Journalists Continue to Miss the Mark

Robert Powell recently wrote an article for MarketWatch where he talked about annuities. I stop short of further description of his article because his writing was such a random conglomeration of previous misleading statements, that his words had no cohesion and really did not make any significant point. His writing is vague and filled with generalizations, but with no facts or details to support any of his statements. It was as if he has been gathering all the rhetorical criticisms, we are used to hearing the NASD use, in their propaganda campaign against fixed and indexed annuities, and he tried to piece them all together and call it an article. While I think he was trying to point out that bad sales practices hurt people who are sold annuities improperly, HIS misinformation and misleading statements are actually what is hurting the buying public. The point I want to address, with the mention of this piece, is that articles are regularly being published in leading financial journals and papers, apparently, without the editors requiring that the claims and statements of the writers be backed up with supporting facts and details. By quoting or restating the propaganda of the NASD, the writers are claiming to have done research, but for all of their claims of the unsuitability of indexed annuities for seniors, they have yet to produce a single senior client who can show that the sales documents they received, and the disclosure forms they had to sign during the application process for an indexed annuity, were not consistent with the terms of the final contact. Claims by these writers, of high commission and surrender charges equating to realized losses by annuity purchasers, are just not true and these accusations have never been supported by real life examples in any article I have yet to see. Responsible journalism seems to have taken a back seat, in regards to indexed annuities, and it appears that the financial journalists are willing participants in the NASD propaganda campaign to reacquire the loss of $24 billion in assets each of these past two years to the very popular indexed annuities.

Where is the Professionalism and Common Sense from Annuity Critics?

The majority of fixed and indexed annuities that are sold today have a very generous withdrawal privilege, typically 10% per year, whereby the contract owner may take money from their account, penalty free. If managed properly, this withdrawal privilege eliminates the need to annuitize the contract, in order to get money out for regular income or for emergencies, and provides a liquidity that should be sufficient for anyone who considers this lump sum a significant part of their retirement asset base. By using withdrawals only to access these funds, the entire balance of funds remaining, after the death of the owner, may easily and quickly be passed on, probate free, to the spouse, or to the children and grandchildren. But, considering that the conservative rule of thumb, for someone in retirement, who wants to make sure their nest egg never runs out, states that they must cap their annual withdrawals to 4%, or one twenty-fifth of the entire amount, if the owner of an annuity were to make the full 10% annual withdrawal allowed in their contract, this person would quickly run out of money long before they ran out of life expectancy. So, when critics of indexed annuities are harping on the surrender charges and how an indexed annuity “locks” up the senior’s assets, what they fail to mention is that the terms of the annuity could be the only discipline standing between this person and a retirement of poverty. Add to that, the ongoing option to convert the entire sum into a guaranteed lifetime income, and you will find that an annuity becomes one of the best and most suitable vehicles for use with seniors for retirement planning and conservation of assets.

STOP Feeding the Frenzy with Comparisons to Market Gains

If you are an insurance agent selling indexed annuities and you use any references to compare them to the market, I am suggesting that you stop that practice immediately. When you use phrases such as: market-like returns, similar to mutual funds but with no downside risk, hybrid product, or any other terminology that compares indexed annuities to market products, not only could you be violating securities laws, but you are adding fuel to the fire of attacks currently being waged against indexed annuities. Part of the blame, for the negative attention currently given indexed annuities, has come from these inappropriate connections to the market, made by the very agents trying to promote the product. Agents, who believe, that, when they are selling indexed annuities, they are competing with mutual funds, stocks, and bonds, will likely feel compelled to make the insurance product “look” as much like their competition as possible, but with all the negative aspects removed. As you are attempting to explain indexed annuities, and your approach is to take your prospect from a point of reference with securities products, where they have familiarity, then this person’s thinking will become “locked in” to this comparison, and will erroneously carry over to the annuity, many of the expectations and negative characteristics they have experienced in the market. You have no control over which of these implications about annuities they may incorrectly attach, so you have, in essence, lost control of your client by using this sales approach. Instead, consider beginning with a full and detailed explanation of all the positive and unique aspects about the guarantees of annuities, and that not only do those guarantees outperform most bank products, but the POTENTIAL is built into indexed annuities to earn a much higher yield, by way of the link to some outside index. Don’t let the fact that this link is a market measure, confuse the issue and take you back to your old habits of market comparisons. For your product, the index is merely a measuring tool. You could have just as easily linked the potential interest to some other measure, such as the increase in the number of days you have this year without rain, over the previous year. The indexes serve as no more than a trigger for the “extra” interest credits. Don’t aid the NASD any longer by negative and defensive selling techniques. Establish the need and suitability of your client, and then sell these insurance products proudly, because they are an excellent way to safeguard your client’s money in a product that can provide them with security and benefits which they cannot find elsewhere.

Professional Ethics Become Increasingly Important as Attacks on Indexed Annuities Continue

I read, with interest, an article in the 2/5/2006 USA Today Online, entitled Financial scams expected to boom as boomers age, by Kathy Chu. Her article was filled with some of the same rhetorically misleading statements that we are used to hearing from a press, which, thoughtlessly aids and abets the propaganda campaign against indexed annuities, which is being waged, regularly, in the media, by the NASD. This article wrongly insinuated, that, seminar selling is a deceitful method of promoting your financial services; that indexed annuities are high costs; the familiar statement that the existence of surrender charges in an annuity alone makes indexed annuities unsuitable for people over 60; and, mistakenly referred to indexed annuities and variable annuities as if they were the same product. At the same time, Kathy’s point, that fraudulent sales practices are likely to increase, as the size of the retirement pot explodes in the coming decade, is a possibility we cannot avoid addressing. Whether your corner of the senior market is only focused on long term care insurance, Medicare supplement policies, estate planning, annuities, or you offer complete financial planning, ethics in the marketplace must begin with each individual offering services to the public. The attack on indexed annuities we are now experiencing may have happened regardless, but when one single agent steps over the line, and selfishly uses unscrupulous sales practices, it hurts everyone. Even if we all agree that the products we are recommending are sound, and indexed annuities survive this current attack, I encourage you to review your marketing methods for the highest level of integrity. Don’t just think that if you are using approved sales material you are doing a good job of communicating the details of your recommendations to your prospects. Omission of important information is just as wrong as offering false or misleading information. As the competition among advisors for this growing pot of retirement money really starts to heat up, I hope you pursue the development of your professional skills and reputation as your means to increase production, rather than employing some questionable slick marketing program that promises to double and triple your stagnant income in the coming year. Fortunately, the market eventually flushes away the bad seeds, but in this lucrative environment, it could take some time, and, it also could wash away bystanders who are simply standing too close to the offenders, or sitting on the fence of their ethical sales practices. Define yourself by your associations. There are unbiased professional designations that have public recognition as a standard of excellence. I recommend that if you want to flourish in this senior market for the foreseeable future, your business plan must include securing one or more of these highly regarded designations to increase your knowledge, define your principles, and distinguish yourself among your competition.

Buyer’s Remorse Should Not Become Excuse for Lack of Due Diligence

To expand of the idea that buyers of annuities are always furnished, by law, all the information they need in order to make an informed decision, I wanted to discuss this issue from a slightly different angle. With the purchase of an annuity, the entire process, from application to contract delivery takes at the minimum, two weeks, and usually up to a month or more. Consider that the final decision to make an application to purchase an annuity is probably not reached until after several meetings with the agent. Then, when the policy is issued, up to a month later, and delivered to the client, the buyer has an additional “free look” period that ranges from 10-30 days, depending upon the state, to allow the client time to receive and review the final contract documents before becoming bound by its terms. If for any reason the client decides they do not like any provision of the contract, they simply notify the issuing company, before the expiration of the free look period, and they can return the contract, get all of their money back, and it will be as if the whole thing never happened. This lengthy process, that averages several months, provides more than sufficient time for any potential buyer to check out the credentials of the agent or the company with which they are considering doing business, with their state insurance department, or, to get a second opinion about their consideration from another advisor, attorney, CPA, or family member. Once the “free look” period is over, however, the contract goes into full effect, and both parties are then legally bound by its conditions. If after this time, a buyer changes their mind, or suddenly decides to look into the details of their purchase for the first time, and then finds them not to their liking, it is too late. They signed a contract with full disclosure and with adequate time to do their own investigations before committing to it, but they chose not to. This “Buyer’s Remorse” does not excuse an annuity purchaser for their lack of personal responsibility, nor should it provide them with escapes above and beyond that of the contract to which they agreed, nor should it assume blame to the agent, who HAD to use all the state approved and required disclosure forms, or the policy would have never been issued. With all the safeguards and disclosure requirements surrounding the purchase of fixed annuities, there is NO excuse for anyone holding an annuity contract they do not understand and do not want, except for their own lack of due diligence,or because they simply changed their mind.

Annuities Have Always Had Complete and Full Disclosure

In an online Washington Post article by Michelle Singletary, on February 2, 2006, entitled, Annuities Should Gain Transparency, she is attempting to discuss the recommendations of the NAIC to extend the requirement for Senior Protection in Annuity Transactions model regulation to purchasers of all ages. But as most journalist who attempt to write on this topic, Michelle has fallen prey to the practice of including insinuations that are not based in truth or fact. In her article, Michelle authoritatively asserts that “many seniors didn’t understand or weren’t adequately informed of the details in their annuity contracts.” She further states that “they didn’t know, for example, they could be assessed a ‘surrender charge’ if they needed to withdraw money from an annuity too early. They didn’t know that the interest rate paid on their money could change.” I wonder how long these accusations of the stupidity of our seniors will continue before someone finally speaks up on their behalf and defends them as responsible, intelligent, and business savvy adults. After all, our seniors know how to purchase real estate on their own, buy cars, invest in stocks, bonds, and mutual funds, buy CD’s, and figure out the complexity of their insurance and Medicare. Since ALL annuities have forms that are required to be signed by anyone purchasing one, that fully disclose surrender charges and the details about any interest rate guarantees or potential changes, all of the important and necessary information regarding an annuity they are considering is ALREADY being given to them. Additionally, every annuity contract, when issued, contains full disclosure of this critical information. If that is still not enough, then each new annuity owner has a state mandated “free look” period from 10 days up to one month, in which to read and make sure they fully understand the contract to their satisfaction before they are bound by its terms. To suggest that our seniors are not capable of reading, asking questions, or raising concerns BEFORE they buy an annuity, is an insult to their intelligence. Our seniors are some of the wisest members of society. With all the required disclosures that are mandated by use of state approved forms, the buyer, regardless of their age, has to be held responsible for making sure they understand what they are buying. The agent can only offer the information. The responsibility with the purchase of annuities, as it has always been with any product we buy in a free society, lies with the consumer, who needs to pick the information provided apart, as much as necessary, in order to make their choices appropriately. But, unless fraud is proven, once the buyer makes their decision, we have to assume they did so willingly and fully aware of everything that was important to them.