department has a funded Guarantee Association that typically covers $300,000 in annuity assets for each client with each company. Where else can you find more safety and security for your retirement nest egg?

How Secure Is a Retirement That Depends on Corporate Stock, Company Pensions, or Corporate Longevity?

The previous notion, that big corporations were the economic safety net of the American worker, is quickly being dashed, as some of the nations largest, and most stable companies; such as IBM, Verizon, Hewlett-Packard, Sears Holdings Corp., Circuit City Stores, Inc., Hospira Inc., Motorola, Inc., Lockheed Martin Corp., Aon Corp., and NCR Corp., to name a few, are all rushing to free themselves of the escalating expense of providing and maintaining pension plans. The Enron fiasco proved, among other things, that it is risky business to put all of your retirement nest egg in one corporate basket. The subsequent disclosures, of numerous big corporations “cooking the books,” that sent the market into a frenzy, from which it is still reeling, continues to add emphasis that we cannot blindly assume that large companies, in which we either invest or are employeed, are looking out for our best interest. Placing retirement assets into securities products, based in the market, and investing in big corporations, will always carry tremendous risk. While investing in corporate America will remain a major source of potential financial growth and wealth for the savvy investor, the individual needs to be less greedy, and more realistic about their desire, or ability, to take risks with their financial future. Relying on the stock market to grow your 401(k), to make up for your lack of sufficient savings, compounds a risk on money you can ill afford to lose. Counting on your company, or even Social Security, to take care of you at retirement is a foolish risk of another kind. Because of a changing economy, we are entering an age of increased individual financial accountability. While things could continue to change drastically, as we move through this adjustment, presently, there are tools available to help individuals assume this responsibility with confidence. Thousands of INDEPENDENT financial advisors are scattered around the country, ready to assist workers and retirees with making this transition. Products, like fixed and indexed annuities, allow the older workers, and retirees, a suitable substitution for the disappearing certainties and guarantees of company pension plans.

Glauber, Chairman of the NASD, Guilty of Breaking NASD Rules in His Attack on Indexed Annuities

In speeches and quotes, Robert Glauber has repeatedly referred to indexed annuities as investments, a clear violation of SEC and NASD rules. If ANY of the registered agents under the jurisdiction of the NASD were to use the same words as Glauber, in a sales presentation, they would be guilty of misrepresentation, and could be subject to disciplinary action by the NASD. Even insurance agents, who are not registered in securities, are forbidden to represent, to a prospective client, that an indexed annuity is an investment, and must be very careful in any references they use in comparing the two, as part of the accurate disclosure requirement to the buyer, enforced and regulated by each state insurance department. Ask the registered agents in Massachusetts, whose marketing materials for indexed annuities were scrutinized by the NASD, and later found to be unacceptable, if they will ever mix up the use of this terminology again. For their incorrect sales materials and methods, in some cases incorrectly referring to, or comparing, indexed annuities to investments, they were penalized, fined, disciplined, and made a public example to all other registered agents wishing to sell indexed annuities. So, who at the NASD, or other regulatory body, has the chutzpa to call Mr. Glauber on his OWN violations of the policies of the organization he heads? Is this another example of the elite, who sit in power, exempting themselves from their own rules and laws? With the growing resentment building toward the NASD, among registered agents whose primary business is insurance products, over the aggressive and inappropriate intrusion of the NASD into non-securities areas of their business, I hope that if not some individual, then this group as a whole, will speak up and call for Mr. Glauber to be disciplined, similarly to any other registered NASD member, require that he retract his erroneous statements, and perhaps even call for him to step down as chairman of the NASD.

NASD Propaganda against Indexed Annuities Led by Glauber Double Talk

The NASD, and its Chairman, Robert Glauber, are at it again. In a message he delivered on Monday at an NASD enforcement conference in Miami, Fla., Glauber’s words were filled with lies and misleading insinuations. He stated that buyers of fixed annuities think they are buying a product that is the same as a variable annuity and that this should require that the NASD offer their protection to those buyers from agents, he is insinuating, are all misleading their prospects about the facts and details of fixed and indexed annuities. But, Mr. Glauber, as he has often done as of late, is the one to lie and misstate the details and facts about indexed annuities, and incorrectly insinuate that fixed and indexed annuities are the same as variable annuities. His “mantra” that he loves to promote, is that "it is not clear whether indexed annuities are securities or not." Other than erroneous statements like this, made by the head of an agency whose members are having a hard time competing against the popularity of indexed annuities, the public has no question that indexed annuities are savings vehicles and not investments, offered by insurance companies, with guarantees of principal, guaranteed minimum returns, and the potential of earning higher interest than the guaranteed minimum, based on changes in a linked index. Glauber also drops phrases like, “fixed annuity investors,” in his attempts to try to legitimize his claims that fixed annuities are investments, when in fact; they are not investments at all. No one, other than Glauber and his jealous securities industry cronies, claim that they might be. In cases where risky securities products have been replaced by guaranteed products, like fixed and indexed annuities, Glauber incorrectly indicates that the NASD has authority over the fixed products in these cases, because they were used to replace a securities product. If Glauber, or anyone at the NASD or related securities industries want to try to intelligently argue, that it is innappropriate to move a senior’s assets from a risky market investment, where they can and HAVE lost principal value, into a product that offers guarantees of principal and a minimum return, and the potential for a guaranteed lifetime income, I welcome that challenge. Meanwhile, I encourage Mr. Glauber to CEASE and DESIST his propaganda campaign against the insurance industry, and focus on his own sick industry and cleaing up the widespread corruption in the securities industry that has caused so many people to flee its uncertainty and risk, and seek out secure and guaranteed products, like fixed and indexed annuities.

IBM Joins Companies Freezing Pension Plans

IBM recently joined the ranks of major US companies who are attempting to distance themselves from pensions as a means of providing retirement benefits to employees. Similar to the other companies that have already made such moves, IBM will be freezing its defined benefit pension plan in 2008, and plans to encourage greater participation in their 401(k) plan, even to the point of making company contributions for non-contributing employees. While this change is estimated to cost IBM nearly $270 million in the short run, over the next 5 years, even with greater company contributions to the 401(k) plan, it is estimated to save IBM a whooping $2.5 billion, as well as make the expense of providing retirement benefits more predictable. This shift in company policy, away from pensions, however, transfers a great deal of individual retirement planning responsibility and discipline to the employees, especially those who will be relying completely upon their 401(k)s and social security when they retire. Unless company HR departments revamp the level of informed advisory service they currently provide, there will be a great need for outside professional advice to individuals needing assistance in learning how to maximize their retirement security through both company and outside sources. This should provide a great deal of opportunity for brokers, advisors, and insurance professionals who want to pursue this market. The older segment of that working group, who only currently average about $125,000 in current retirement savings, will need to implement some aggressive savings measures to even consider a timely retirement. The need for professional outside planning help with pre-retirement issues has never been greater. I encourage professional planners and advisors to consider this opportunity as a serious responsibility, and always consider the client’s needs and objectives above your own personal preferences, product biases, or potential gain. This trend should take quite a number of years, perhaps more than a decade, to settle down, and during that time, there will be plenty of clients for competent advisors who maintain an ethical and professional reputation.

Keeping Retirement Money in your 401(k) Plan Comes at a Price

The Wall Street Journal recently featured an article stating that people were beginning to favor leaving their money in the company 401(k) plan after retirement, rather than roll those funds into a personal IRA. The primary reason mentioned in the article for leaving 401(k) money in the plan was based upon the probable lower institutional fee structure that a 401(k) plan assesses against the various investments offered. But considering fees separate from potential return is absolutely meaningless. Given the very limited choices for investing within a company plan, versus the virtually unlimited choices available within an IRA, whatever savings you may derive in fees on a plan investment is pointless, if, you would rather have your money invested elsewhere, given the choice. Of course, this argument, centered on investment costs and options with retirement money, presupposes that the retiree wants to, or should, continue to go for maximum growth, even when it puts their limited nest egg at risk, rather than tuck their life savings safely away in something with guarantees and a fair, but respectable, return. Another important consideration that was not mentioned in the article is that of spousal rights. A spouse of a 401(k) plan participant has to sign off on withdrawals or rollovers, where an IRA requires no such spousal approval. This difference could be viewed as a plus or a minus, but it is definitely something that should be carefully understood and considered by the client. Also, it is important to check 401(k) plan documents to see if, when you leave your money there after retirement, you reserve the option of freely rolling the money out of the plan in the future. Finally, when you consider the very favorable tax treatment available for passing unused IRAs to both spousal and non-spousal beneficiaries at your death, which allows them to maintain tax deferred growth and “stretch” distributions over their entire lifetime, I see nothing but huge advantages for retirees to continue to move 401(k) money out of their company plan and into a personal IRA as soon as possible. No plan administrator, or company HR person, who only has their limited plan options to offer, will ever be able to give the same level of unbiased, broad based, and professional advice on how to manage retirement money, as an independent broker, financial advisor, or insurance agent.