Have you ever wondered why there are so many regulations and procedures in place for the securities industry? I mean, really, who ever reads through every page of a prospectus before buying a mutual fund or a stock? But a detailed prospectus is required to be developed for every investment, and provided to every person who is considering a purchase of that security. The reason is simple. Because products sold in the securities industry hold NO guarantees and the buyer assumes ALL of the risk in a purchase, the government has attempted to do all they can to protect the public by requiring as much disclosure about the risk of each investment before the purchase, and to protect the public from being swindled into buying illegal investments and cons.
With all of this regulation in place, there are still some types of fraudulent schemes uncovered regularly which have bilked innocent, albeit naïve and possibly greedy investors, of millions of dollars. Most recently I just read about a Ponzi scheme which is reported to have walked away with $317 million dollars from nearly 1,400 investors in 41 states over a 15 year period. In case you don’t know what a Ponzi scheme is, it is where a non-existent investment is sold to people, false reporting makes it look like their investments are making money, and any payouts or refunds are simply made by collecting new investor money. All the while, the crooks are pocketing most of the money and in the case of this one mentioned above, hiding it in ways that make it next to impossible to recover. It is the proverbial robbing Peter to pay Paul put into a sophisticated and elaborate process. Eventually every such plan will crumble, but not before many people have been harmed and lots of money has been lost.
False investments have taken on many forms over the years, and once a particular angle is revealed, the crooks come up with a new look or a new way to look legite in their efforts to appeal to the inherit greedy nature of people who are looking to find the big winners of the investment world, only to find that they really were taken in by a side show of smoke and mirrors.
But not only are illegal investments a concern, what about the illegal, or unethical use of legal investments? What about suitability in the securities industry? Is the placement of senior adults with fixed assets and limited income into any kind of risk instrument appropriate when ANY loss of asset value will directly impact their financial security, reduce their income, and erode their quality of life? What about the common practice of “recommending” trades to clients, when the only real purpose for the trade is to create a commissionable transaction for the broker? Every day brokers are practicing this illegal act of “churning” client accounts, but no regulatory authority is doing anything to stop them or even slow them down. It is an accepted way of doing business.
What about the enormously high compensation that people at the top of major Wall Street firms are paid? Recently I just read where the head of Lehman Brothers received a $40.5 million dollar payout. Are his services really that valuable to the firm, or is the firm just making so much money that they have that much to give away to the top execs?
How about the companies whose stocks we buy or hold within mutual funds in our investments and retirement accounts? We already know from our experiences with MCI and Tyco that it became common practice for large corporations to “cook the books” to inflate stock values, which eventually plummeted when the real accounting became public. Are we confident that when the market places a value on a security, that value is real, or is it fictitiously created to enrich a few at the expense of the masses, like the Enron scandal?
The reason that the securities industry has been able to become one of the most highly regulated industries in the nation, yet have one of the worst track records for abusive conduct, and still hold the admiration and trust of the public is a baffling curiosity of human nature. How is it that we can take such information in stride and still keep coming back to this fountain to continue to drink of this tainted water? I think it comes back to that same word I have used a few times previously, fueled by another of our less attractive human traits.
If you were to poll every single person who has ever put any money, in any form into the market, and you were able to ask them why they were willing to put their trust into a system that we know will predictably and periodically falter; a group of people whose entire reward system almost mandates that they become self-serving; companies whose actions have shown a disdain for individuals, the environment, ethics, and at times national security over their need for the “appearance” of a healthy bottom line; you would get, without variance, one single answer. Everyone who accepts these adverse conditions and overlooks all of these potential risks to their financial security is only motivated by one single reason—GREED!
But the story does not end there. It would seem that after someone got beat up in the market during a “correction” they would pack up their bags and go home with whatever marbles they have left. Nevertheless, people keep bellying up to the bar and coming back for more. Why do people inherently keep subjecting themselves to this risk, even if their experiences should have taught them otherwise? The other human trait that keeps us from admitting our mistakes and prevents us from changing our bad course of action is PRIDE.
The securities industry has successfully learned how to completely manipulate both of these debase human tendencies in order to convince investors to not only assume all risk for their losses, but to assume all BLAME for their bad investment decisions, and further to CREDIT all gains and profits to their broker. Amazing!
I guess when you have an industry that has been able to accomplish all of this, that it is not difficult to see how they have been able to distract the public attention from the REAL fraud and deceptive practices in their industry and get the media all worked up about the very legal and ethical sale of fixed indexed annuities to seniors by starting up a buzz about “suitability,” a key component of a securities sale, but not even a part of most insurance sales until recently. If you take time to check, you will find that while there are always some fraudulent securities schemes going on, there has NEVER been a fraudulent annuity sold, and there has NEVER been a company fraudulently posing as an insurance company. So every insurance product that has ever been bought in this country has been a very legal, fully approved product, offered by a fully approved carrier who not only has to meet state regulations for financial accountability, but is reviewed annually by a number of independent insurance rating agencies for financial strength and stability.
The most ironic thing I find in the way the securities industry has criticized indexed annuities is when they wrongly superimpose securities regulations over an insurance product. The two industries are completely separate, follow separate and unique regulations, and are controlled and supervised by totally different government entities. When the two track records are places side by side, it is clear which one you can trust and which one you need to be very careful about before you give them any of your hard earned money. The distinction is clear; you will ALWAYS be left holding the bag with a securities purchase, good or bad. But with insurance you are transferring your risk to the insurance company. If you can control your greed and swallow your pride, you may just realize that over time, your safe fixed indexed annuity can provide you all the return you will ever want, without you having to accept the risk, the fear, the uncertainty, and the sleeplessness that comes with the package of putting your nest egg into the hands of the securities industry.
Wednesday, February 28, 2007
Legally, an Annuity could not be More Clear
I am still puzzled by the recent filings of class actions suits against indexed annuity issuers, with claims that the policies were sold to seniors illegally, unsuitably, or unethically. It is important to remember that an annuity, as an insurance product, is a contract between an insurance company and the annuity owner who purchases the policy. To my knowledge, there has never been an insurance company who has breeched their contractual obligations under any indexed annuity contract which has been issued. To really understand this point, let’s review what it takes for an annuity product to be brought to market.
Before any annuity can be offered for sale, first the insurance carrier has to design the product in a way that it believes will have a market appeal, as well as allow the company to make a profit selling this product. The insurance company has to prepare and submit the entire annuity contract, all marketing materials, and all forms and paperwork exactly as they will be used in the presentation and sale of this product, to each state insurance department where it plans to offer the annuity for sale. It is then the task of the state insurance department to review the material, make sure that the product and the materials meet their state insurance laws, return the documents back to the insurance carrier if they require any necessary changes or revisions, and finally, approve the new annuity for sale in its state. If an insurance company wants to sell this new product in every state, it must make 50 different such filings. With each state autonomously controlling their own insurance laws, the insurance company may have to make different changes in each state in order to meet their unique requirements.
Once a product is approved for sale to the public, it is then incumbent upon the insurance carrier, as part of the underwriting process to make sure all required forms and paperwork that were approved by that state insurance department, are properly completed and signed by the purchaser before the policy is issued. If the client willfully makes application to the annuity carrier for the purchase of this product, provides the premium dollars with which to purchase the product, and signs the contractually binding forms with which to enter into this contract, they still have time to get out of the deal, no questions asked. Each state offers a “free look” period where the client can get the actual policy in hand, which is their contract, and do any review of it they choose, or have it reviewed by anyone they choose, and then if they are unsatisfied for ANY reason, they can refuse to accept the policy, return it to the company within the allotted time, and the company is legally and contractually obligated to return all of their money as if the contract never existed.
After the “free look” period has passed, however, the annuity owner is now bound by the terms of the contract which they freely and willfully entered into, and the provisions of which they were provided in complete detail at both the time of application, through state mandated forms, as well as in the delivery of the contract document itself. At this point, the only contractual requirement of the annuity owner, in order to get the full benefits under the contract, is to leave their money on deposit according to the agreement. The insurance company, on the other hand, is now on the hook for guaranteeing the client’s money, tracking and crediting interest, processing statements, providing withdrawals as allowed in the contract, keeping track of the account values, and offering any other policy benefits.
Still, as detailed in the agreement, the annuity owner can fully or partially cancel the contract at any time, with the provision of surrender, which carries with it a early termination penalty called a surrender charge, which was also approved by the state insurance department, disclosed to the client at time of application, and again included in the contract documents. These surrender charges are never assessed unless or until the annuity owner intentially decides to make a withdrawal in excess of the allowed annual withdrawal amount, or if they excercise their contractural right to legally break their contract completely, and get their money back.
So the question is where in the world is there a problem with the performance of the insurance company in this whole process? Since this part of an annuity sale is so carefully controlled and supervised, the only place that anyone has been able to really sink in their teeth and condemn indexed annuities is in the sales process itself, and that focus has been almost entirely on the subject of suitability. But, if suitability is the real question, then either that would be only a case by case consideration, or else, the state insurance departments who approved the sale of a particular product for defined age groups would be the one who would be ultimately liable if it were determined that any specific annuity product were unsuitable for an entire class of people.
Before any annuity can be offered for sale, first the insurance carrier has to design the product in a way that it believes will have a market appeal, as well as allow the company to make a profit selling this product. The insurance company has to prepare and submit the entire annuity contract, all marketing materials, and all forms and paperwork exactly as they will be used in the presentation and sale of this product, to each state insurance department where it plans to offer the annuity for sale. It is then the task of the state insurance department to review the material, make sure that the product and the materials meet their state insurance laws, return the documents back to the insurance carrier if they require any necessary changes or revisions, and finally, approve the new annuity for sale in its state. If an insurance company wants to sell this new product in every state, it must make 50 different such filings. With each state autonomously controlling their own insurance laws, the insurance company may have to make different changes in each state in order to meet their unique requirements.
Once a product is approved for sale to the public, it is then incumbent upon the insurance carrier, as part of the underwriting process to make sure all required forms and paperwork that were approved by that state insurance department, are properly completed and signed by the purchaser before the policy is issued. If the client willfully makes application to the annuity carrier for the purchase of this product, provides the premium dollars with which to purchase the product, and signs the contractually binding forms with which to enter into this contract, they still have time to get out of the deal, no questions asked. Each state offers a “free look” period where the client can get the actual policy in hand, which is their contract, and do any review of it they choose, or have it reviewed by anyone they choose, and then if they are unsatisfied for ANY reason, they can refuse to accept the policy, return it to the company within the allotted time, and the company is legally and contractually obligated to return all of their money as if the contract never existed.
After the “free look” period has passed, however, the annuity owner is now bound by the terms of the contract which they freely and willfully entered into, and the provisions of which they were provided in complete detail at both the time of application, through state mandated forms, as well as in the delivery of the contract document itself. At this point, the only contractual requirement of the annuity owner, in order to get the full benefits under the contract, is to leave their money on deposit according to the agreement. The insurance company, on the other hand, is now on the hook for guaranteeing the client’s money, tracking and crediting interest, processing statements, providing withdrawals as allowed in the contract, keeping track of the account values, and offering any other policy benefits.
Still, as detailed in the agreement, the annuity owner can fully or partially cancel the contract at any time, with the provision of surrender, which carries with it a early termination penalty called a surrender charge, which was also approved by the state insurance department, disclosed to the client at time of application, and again included in the contract documents. These surrender charges are never assessed unless or until the annuity owner intentially decides to make a withdrawal in excess of the allowed annual withdrawal amount, or if they excercise their contractural right to legally break their contract completely, and get their money back.
So the question is where in the world is there a problem with the performance of the insurance company in this whole process? Since this part of an annuity sale is so carefully controlled and supervised, the only place that anyone has been able to really sink in their teeth and condemn indexed annuities is in the sales process itself, and that focus has been almost entirely on the subject of suitability. But, if suitability is the real question, then either that would be only a case by case consideration, or else, the state insurance departments who approved the sale of a particular product for defined age groups would be the one who would be ultimately liable if it were determined that any specific annuity product were unsuitable for an entire class of people.
Monday, February 26, 2007
Where is the REAL Problem with EIAs?
With the sudden onset of several class actions lawsuits recently filed against insurance companies who issue EIAs, (which we now prefer to call FIAs, for Fixed Indexed Annuities), it calls to question why the pursuit against these products is now finding its way into legal channels, rather than through the regulatory agencies who normally handle such concerns. Similar to the thinking used by Mr. Monk when he solves one of the cases he is working on, it helps if you simply ask the question, “who benefits?” In this case that would need to be a three part question, asking who benefits from the action itself, who benefits from the negative publicity about indexed annuities, and who would benefit it the action prevails?
Let’s begin by looking at who benefits from just the simple filing of any of these cases. Already in the new case against Midland National Life, the attorney for the plaintiffs is being quoted and his name publicized in articles that have made it to the press. We see every day how attorneys advertise on TV looking for big personal injury cases to represent. When the potential prize is the deep pockets of an insurance company, it is a lawyer’s dream, and financial windfall, to settle such a big case. Building a reputation as a winning attorney in such cases can increase the size and number of big cases that come to these law firms. Landing a class action suit, that gains national attention and where the awards can reach hundreds of millions of dollars, is the ultimate professional pinnacle for any attorney who practices this type of law. Even if the case ends in an out of court settlement for far less than the original suit, there can still be enough publicity and fees to change the course of the attorney’s career. After years of watching the battle between the securities and the insurance industry over indexed annuities, it is not surprising to see that attorneys now want to cash in on this conflict, and take their piece of the pie.
In spite of this bad publicity, the securities industry is still losing billions of dollars in lost client investment accounts to indexed annuities, which represents hundreds of millions of dollars in lost commissions to brokers and broker dealers every year. After years of very calculated and deliberate attacks in an effort to discredit these products, it has to be a warm reception for the securities industry to see indexed annuities now being suddenly blindsided by a foe which has been attacking them for decades. While it is unlikely this common agenda will make the securities industry best buds with these carnivorous attorney’s, it is clear that they relish in the outside assistance to their cause to either wipe out indexed annuities or gain control over them.
If any of these class actions prevail, it is ironic to really examine who will NOT win. The supposedly thousands of harmed seniors who bought these annuities in the first place will end up being the big losers if all of this goes to trial and the lawyers prevail. This is not a question about ethics, nor really a question about product suitability, as some have indicated. It is, as it always is when large sums are at stake, a question of money.
The criticism has been falsely made that those elderly adults who purchased any of these indexed annuities have had their “assets frozen.” The basis for this claim is because annuity policies have surrender charges, often for more years than the life expectancy of the owner. The assumption that has been falsely made is that this is preventing these annuity owners access to their money. The truth is that these people have access to ALL of their money through a number of contractually protected means beginning in the very first policy year. First, they can make penalty free withdrawals each year of up to 10% with most companies and in most indexed annuity products. In many cases they can access up to 100% of their money free of any surrender charges if they need nursing care for an extended period of time. And, as with ALL annuities, they can convert their contract into a stream of income they can never outlive. So, unless these people are forced, or frightened, into completely canceling their contracts prematurely, there is no better place for an elderly person to put their nest egg, and their money could not be safer than it currently is in their annuity.
Consider what will happen if these attorneys prevail. Do you think for one minute that they are working on this case for free? They may have made their fees contingent, but they are looking for a large pay day when this case is either won, or settled. If the real concern is for liquidity to these seniors, and the attorneys simply succeed in getting the insurance companies to release the original premium dollars with interst to particpants of this lawsuit without surrender penalties, where are the attorney fee going to come from?
Consider the weak arguments that can be made in a class action against indexed annuities and you will find that it will be impossible for any attorney to make a sound argument that any of the annuity owners were materially harmed in the purchase of their annuity. By contract, 100% of their money is guaranteed, they probably have a minimum guaranteed interest return over the life of the contract, and they have all kinds of access available to their money, as I mentioned above. Change of circumstances or buyers remorse by the purchaser is not the substance for a class action lawsuit. Also, if some of the agents were too greedy or aggressive and did not follow approved or ethical sales procedures with their clients; this would indicate an individual case by case concern against those particular agents, not a class action problem against the insurance company. And, if the insurance company product that was sold was approved by the state insurance department and all state required forms and disclosures were used in the sale, how can the insurance companies, or the agents who used the proper paperwork, be held liable for following the approved insurance law.
Insurance companies who sell indexed annuities have shown, by their past actions, that when it is clear that a client bought an indexed annuity under some type of sales misconduct by an agent; in these rare circumstances, they have offered to give this client their money back without penalty. It is unlikely to think that insurance companies would waste money and the bad publicity to legally fight a truly dissatisfied client who believed they were sold their product unsuitably. So, if there are clients of these companies who have valid complaints, they would probably be much more successful getting all their money back directly from the insurance company without the need or cost of an attorney.
IF, on the off chance that this case was won in court, there could be a punitive award made that could result in a small split of that money to each of the annuity owners. But most likely, if there is a settlement it will be for the insurance company to release all premiums plus interest since date of deposit to each party to this class action suit, and they will have to part with a portion of their “refunded” money in order to pay the attorney for helping them get out of their indexed annuity contract early. With typical attorney contingency fees ranging from 25%-50%, how much of a victory will it really be when these seniors get free of the insurance company, only to have a huge chunk of their money stolen away by their supposed knight in shining armor.
Let’s begin by looking at who benefits from just the simple filing of any of these cases. Already in the new case against Midland National Life, the attorney for the plaintiffs is being quoted and his name publicized in articles that have made it to the press. We see every day how attorneys advertise on TV looking for big personal injury cases to represent. When the potential prize is the deep pockets of an insurance company, it is a lawyer’s dream, and financial windfall, to settle such a big case. Building a reputation as a winning attorney in such cases can increase the size and number of big cases that come to these law firms. Landing a class action suit, that gains national attention and where the awards can reach hundreds of millions of dollars, is the ultimate professional pinnacle for any attorney who practices this type of law. Even if the case ends in an out of court settlement for far less than the original suit, there can still be enough publicity and fees to change the course of the attorney’s career. After years of watching the battle between the securities and the insurance industry over indexed annuities, it is not surprising to see that attorneys now want to cash in on this conflict, and take their piece of the pie.
In spite of this bad publicity, the securities industry is still losing billions of dollars in lost client investment accounts to indexed annuities, which represents hundreds of millions of dollars in lost commissions to brokers and broker dealers every year. After years of very calculated and deliberate attacks in an effort to discredit these products, it has to be a warm reception for the securities industry to see indexed annuities now being suddenly blindsided by a foe which has been attacking them for decades. While it is unlikely this common agenda will make the securities industry best buds with these carnivorous attorney’s, it is clear that they relish in the outside assistance to their cause to either wipe out indexed annuities or gain control over them.
If any of these class actions prevail, it is ironic to really examine who will NOT win. The supposedly thousands of harmed seniors who bought these annuities in the first place will end up being the big losers if all of this goes to trial and the lawyers prevail. This is not a question about ethics, nor really a question about product suitability, as some have indicated. It is, as it always is when large sums are at stake, a question of money.
The criticism has been falsely made that those elderly adults who purchased any of these indexed annuities have had their “assets frozen.” The basis for this claim is because annuity policies have surrender charges, often for more years than the life expectancy of the owner. The assumption that has been falsely made is that this is preventing these annuity owners access to their money. The truth is that these people have access to ALL of their money through a number of contractually protected means beginning in the very first policy year. First, they can make penalty free withdrawals each year of up to 10% with most companies and in most indexed annuity products. In many cases they can access up to 100% of their money free of any surrender charges if they need nursing care for an extended period of time. And, as with ALL annuities, they can convert their contract into a stream of income they can never outlive. So, unless these people are forced, or frightened, into completely canceling their contracts prematurely, there is no better place for an elderly person to put their nest egg, and their money could not be safer than it currently is in their annuity.
Consider what will happen if these attorneys prevail. Do you think for one minute that they are working on this case for free? They may have made their fees contingent, but they are looking for a large pay day when this case is either won, or settled. If the real concern is for liquidity to these seniors, and the attorneys simply succeed in getting the insurance companies to release the original premium dollars with interst to particpants of this lawsuit without surrender penalties, where are the attorney fee going to come from?
Consider the weak arguments that can be made in a class action against indexed annuities and you will find that it will be impossible for any attorney to make a sound argument that any of the annuity owners were materially harmed in the purchase of their annuity. By contract, 100% of their money is guaranteed, they probably have a minimum guaranteed interest return over the life of the contract, and they have all kinds of access available to their money, as I mentioned above. Change of circumstances or buyers remorse by the purchaser is not the substance for a class action lawsuit. Also, if some of the agents were too greedy or aggressive and did not follow approved or ethical sales procedures with their clients; this would indicate an individual case by case concern against those particular agents, not a class action problem against the insurance company. And, if the insurance company product that was sold was approved by the state insurance department and all state required forms and disclosures were used in the sale, how can the insurance companies, or the agents who used the proper paperwork, be held liable for following the approved insurance law.
Insurance companies who sell indexed annuities have shown, by their past actions, that when it is clear that a client bought an indexed annuity under some type of sales misconduct by an agent; in these rare circumstances, they have offered to give this client their money back without penalty. It is unlikely to think that insurance companies would waste money and the bad publicity to legally fight a truly dissatisfied client who believed they were sold their product unsuitably. So, if there are clients of these companies who have valid complaints, they would probably be much more successful getting all their money back directly from the insurance company without the need or cost of an attorney.
IF, on the off chance that this case was won in court, there could be a punitive award made that could result in a small split of that money to each of the annuity owners. But most likely, if there is a settlement it will be for the insurance company to release all premiums plus interest since date of deposit to each party to this class action suit, and they will have to part with a portion of their “refunded” money in order to pay the attorney for helping them get out of their indexed annuity contract early. With typical attorney contingency fees ranging from 25%-50%, how much of a victory will it really be when these seniors get free of the insurance company, only to have a huge chunk of their money stolen away by their supposed knight in shining armor.
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