What is Suitability, and WHO Should Determine it?

In a previous blog I talked about the legal and contractual nature of an indexed annuity. Their structure is so tight; it has left little room for critics to really pick them apart from a legalities standpoint, so they instead have chosen to go after the events surrounding the sale of an indexed annuity, all under the guise of a concern for “suitability.”

First of all, even in the broadest terms, who can say without question exactly what is suitable or not? Suitability of any sale of any product to a particular individual, or group of individuals, is seldom a black and white issue; and in the case of meeting financial objectives, everyone’s financial circumstances are unique and very personal, and are not an exact science as much as a progressively moving target. Suitability, even on an individual basis, is a very objective concept at best, and for some outsider to peek into an industry, or even just glance at a particular case and believe that, for some reason, THEY have better qualifications to determine suitability, is not only absurd, but is nothing more than arrogant vanity. To take such critical judgments and make a legal case out of them is completely ludicrous.

To demonstrate how bazaar this attack on indexed annuities really is from a suitability position, let’s take a look at another industry and determine if “unsuitable” sales are being made there. Automobiles are getting to be a huge expense for those who choose to buy new vehicles periodically. In order to help facilitate the sale of the more expensive ones, dealers have devised financing deals and leases to allow people, who otherwise could not afford such expensive purchases, to drive home in a brand new car. In the case of long term auto loans, if the buyer wanted to sell or trade their car in the early years of the loan, they find that the depreciation of the automobile has eroded the value of the car well below the balance on the loan, and they would have actually have to “pay” in order to sell their car.

If we apply suitability to auto sales in the same way it is applied to indexed annuities, it could be determined that this would be an unsuitable sale. It puts the marginal buyer in a precarious financial position, first by burdening them with a huge monthly payment, which could impact their entire financial picture. Then, they have to cough up significantly higher premiums to insure this more expensive vehicle, and hope that their driving record stays clean. Finally, this deal greatly restricts their future options to unload this car and virtually “freezes” them in this vehicle and this payment until such time as they can at least break even in paying off the remaining loan with the proceeds of a trade or a sale.

But are you hearing any clamor out there to control the sale of new automobiles based upon some outsider’s view of suitability? No! We accept that the buyer is responsible for making that decision on their own and we assume if the financing is approved, and the buyer is willing, the deal must be ok and we give them the right to make a bad decision if they want, knowing that they are the ones who will ultimately have to suffer the consequences of their decisions, good or bad.

In the sale of an indexed annuity, the client and the agent usually spend hours together over several meetings that could span a time frame of days or often weeks or even months. During those discussions, a thorough agent is finding out, not only the client’s financial picture, but is determining the client’s financial concerns, their needs, and their goals. An agent who sells fixed indexed annuities knows that these products are safer than any security product, have better long term returns than most other fixed products like CDs or bonds, and that annuities are the ONLY product out there that can provide a guaranteed stream of income that the client can NEVER outlive. If the client is seeking safety of their limited assets, or has a concern that they may run out of money, the agent knows that of ALL financial products available, ONLY an annuity meets both of those requirements and will likely recommend the client consider putting a portion of their money in one. The next value decision that has to be made is how much of the client's liquid assets should be placed in such a vehicle. Again, there is seldom a clear answer to this question, and the BEST answer can only be determined after understanding the client and what is important to them.

Ultimately, the buyer of the annuity, regardless of their age, unless they are senile or mentally incompetent, is not only capable of making a reasonable and informed decision, but should be allowed the right to make the decision for themselves, either good or bad. Why is it that just because someone is elderly, annuity critics ASSUME that they are no longer able to make good judgments? If they have reached this state of being unable to manage their own affairs, shouldn’t the concern be more for committing them to some type of supervised care?

Truth is, the critics of fixed indexed annuities are simply playing the empathy card and using the elderly as their pawns for their own personal agendas. If we want to protect our senior population, why don’t we talk about how we can protect them from being used as a political football and allow them to maintain the dignity of independence for as long as possible, and be able to enjoy the quality of retirement they worked so hard to achieve without being insulted and belittled as the constant objects of political power plays?