Indexed Annuities

Im back; and there is so much we need to talk about.

2009-08-26T17:18:00.001-04:00

After taking a break for a few years from the insurance industry to rehab a few properties, I am back to resume my writings and comments about indexed annuities. I have not been completely silent during this time, but, participated in the letter writing campaign to the SEC before the last consideration of 151A, which I posted here in June 2008.

A lot has transpired in the industry, the products, and in the regulation of indexed annuities in the last couple of years. Not only am I ready to resume writing about these things and stay on top of what is presently going on in the annuity market, I am out actively talking about indexed annuities and encouraging seniors to rely upon them for the safety and security they offer to their retirement nest egg. Read the previous post which I submitted to the SEC, which clearly identifies my arguments about the issue.

Of all the incredibly stupid claims that the critics of indexed annuities have offered, the brightest spot in all this debate is the long overdue, but welcomed united opposition to the SEC by the NAIC. When I approached my own insurance commissioner a few years ago, his patently political reply did not offer me much encouragement that he would take a strong stand, and the Minnesota insurance commissioner, quoted when Allianz became the object of an attack, similarly did not provide me the assurance of strong leadership in defense of the regulatory realm of state insurance departments.

As we continue to watch how things develop, I will look for articles to comment on. If you find one of particular interest, please send it to me. Let’s crank up this debate and let our supportive voices be heard.

Comments to SEC for proposed rule 151A

2008-10-13T23:14:00.000-04:00

The basis explained by the SEC for the recommended redefinition of indexed annuities as securities, under the Securities Act of 1933, is due to the suggested “risk” that a buyer faces while owning one of these products. The very unique character of the indexed annuity is that in addition to having all of the safe features of a fixed annuity, it also has the “potential” to earn additional interest, and because the measure for these “extra” earnings are mathematically tied to the performance of a named index, the SEC has suggested that the annuity owner is assuming investment risk, and therefore these products should be regulated by the SEC, rather than state insurance departments. This position by the SEC is erroneous and misguided and needs to be retracted.

Insurance industry experts and major insurance carriers have argued against the SEC acceptance of this rule, clearly illustrating that it is the insurance company which bears the investment risk involved in determining this “extra” interest and NOT the annuity owner. The insurance company is contractually bound to credit the policy holder the additional interest when the formula is positive, according to their contract, and regardless of how underlying insurance company investments performed.

The annuity owner is protected from losses in an indexed annuity with contractually defined guarantees of return of premium, and in most cases, a minimum interest return over the life of the annuity. Because the insurance company has developed a method whereby they will credit this “extra” interest, based upon the movement of some outside index, the owner may or may not always get this “extra” interest, depending upon how the mathematical formula works out when the index numbers are plugged in for that crediting period.

What the SEC is basically saying in their assertions, is that because this potential for “extra” interest is uncertain and not guaranteed, it is therefore risk to the owner, because, in order to pass rule 151A in good conscious, the SEC has to find that the annuity owner actually has some risk of loss within an indexed annuity contract. According to tax laws, if an investment loses value which you never realize, you cannot claim a taxable loss, because in the eyes of the IRS, a loss never occurred. Similarly, in an indexed annuity, where the owner has the “potential” to earn extra interest, but did not because the measuring stick value went down rather than up for that crediting period, the owner never earned that interest, so they never had that interest to lose.

Without a loss, there was NO RISK, only the potential for gain. The annuity owner’s original deposit is never at risk, and all previous period interest earnings, once credited to the account, are similarly guaranteed from that point forward. With no risk to the purchaser, there is NO SECURITY product definition that falls under the Securities Act of 1933, and therefore, NO NEED for the SEC to attempt to take control of this product away from state insurance regulators. In fact, the SEC is outside of their jurisdiction in their attempts to define indexed annuities as securities.

During the enormous slide of the stock market over the past two weeks, this financially alarming time interestingly illustrates the very significant differences between indexed annuities and every security product available, and punctuates exactly why these annuity products are NOT securities. While in this short time, stock portfolios plummeted as much as 40%, Wall Street giants went bankrupt, corporate bonds lost value or became worthless, major banks became insolvent, and every investor who had ANY holdings in any part of the market feared for their financial future; EVERY owner of an indexed annuity experienced exactly the same thing:

No matter what happened to stock values, interest rates, bond prices, or the price of oil, EVERY single owner of an indexed annuity in the USA was guaranteed not to lose one single penny of their savings held securely within those insurance products.

If EVERY retiree, who is presently suffering severely from the enormous decline in the value of their market invested retirement accounts, had instead purchased a guaranteed indexed annuity insurance product, their financial plight would be removed from this national dilemma. If their money was safely in an indexed annuity, they would be able to sleep peacefully, knowing that their money was safe from the corruption that rocked Wall Street, our nation, and the entire world economy.

Finally, a Judge with a Brain regarding FIAs

2007-07-16T16:06:00.000-04:00

In Hawaii, there arose a ray of hope for the intelligence of our judicial system when a judge there refused to certify a class action suit against Midland National Life Insurance regarding the sale of its annuity products. Unfortunately, in St. Louis, such signs of intelligent judicial life were not present when a judge there upheld the certification of a class action suit against Allianz Life Insurance Company of North America. The irony of the Allianz suit is that the focus of the complaint is about the bonus that is part of that product. Maybe if Allianz just took the bonus back, it would make them all happy and they would just go away.

Of course the real issues here are cleverly disguised behind rhetorical claims of improper sales practices, and confused annuity purchasers. And the motivations that once could be easily identified as a financial jealously by the securities industry over the popularity of FIAs, is now becoming a political issue and another way for money hungry attorneys to try to enrich themselves at the expense of big insurance companies, their customers, and the American public.

The information that seems to be missing in all of these accusations is that every single one of these annuities that were sold by these two companies, as well as those sold by every other company not currently part of any action, are all legal products, sold in a legal manner, by licensed agents, using approved sales materials, forms, and disclosures. Midland and Allianz submitted their products, the sales literature, and all forms to each state insurance department for review and approval before any agent could offer these annuities for sale. And in EACH and EVERY case, the state insurance departments approved the final version of the product sold that is now being questioned. And in each case, the carrier makes sure that any agent who submits an application on behalf of a client is properly licensed in that state to sell insurance products, and that all required paperwork has been properly completed with all client signatures on all forms, including a fully detailed disclosure of how every feature of the product works.

When an insurance carrier follows every single legal requirement precisely to get a product approved for sale, appointing agents, and processing applications, then how can they be found guilty of doing anything wrong? If any group of consumers, or government officials believe there is a problem with any of the product designs or forms used, since they were ALL approved by individual state insurance departments, then the only beef I see they can have is with the state insurance departments. But since there are statues regarding limitations of a suit of a government entity, and it would require a separate suit in each state, there is not enough money in it for the attorneys to pursue such a course. So, they have tried to join the tide of negative propaganda begun by the securities industry of confusing the facts. Then they have been seeking out judges ignorant of the insurance industry and its regulatory structure, to attempt to certify these class actions, hoping that even a settlement will mean millions of dollars for their trouble. Fortunately, in Hawaii, they ran into a judge with some common sense, even if he is not familiar with the specifics of insurance regulation.

The victims in the pursuit of these class action cases are the annuity owners themselves. Not because they bought a product that is defective, or that they were not fully informed of the details of their purchase, but because no matter the outcome they will lose.

Fixed and fixed indexed annuities are one of the most appropriate financial products available for seniors with limited assets and income to place their valuable nest eggs because of their safety and guarantees. The securities market cannot offer the safety and security of principal, and banks cannot offer the long term level of interest that these important products can. And nothing offers the income guarantees that an annuity offers.

Those 400,000 people that are included in the group that are supposedly being represented in the action against Allianz, are not in any financial danger if they left their money alone and retained the annuity product they bought. There is no impending concern that if something is not done soon, they will lose money. In fact, the opposite is true. If they leave their money alone, the product will perform as intended and they will receive the maximum benefits offered in their contract. NONE of them will suffer a surrender charge or penalty, UNLESS they choose to break the contract and withdraw their money early.

If this suit, or at least the publicity of the suit, causes just one person to unnecessarily cancel their contract, withdraw their money, and incur the surrender charge, then that realized cost is not the result of the product, the insurance company, or the sales agent. That loss to the annuity owner is the direct responsibility of the irresponsibility of the attorneys who are pursuing this case. And the way fear and panic can spread through the masses when fueled by the false validation of publicity, it is likely that hundreds, if not thousands of people will unfortunately suffer huge financial losses for no reason, other than they were lead astray by some money hungry lawyer who misrepresented his real intentions.

The worst case scenario is if any of these cases were to prevail, to any degree. The typical take for a law firm pursuing class actions is from 35-50% of the award. That means that for those annuity owner participants who allow the attorneys to represent them in this case, in their hopes of getting out of their contract early and getting their money back without paying the surrender charges, will pay at least double in attorney’s fees from what they would have paid in surrender fees if they had just surrendered their contracts directly to the insurance company. Considering that few, if any of these 400,000 annuity owners, needed to get at all of their money right away; even if for some emergency, they needed more out of their annuity than was allowed without penalty, paying the penalty only on the excess and leaving the rest in the contract, would be the least costly of all emergency options.

Hopefully, as those class action suits that have been certified progress, they will find their way in front of judges who have the mental capacity of the Hawaii judge, and see that there is no class action possible when every product was legally sold under the regulatory authority of the insurance department of each state. If there is individual concern that some agents have used illegal or unethical methods in their sales, I am all for cleaning house of the bad agents. But as the judge in Hawaii so brilliantly concluded, that is an individual case by case consideration, and not a class action.

Here We Go Again

2007-05-23T14:12:00.000-04:00

Now it is the Massachusetts Secretary of State who is trying to stick his nose into things which is none of his business. I guess Mr. William F. Galvin didn’t like the Minnesota state officials getting all the publicity. Those “M” states must really have a competitive thing going on because these charges are as ludicrous as those made by the Minnesota Attorney General against a prominent insurance carrier.

In an article recently published in telegram.com, about 2 men charged in an investment scam in central Massachusetts, the actions of public officials, in racing to conclusions, and the assumptions of wrongdoing, when there is no evidence for such misdoings, are incredible. In case you did not read about it, the two men in question sold annuities, an insurance product, to some elderly people who voluntarily attended a financial seminar they held. For some, this simple statement is enough to motivate them to cry fowl, but let’s look at the real criticisms made in these particular cases, because they have no merit whatsoever.

The basis for the claim by the Secretary of State is that the men were giving unauthorized advice to seniors. First of all, what in the world is the Secretary of State doing jumping into this role of financial police. Yes, I know that the Securities Division is the one taking this action, but still, the products sold to these people were insurance products, so this is not a securities issue for them to chase.

Anyway, the claim is that the advice these men were giving was investment advice, and that they were not properly registered to give investment advice. Interesting enough, the products these men actually did sell to these seniors are not investments, but insurance products, and it is actually unlawful for insurance agents to call insurance products investments. Too bad that rule does not apply to financial journalists, securities officials, and Secretary’s of State.

So the real question is why would these men offer investment advice, only to end up selling the clients an insurance product, which by the way, both agents were properly licensed to sell, and the products they sold were approved insurance products for sale in that state to people of that age group. The sale that was made was completely valid and lawful under the insurance laws of Massachusetts, the only jurisdiction responsible for oversight in such matters. And if you look closely, you do NOT see the state insurance department joining in this complaint, because they do not have one against these agents.

The complaint by the Secretary of State also indicates that one of the men was “dishonest and unethical in presenting himself to seniors as an objective and unbiased financial advisor.” It seems to me that this conclusion is a very assumptive one, given that the man was presenting an approved product for which he is properly licensed to sell. If an outside observer, such as the Secretary of State, is going to judge the motives and intensions of a salesperson selling ANYTHING, then unless they were there to witness exactly what was said, there has to be clear evidence that their presentation was dishonest, and that their intent was solely for personal gain, at the expense and harm of the prospect. Come on, every salesperson selling every product wants to earn a commission from that sale, but that fact does not in any way support that they were willing to somehow “force” the person to buy.

So, this argument made by the Secretary of State, has to make the following false assumptions in order to hold water:

*The buyers of the annuities are in fact harmed by their purchase of them, and
*The agent was able to get the buyers to buy against their will.

If you go back and read some of my previous blogs, you will see that I strongly support the sale of guaranteed, safe, and secure indexed annuities to elderly clients. There is no more suitable financial product for a senior. ANY securities product WOULD be an unsuitable sale, but these agents were not selling securities, as claimed, but were selling fixed, guaranteed annuities. So, that negates that part of the argument completely.

The sales process for presenting and selling an annuity is also regulated by the state insurance department, so these agents had to use approved sales materials, approved full disclosure forms and applications, signed by the buyers BEFORE the insurance company would issue the policy, and the buyers would have been given all details of the product in the contract, with a “free look” period where they could change their mind and get out of the deal without penalty. This information eliminates the possibility that the agent would be able to be dishonest in his representation of the product to the client. Every buyer is required by law to sign all of the documents which disclose in complete detail exactly how the policy works.

If a policy was issued, that signed documentation can be produced to show that the client saw that disclosure and had every opportunity to read all of that information and plenty of opportunity to change their mind if they wanted to, before becoming bound by the terms of the contract. So, there is no way that a person can be forcibly coerced to buy an annuity against their will, unless they are just plain stupid and can be manipulated to do anything the salesperson wants them to do. To assume that this is possible is an insult to the intelligence and integrity of the individuals involved, and every other elderly person who is lumped into this category of gullibility.

As far as a salesperson being unbiased, let me ask you to consider that when you go to a Toyota dealer, do they suggest you also check out Honda, before making up your mind on which car to purchase? Does a stock broker suggest to their senior clients that they call their insurance agent to see what kind of guaranteed insurance products are available, before entering into the unsuitable risky investment which they are recommending? Insurance agents sell insurance, brokers sell securities, and Toyota salespeople sell Toyotas.

Insurance products are financial products that offer numerous financial solutions to many financial problems. In many cases, insurance is the ONLY solution to some problems or concerns, because of the guaranteed nature of many insurance products. To represent that information to a potential client is not an exaggeration, or an empty and misleading sales pitch, but a fact.

Independent insurance agents are responsible for their own training and continued education. They already had to take a class and pass an exam to get licensed, and most states have annual continuing education requirements, but most professional agents want to go further in an effort to be better informed and prepared for their areas of specialty. The rub here is that when an agent takes the time and trouble to receive more training or education, so that they can be better at what they do, many of the certifications they pursue are criticized as inferior, because some of the higher powers do not want to recognize anything but a few select designations. Agents who are willing to seek more training, no matter what the source, should be applauded and supported in that quest, not chastised for taking the wrong course.

It is time for the issue of selling annuities to seniors to be removed from the political arena because the real victims here are the seniors. But the ones inflicting the harm on them is not the insurance industry, but the media, the securities industry, and these trigger happy politicians in unrelated state departments who are trying to put another notch on their guns by stepping into areas where they do not belong. Who is there that can stop this madness and protect our elderly from this dissemination of apparantly official misinformation?

The telling sign in this is that the visible cases you hear about are not being brought forward by unhappy annuity owners, but by others who are seeking out poster children for their selfish campaigns. Let’s leave the seniors alone and give them the respect they deserve to make sound financial judgments on their own, without the need for any head of state to baby sit them. After all, they made it where they are today by a lifetime of good decisions. Until they reach the point where they cannot manage their own affairs, they should be allowed to continue to make their own decisions. And then, only on a case by case basis, led by the family and loved ones who truly care about the well being of the senior as a person, not as a political football.

Did EVEYRONE forget what Annuities Are All About?

2007-05-14T13:41:00.000-04:00

In the race to sue insurance carriers over alleged inappropriate sales of indexed annuity products to seniors, and in the ongoing attacks by the securities industry leaders about confusing product structure and sales methods, it seems to me that this clamor has totally diverted attention from what an annuity is really supposed to be. A fixed or fixed indexed annuity is an insurance product meant to provide individuals a way to guarantee a steady source of income for retirement from an accumulated asset base. As people are delaying retirement until much later in life, insurance companies have been looking for ways to get people to commit their dollars to an annuity sooner in life, by offering distinctive deferral features in the early stages of policy ownership. Nevertheless, the primary function of any annuity is always meant to be income, not accumulation.

In recent years, insurance companies have reacted to the growing interest of annuity buyers in deferring the start of a retirement income stream, by designing annuities to include creative deferral features that can allow for the annuity to double as an accumulation vehicle until the owner decides to activate the income features, even if that deferral last for a number of years. This trend has evolved into a marketing effort that has promoted the savings and deferral features of an annuity more than the income features. To further enhance the deferral benefits, liberal annual withdrawal privileges can actually become a substitution for the guaranteed income and cause annuity owners to keep their annuity in deferral without ever annuitizing them at all.

Still, the basic guaranteed features of an annuity, which can provide an income stream that a person can never outlive, are always present, even in these newer products which offer creative interest crediting strategies during the deferral phase. So, no matter how an annuity is viewed by its critics and detractors, it is still the only way an individual can take a fixed cash asset and create a guaranteed stream of income that can last them for the rest of their life, no matter how long they live. And if they so choose, they can have that income benefit transfer, after their death, to a surviving spouse or other individuals.

If you can go back to the basics and begin to see this unique and powerful benefit that every fixed and indexed annuity can provide, you will see them in a different light in the context of current criticism. And in the case of the possible class actions suits which lie ahead for several carriers, in the function of their original intent, all of the annuities in question are perfectly suitable for even the oldest of clients who purchased one. The fact that a senior can buy an annuity and then decide when or if they want to use it to create a guaranteed stream of income, is actually providing these people a powerful financial tool. To offer them a way to earn a respectable interest return during that deferral period, with all of their money guaranteed during whatever amount of time they may choose to wait, is an incredible plus, not a negative, as some are mistakenly trying to show. And to protect their hard earned savings from market risk and interest risk by guaranteeing their principal and guaranteeing a minimum interest return, is a very positive feature that makes fixed and indexed annuities perfect for a retired individual of ANY age.

Dear Ms. Schapiro, It’s NONE OF YOUR BUSINESS!!

2007-03-28T11:51:00.001-04:00

The combination of the NASD and the NYSE into one self regulatory organization must have NASD chairman, Nancy Schapiro, lusting over the potential for the increase in her power and authority. In her recent talk at a Phoenix meeting for the Securities Industry and Financial Markets Association, New York, she insisted that she will continue to focus on the “sales practices aimed at seniors” and the “emerging life settlement industry.” It would be a very good thing if Ms. Schapiro did in fact try to clean up the serious violations of ethics in the securities industry in the sale of unsuitable and fraudulant risk instruments to our senior population. Brokers routinely place elderly clients with limited assets and income in high risk stocks, mutual funds, or in variable products, and brokers openly practice the illegal acts of churning client accounts for no other purpose than to generate themselves a commission. These practices are rampant, and no one in the regulatory branches of the securities industry is doing anything to try to control or eliminate these abusive actions.

But somehow, Ms. Schapiro seems to think that she DOES have time to meddle in the insurance industry affairs and implies, just as her predecessor did, that she should have authority over insurance matters that have nothing to do with securities. The only connection that Ms. Schapiro, or anyone else who has raised such a claim, can use to offer any reason for her need to step into the insurance industry and gain control over the sale of fixed and indexed annuities, and now the life settlement business, is that these products directly compete with the securities industry. Her claims that there should not be any kind of “regulatory arbitrage that provides an incentive for the sale of one product over another,” is really just her admission that these products are more suitable for this senior market, and in many cases these insurance products are beating the securities alternatives in a head to head competition, stealing hundreds of millions in commissions from NASD members.

What better way to compete with your competition than to get regulatory control over them? Already, by the combination of the NASD and the NYSE, the monopoly factors in the securities industry have been increased. Competition is the backbone of our free enterprise system. No one ever said that the economic playing field has to be level. It is the goal of business and industry to find a difference, secure a selling edge, in order to maintain, or gain market share.

Insurance is a completely different type of product than a security and the rules that govern them have correctly been placed under the authority and control of our state insurance departments, and should stay that way. To make any attempts to force similar regulation over these two different industries, just because they often compete for the same dollars among the same market, would be as ludicrous as requiring that automotive, bus, and rail travel be regulated the same as air travel. Both are getting passengers from point A to point B, but other than this, the similarities end. The same is true here. Insurance products may offer a means to financial growth, but they also offer guaranteed features and benefits that no securities products can match.

The proper way for the securities industry to compete with insurance is not to bash insurance, or try to change it or control it, but to dig deep into their creative processes and find product solutions that CAN compete with the safety and guarantees of insurance products. Oh, and if along the way you can stop the abusive selling of unsuitable risk investments to seniors, that would be a worthwhile way for you to devote your time and energy.

The Perceived Evil of Selling ANYTHING

2007-03-26T18:25:00.000-04:00

There is nothing more dangerous for the good of this country than someone using a carefully crafted marketing plan to sell something to the buying public. Let the target of this plan be people over the age of 60, and you have a real national crisis on your hands. At least, that is what some in the financial media and in competing industries would have us believe. There has been so much hype lately about how insurance agents are methodically plotting to sell unsuspecting seniors some type of dreaded insurance product; you would get the impression that there was a major reason to panic about the safety of our retired population. Truth is that the real problem is more in perception, or perhaps in this propaganda, than in reality.

The fact that the American public is subjected to constant marketing assaults is an accepted part of the culture which arises from our democratic society and the free enterprise system. We are bombarded daily with some type of marketing blitz, whose sole purpose is to sway our decision to buy certain products over other competing brands. If effective and intentional marketing methods get us interested in something, and then capture us in a moment of weakness, like when we are eating a free meal at a seminar, critics imply that such marketing tactics can completely remove all resistance and reason from an otherwise, intelligent and rational adult.

Retail stores spend millions of dollars each week in print ads, TV, and radio commercials, just to get you to come to their store for the possibility of capturing your interest in some product they sell. The customer is free to visit the store, look at the merchandise and leave without spending a dime. If they want, they can choose to talk to a salesperson and get information for later consideration; or, if they prefer, they can make a purchase decision right there on the spot and go home with their new acquisition today. We value this freedom to choose and even if our choices do not turn out so well, we defend our right to make our own decisions.

Service professionals do not have retail sites where people can casually come browse the merchandise they offer before they consider a purchase. Even though some commercials would have you think otherwise, financial products are not a do-it-yourself purchase and most people need much more information and explanation than they can acquire on their own, before being in a position to make an informed decision about such an important consideration.

Seminars have become the “stores” that many financial professionals have chosen to use to market their products and services. The meal, an obvious part of the draw, is no different than the many sales ads and commercials we hear that entice us to go “shopping” at some particular store this weekend. But once in the room, no one who attends the seminar becomes a sure thing. Like a casual visit to the mall, the seminar allows the attendee to anonymously “browse” through the ideas presented by the sponsor, and to preview the financial professional’s credentials before agreeing to allow them into their personal space by way of a follow-up appointment.

The goal of the financial seminar is no different than any other marketing campaign used by countless businesses every day. It is to attract potential customers for the purpose of being able to tell your story about what you have to offer that might be of interest to those who respond to your advertisement. Then, from those who attend the seminar, the goal is to identify those who have further interest from those who do not. Anyone who attends a seminar does so of their own free will, even if they are over the age of 60. Once there, any attendee who decides to continue to meet with the sponsoring agent does so of their own choosing. Finally, even after attending a seminar and meeting with the agent several times, the person is completely free to choose to purchase a product from this agent or not. To assume some evil or malicious intent on the part of an agent, simply because they have chosen this particular marketing method with which to expand their potential clients, is puzzling. And to chastise any agent or supporting marketing organization, who attempts to develop the most effective seminar marketing system, is to challenge the very foundation of our economic freedoms.

The real questions in all of this debate about marketing financial products to seniors, is why some consider it inappropriate to use the same acceptable types of marketing methods regularly used in other industries in the area of insurance products, and equally as curious is why some think that this particular elderly segment of our population is so helpless and in need of special protection? Interestingly, it seems that ALL of the criticism of how insurance agents are marketing insurance products comes from OUTSIDE the insurance industry from competing segments, especially the securities industry. They refuse to accept that insurance falls under a completely different regulatory authority then securities, and that insurance has its own set of rules, none of which are being violated by the current marketing practices, which include the use of seminars as a means to meet prospective clients.

It is time for those who have unwittingly gotten aboard the bandwagon to condemn the sale of annuities and other insurance products to seniors, first set in motion by the securities industry, to take a clear look at what is really going on and stop overstepping their bounds. This is a turf war by the securities industry and nothing more. The insurance industry is one of the most highly regulated and respectable industries in the country and every product that is offered today has undergone an intensive review for product design, pricing, and suitability for the market in which it is approved for sale. This means that if an insurance agent is promoting the use of annuities as retirement financial tools to a primarily senior group, even if they use a seminar marketing system, they are completely within compliance and within the legal authority of their insurance license to do so. Most importantly is that any criticism or opinion of the securities industry is totally irrelevant.

What is Suitability, and WHO Should Determine it?

2007-03-07T12:17:00.000-05:00

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?

Does Anyone Else See the Double Standard?

2007-02-28T15:31:00.000-05:00

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.

Legally, an Annuity could not be More Clear

2007-02-28T13:33:00.000-05:00

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.

Where is the REAL Problem with EIAs?

2007-02-26T16:07:00.000-05:00

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.

For Seniors: Mutual Funds, or Indexed Annuities?

2007-01-30T11:07:00.000-05:00

One of the criticisms about fixed indexed annuities, often raised by the NASD and others in the securities industry, stems from the liquidation of elderly clients’ stock and mutual fund accounts in order to put the money into an annuity. Moving money from one financial instrument into another is a strategy that has taken on many forms over the years: converting an IRA into a Roth IRA; cashing in a 401(k) early, paying the tax, and investing the money otherwise; removing equity from a home and investing it in a side fund; and liquidating stocks or mutual funds and moving the money into a fixed indexed annuity. Any of these strategies have their supporters and their detractors, but the glaring difference in this list of complex strategies, which need to be evaluated on an individual basis, is that the move of a senior citizens’ money out of a risky stock or mutual fund into a safe and guaranteed fixed indexed annuity, is a financial no-brainer. That is, unless you are the broker or broker dealer who is losing the account and all future commissions to an insurance agent and the company who issues the annuity.

The majority of individuals and couples in retirement begin this phase of their life with a fixed amount of income and assets from which to live on for the rest of their lives. Even those who have done a good job of saving and planning may only have a slightly larger pot from which to dip, and still have to make their limited assets and income stretch for two or maybe three decades. One of the biggest fears expressed by elderly Americans is that they might outlive their resources. With growing uncertainty about the continuation of Social Security benefits, the potential for increases in taxes, the rising cost of medical and prescription expenses, and the looming threat of long term care expenses, seniors have a lot of areas that directly affect the quality of their retirement over which they have no control. To add the possible loss of the principal value of their fixed asset base to this ominous list, due to fluctuations in the market, is not only unwise, but is irresponsible. And any broker or advisor who continues to place these seniors’ assets at risk is the one who should be chastised for endangering the financial security of our elderly population.

Of all the financial avenues available for a senior adult to store their nest egg, there is only one place where their principal is 100% guaranteed, they receive a guaranteed interest return plus a chance to get a higher return, they have good liquidity and access to their money at all times, and they have the ability at any time to create a guaranteed stream of income they can never outlive. This amazingly perfect solution to all of the needs and concerns of retirees is none other than the fixed indexed annuity. This product, and this product alone, resolves the biggest fear of all seniors, that they might outlive their money. While bank CDs and bonds might offer security, they do not have the return potential of a fixed indexed annuity, and they DO not offer a guaranteed lifetime income option.

But this discussion began by pointing out that some in the securities industry suggest that it is inappropriate to move a senior’s money out of stocks and mutual funds into a fixed indexed annuity. The thing that is lacking from these critics is not their condemnation about annuities, but a simple explanation of why securities should ever be construed as an appropriate investment for anyone who is retired or living on fixed assets and income.

Consider that the market continually goes through cycles, and that any senior who lives more than a decade in retirement will likely experience at least one market correction, or downturn. Historically it takes years for the market to return to its original point before it recovers all of the losses incurred in a correction and begins climbing above that previous benchmark. If you are 65, 70, 75 or older, and your asset base, which is providing a portion of your income, suddenly loses a significant amount of its value, your financial security is immediately compromised. First of all, you are no longer earning ANY return on this asset and if your plan was to live off the interest only, that plan is terminated until the market fully rebounds and starts to return a substantial gain. So, the choices to the retiree caught invested in the market are to liquidate principal or reduce their standard of living just to take up the slack caused by the loss of their asset value. The greater the losses in the account value, or the longer the downturn continues, the higher the risk that the asset base can be so badly eroded by the combination of losses and withdrawals, that this person will not live long enough to ever be able to recover financially, and could run completely out of money in a few short years.

When there is a safe alternative that can completely remove all of these negative probabilities, why in the world would any intelligent person ever want to expose themselves to that risk, just for the chance to get a few points more return in a few of the good years? The reason our seniors continue to buy into this false illusion, that the only way they can secure their retirement is to place it at risk, is because of the social pressure to maintain the status quo. Our society carries the greed of our youth to get all the return we can get, right into our later years, when in fact, we should be slowing and making the transition in our investments from risk to security over the last few decades of our working careers. Retirement is not just a continuation of our previous career paths, but it requires a complete shift in goals and priorities, and our financial gears need to shift dramatically from accumulation to preservation by the time we stop receiving earned income.

In discussing this issue of mutual funds for seniors versus fixed indexed annuities, there is no uncertainty. The annuity is the only choice for the retiree. Safety, security, guarantees, versus risk, fear, losses, and potential for financial disaster. There is no argument which considers the complete well being of the senior that can offer any other recommendation than to place their retirement savings in a fixed indexed annuity.

Brokers who continue to prey upon seniors and endanger their retirement security should be held accountable for their bad advice and unsuitable recommendations. Insurance agents, or any other advisors who recommend that a retiree remove the risk from their assets and move their money from stocks and mutual funds into the safety and security of a fixed annuity, should be applauded. The bias of the NASD and the securities industry is rooted in their greed, and ignores the best interests of their clients. I wonder if brokers were made to take fiduciary responsibility for their recommendations, how many would continue to provide such faulty advice to our seniors.

Maturity Date Is GOOD for Annuity Owner

2007-01-25T11:43:00.000-05:00

In the recent action taken by the Minnesota Attorney General against Allianz, I read that one of the concerns she raised in the sale of indexed annuities to seniors is that the maturity date is almost always decades in the future. The statement was made that this locks up the client’s money so that they cannot get to it until the maturity date arrives. This misconception is probably one of the biggest misunderstandings about the inner workings of insurance products, and the Minnesota Attorney General is not the first person to make such criticism based on this inaccurate conclusion. Unfortunately, not only is this information completely WRONG, but such false statements unnecessarily fuel the fear in senior annuity owners that they will not be able to access their money when they want, and provides them the motivation to cash in their policies early, which forces them to pay surrender charges for no reason. In an effort to help save some poor elderly annuity owners the trauma and expense of worrying about an issue that is really one of their policy benefits, I want to fully explain what a maturity date in an annuity is all about.

Every insurance contract, whether it is life, health, or an annuity, is a unilateral contract. What that means is that there is no negotiation by the applicant on the terms of the contract. The client is underwritten, based on established qualifying criteria, which by the way are set by the company and approved by the state insurance departments, and then the company makes the offer of the contract, to which the applicant can only accept or reject. In an annuity application, the only underwriting is financial. Someone wishing to purchase an annuity has to provide information that supports that this purchase is “suitable,” a financial evaluation made by the agent, and reviewed and confirmed by the issuing company. This standard of suitability is somewhat arbitrary, but the industry is slowing narrowing its definition into more quantifiable terms.

Once a policy is issued, the client always has a “free look” period, which ranges from 10-30 days depending upon state, whereby they can read the complete text of the contract, have it reviewed by an attorney, a CPA, or anyone else they so desire. If for any reason they decide they do not want to enter into this contract, all they have to do is return the policy as “not taken” before the end of the free look period, and the company will return any premium in full, and cancel the contract as if it never happened. Ironically, once the company offers a contract to an applicant, barring the discovery of false or missing information, the company does not have the right to withdraw the offer. Once the free look period passes, however, the contract becomes binding on both the company and the applicant, and terms of the contract apply.

Once again, the only condition and performance under the contract for the annuity owner is to deposit the initial premium, and to leave that money deposited for the contract term, which coincides with the surrender period. If there is a 10 year surrender period, then the owner is agreeing to leave their money deposited in the contract for those 10 years in order to gain ALL of the benefits of the contract.

Still, every annuity provides three other features during that contract period to give the owner access to their money, even before the end of the contract term. First, there is always some type of free withdrawal privilege, which is clearly stated in the policy. This varies by contract, but in many cases the owner can withdraw 10% of either the account value or the original deposit each year, without incurring any surrender charge. In some contracts, special needs or conditions, such as nursing home stay, or terminal illness may increase the amount of this free withdrawal up to the full account value.

Second, there is a provision for the owner to annuitize all or part of the account. In other words, they exchange the account value with the insurance company for a guaranteed stream of income. Similar to a pension, once they convert the account balance to an income stream, they no longer own the asset, but own the rights to this guaranteed income, based upon the terms of the payout period chosen.

Finally, if the client wants to withdraw more than what is allowed in their free withdrawal privilege, they can surrender all or part of their account. Whatever amounts they withdraw in excess of their free withdrawal will be subject to the surrender charges stated in the written contract they received at the very beginning, and were allowed a free look period to review before accepting its terms. This means that surrender charges should NEVER be a surprise to any annuity owner, unless they choose not to read the contract to which they willingly entered.

Now, on to the maturity date. In every annuity contract, in exchange for the deposit of money by the annuity owner, the insurance company offers a number of benefits. The withdrawal or income benefits mentioned above are part of the insurance company’s contractual obligation. In the case of the guaranteed income, the owner may exchange their account for a lifetime income. In such cases, the insurance company is obligated to pay the client the agreed stream of income, regardless of how long they live, even if it means that the insurance company has to pay out more than the amount that was in the account value.

The client’s principal is always 100% guaranteed throughout a fixed annuity contract, and the value of their deposit can never go down, unless they withdraw money from their account. In addition, the insurance company agrees to pay the owner interest on that deposit. In many cases this interest rate is guaranteed, or a minimum interest is guaranteed. In an indexed annuity, there is the opportunity for that interest credit to increase based upon changes in some stated measurement of an outside index.

The purpose of the maturity date is to specify in the contract the period of time whereby the company has to continue to provide all of the stated benefits to the annuity owner. While the annuity owner has provisions to break the contract early, sometimes with penalty, there is no such provision for the insurance company to break the contract early under any conditions. Their time frame is set for the entire period stated in the contract up until the maturity date. It is ONLY at this time that they can require that the annuity owner take their money back with earnings, either in the form of a withdrawal; which since this date is long past the surrender period, there is no cost to do so; or to annuitize the account balance into a stream of income. Prior to the maturity date, the insurance company may not force the annuity owner to take ANY money out of their non-qualified account if they don’t want to. In practice, unless the financial conditions have drastically changed in a way that disadvantages the insurance company, it is unlikely that any of them would ever force an elderly annuity owner to even take their money out at the maturity date, if they were still living. If you check this date, in relation to the owners age, the maturity date is usually well past the life expectancy of most people.

So, any argument that the maturity date somehow ties up an annuity owner’s money is completely false and indicates a total lack of understanding about insurance terminology. I challenge the Minnesota Attorney General, members of the securities industry, and financial journalists to cease and desist spreading unnecessary fear and panic among our seniors who have purchased, or are planning to purchase some type of fixed annuity, by their continued use of false information or insinuation. This reckless use of pubic visibility is hurting our retirees and is costing them money. If you are sincere about your concern for this segment of our population, stop using them as a political football for your own purposes and advances. Maturity dates are one of the MANY guarantees that fixed indexed annuities contain that make them not just suitable for the senior population, but are the ONLY financial vehicle which can offer them all of the safety and guarantees seniors want, with a reasonable rate of return.

Fixed Indexed Annuities- FIA

2007-01-24T12:46:00.000-05:00

I recently went to a sales meeting where some of the biggest carriers in the indexed annuity business were present and they all were using the new name of Fixed Indexed Annuity, or FIA for short, and had dropped the word "equity" from the name completely. If you read my recent post of "There is no EQUITY in Equity Indexed Annuities," you can see one of the reasons for this change. Another reason obviously is the volume of negative publicity these wonderful insurance products have received simply by having this verbal reference to equity products. I applaud these companies for this adjustment in the label we use for indexed annuities, and recommend that all agents begin to use this new reference immediately, which accurately describes this insurance product, and never let the "E" word cross your lips again.

The TRUTH about Surrender Charges in Indexed Annuities

2007-01-18T11:32:00.000-05:00

The securities industry opponents of indexed annuities have used the surrender charges, for early termination of an annuity contract, as a claim of high expenses involved with the purchase and owning of an indexed annuity. Besides the fact that this is a complete lie, suggesting that surrender charges are a negative about indexed annuities that should inhibit people from purchasing them, is simply a scare tactic used by the securities industry to try to get back some of the $24 billion a year it has been losing in sales for several years to these fantastic financial products.

The truth is that an indexed annuity is a contract, not an investment, and as with any contract, once you agree to its terms, you have the legal obligation and responsibility to abide by its conditions, and if you want out of a contract early, there is always a penalty. In most contracts, there is either an early termination fee, or the party breaking the contract can be sued for breech of contract. When you are selling your home and someone makes an offer that you accept, a binding contract is created. If that person decides before closing that they do not want to purchase your house, you have legal rights to enforce the contract, or else receive some form of restitution for their breech of your agreement. In most cases, you can at least keep their earnest money deposit for their failure to perform under the contract.

If you have ever gotten one of those nice new cell phones at a discounted price at your service provider, you had to sign a contract stating you would continue service with them for either a one or two year period, depending upon the amount of discount you received. If for some reason you wanted to end that service before the end of that period, you are still legally obligated to continue to pay the monthly service fee until the end of the contract, or else pay them a lump sum termination fee. With my company that termination fee is $175. I wonder how many people, lusting after the latest cell phone technology, really understand what they are committing to when they quickly sign that extra piece of paper, as they get their sexy new phone.

If you sign a lease agreement to rent an apartment or office space for one year, or you join a gym and sign a one year contract, you are legally obligated to pay the entire year’s worth of payments, even if you later want or have to move out of the rental space, or if you want to cease going to that gym. As you can see, we enter contracts throughout our lives, and accept their terms without question; at least until abiding by their conditions becomes an inconvenience for us. Contracts should therefore, never be taken lightly, and ALL terms of a contract should be accepted and understood BEFORE you sign any fine print. Once you sign your name, whether you have read it carefully or not, you ARE agreeing to every single detail that the fine print contains.

With an indexed annuity, the insurance company is committing to a long term set of benefits and guarantees that will cost them money to provide. The only commitment, to which the purchaser of an annuity is agreeing, is to deposit premium and leave it with the company for a stated period of time. If the purchaser wants to get out of the annuity contract early, fortunately, there is a legal provision for that, and that is by way of surrender. In this case, however, if the surrender is made during the surrender period, the insurance company is legally allowed to deduct a previously agreed fee from the client’s account to help cover their lost cost, expenses, and profits that were to be spread out over the entire term of the contract. If the annuity owner holds the contract as agreed, however, and does not seek to end it before the contract term has passed, surrender charges are irrelevant. The only time surrender charges will ever be assessed on an annuity contract is when the client, of their own choosing, reaches in and takes out more money from their contract than the allowed annual “free” withdrawal, or if the client terminates the entire contract early. Even then, the surrender charge has been fully disclosed in writing since day one, and the agreed deduction is only assessed against any contractually excess amounts withdrawn.

For anyone to call a surrender charge an expense of owning an annuity contract is misleading the public and spreading false information about these products. These scare tactics have caused fear and panic, and lead many elderly annuity owners to take rash actions that have unnecessarily cost them money. It is irresponsible for anyone to scare innocent annuity owners by suggesting that they may have these fees deducted from their contract other than as the contract indicates. I am certain that many of the seniors who have hastily cashed in their entire annuities, just because negative publicity gave them wrong information about surrender charges, actually ended up, because of their own action, paying the full surrender charges unnecessarily when they gave up their annuity early, because of the lies being spread by members of the securities industry. If these same annuity owners had known the truth, and had left their money in their annuity, they would continue to have full access to the use of their money in the form of withdrawals or annuitization, they would continue to earn a reasonable interest rate, their money would be safely guaranteed in a secure contract, and they would have never had to pay ANY surrender charges.

There is NO EQUITY in Equity Indexed Annuities

2007-01-11T14:02:00.000-05:00

The fact that someone decided to use the word “equity” in the name, when indexed annuities were first developed, is part of the reason why they have come under attack by some in the securities industry. But contrary to the claims of vocal opponents, use of this term is the only misleading thing about them, and efforts are underway to drop this confusing part of the label from this product. The reason the use of this word in the name is inaccurate, is that in an indexed annuity, the client is not purchasing equity in anything. Their money is not buying into any index either. An indexed annuity is an insurance contract, and every purchaser of one of these innovative financial products is buying a contract from an insurance carrier for a stated list of guaranteed benefits. The only connection an indexed annuity has with any index is that the annuity owner has the option to choose an interest crediting strategy, whereby the percentage of increase in the named index is used as a way to measure how much additional interest they will earn, above the guaranteed interest return stated in the contract.

Since an indexed annuity is a contract, and the client’s purchase money is never placed at risk in the market, indexed annuities are not investments or securities, but are unique savings vehicles with enormous safety, vital guarantees of security of principal, guaranteed minimal interest return, and income options that can provide the annuitant a guaranteed income they can never outlive.

If you are a retired individual or couple and you are now living on a fixed income with fixed assets, the last thing you can afford is to risk the security of either your assets or your income. Placing a chunk of your assets into an indexed annuity is an ideal vehicle for someone who wants to guarantee that their principal can never lose value, get a safe, reasonable return on their money, and have a chance to earn more than they could get at their bank in a CD or money market account. Add to that, if this person were to ever fear that they would not have enough money, they could at ANY time, convert their account to a guaranteed stream of income for life, no matter how long they might live.

Securities regulators and industry spokespeople who challenge the insurance identity of indexed annuities have wrongly used the uncertainty of this “extra” interest crediting, which is based upon the changes in the linked index, as a claim of risk. While the “extra” interest credits in an indexed annuity will fluctuate from period to period, and the results are not guaranteed, the principal deposits and all previously credited interest earnings are NEVER at risk. And the client’s money is NEVER placed in the index.

The insurance company has their own way of ensuring their performance in the contract by investing the client’s money in safe long term bonds and then buying options on the index, not with the client’s money, but from the earnings they make by investing the client’s money. This allows the insurance company to safely guarantee the client’s principal, offer a minimal guaranteed interest return, and provide the potential for a higher rate of return that merely uses the changes in the index as a clear measurement of how to calculate this “extra” interest. This one non-guaranteed feature of an indexed annuity is no more confusing than the potential for a bank to change their CD rates to existing customers upon renewal, based upon market changes. And yet, these securities regulators are not clamoring to have CDs regulated by the SEC.

Think of it like this. The index which is used in an indexed annuity to determine the amount of “extra” interest is simply a yardstick. It could just as easily be the change in the average temperature for a given year, the improvement of the number of points earned by your favorite team over last season. The fact that it uses a known stock index is not accidental, however, but the reasons are, once again, determined by the insurance company who offers the contract. Just like when you sign a contract for cellular phone service, you don’t concern yourself with HOW the company will provide the service; only that they will. If we can start calling indexed annuities what they truly are, a contract, and not an investment, then it will clear up a lot of the criticism and confusion that has been wrongly fueled by the use of the term equity in their name.

Clearing the Confusion Between Variable Annuities and EIA’s

2007-01-10T16:02:00.000-05:00

The SEC is presently reviewing the classification status of EIA’s, in all probability, due to the constant clamoring by former NASD chairman Robert Glauber that the identity of them is unclear to him. For those of us in the insurance industry, we do not find the pure insurance nature of indexed annuities difficult to understand nor accept. While there are a few features of EIA’s that are routinely mentioned in detractor’s arguments as they attempt to indicate that these insurance products could be mistaken as securities, it is the misstatements of these features that only confuse the nature of an otherwise very clear insurance contract. One of the tactics used by detractors of indexed annuities, and confused financial journalists, is to describe the features of variable annuities, a hybrid security and insurance product, but refer to indexed annuities, a guaranteed insurance contract.

To make the differences between these products easier to understand, let me first clarify the concept of a variable annuity. The defining features about a variable annuity, which causes it to be regulated as a security, is because of two very important distinctions from its pure insurance cousin. In a variable insurance product, the client assumes ALL of the investment risk, rather than the insurance company. This is why the insurance company is required to put all client funds for variable products in a “separate” account from their general fund. There is no guarantee that a variable annuity holder will earn any return on their investment, their original premiums are not guaranteed, and the value of their account can and does go down with the loss of value of the underlying investments. It is possible for a variable annuity owner to lose some, or even all of their original investment. Within a variable contract, the client chooses specifically how their funds will be allocated from a set of mutual fund-like investments options offered within the variable product.

The few guarantees included in a variable product do not stem from the securities side, but from the insurance side and are provided by a deduction of expense charges from the client’s assets within the separate account, and are charged periodically, regardless of how the investment is performing. It is this catch that has caused so many variable policies to risk lapsing, when their investment losses have reduced the account value to a point where it could no longer pay the insurance premiums for the guaranteed benefits. If this happens, the owner must either pay additional premiums to continue the policy, or the policy will lapse.

Quite different from a variable annuity, in an indexed annuity, the client does not incur ANY investment risk whatsoever. In fact, not only is their initial principal guaranteed, but in most policies, there is a minimum guaranteed rate of interest that is credited over the contract period. In the case of an EIA, unlike a variable product or a securities product, the client does not tell the insurance company how to invest their premium dollars. It is totally up to the insurance company to figure out how to provide the contractual guarantees of principal and interest.

Indexed annuities do not have any fees deducted from active accounts. All of the client’s premium funds are credited to the policy at issue, and no expenses are deducted from that account in the future. Agent sales commissions, company expenses, and profits are all earned by using arbitrage, the same techniques banks use to make money with client deposits. Premiums received for the purchase of indexed annuities are deposited in the insurance company’s general accounts and are invested by the insurance company, at their discretion; in a way that allows them to financially provide all of the contractually obligated policy benefits, pay their expenses, and make a profit for themselves.

Client premium deposits are 100% guaranteed, and interest earnings, once credited, in most cases are “locked in,” and the account can never go down unless the client takes money out. Since an indexed annuity is a contract, there are obligations and responsibilities stated in the policy for both parties to the contract. The insurance company agrees to provide the stated benefits over the policy period, and the client agrees to leave their premiums deposited with the company for a set period of time.

The insurance company does not have any provisions in the contract for breaking or canceling the contract and must provide all of the contracted benefits as agreed for the entire contract term. But in deference to the client, the only provision that is required of them, in order to enter this contract, is the deposit of premiums; and, if the client, for any reason, does not want to continue their part of the agreement, there is a provision in the contract for them to alter, or completely break the contract by way of partial or full surrender.

But like every contract, there is a penalty for such action, and in an indexed annuity that penalty is called a surrender charge. This penalty is never enforced and the fees are never charged until or unless the client withdrawals exceed a contractually allowed annual amount during the surrender period. Surrender charges are clearly stated in the contract, and a schedule of guaranteed surrender values for any future year is provided. This puts the client in complete control of how and when they access their money, and whether or not they will ever incur any surrender charges.

Why Indexed Annuities Are CLEARLY Insurance

2007-01-09T15:39:00.000-05:00

Since the SEC has become involved in the debate about whether or not to reclassify the insurance identity of EIA’s, it is important that they consider a few key elements about indexed annuities which clearly differentiate them from the components necessary for a product to be classified as a security.

The key word in eliminating any confusion on this discussion has to be RISK. Securities are regulated in the manner they are because any investor buying a security accepts a huge amount of risk, and the intense regulation is designed to make sure that an investor only takes on that risk with complete and factual information. EVERY securities product offered has the “potential” for the investor to lose some or ALL of their investment capital. This fact is essential to grasp if you are going to understand the complete difference between an indexed annuity and EVERY securities product.

In any purchase of a security, the client assumes ALL of the investment risk. That means that the investor acknowledges, at the onset, that they realize there is absolutely no certainty that their investment will ever earn them one dime in return, and that they could possibly lose some, or ALL, of their original investment. In an indexed annuity, however, the client does not assume ANY investment risk whatsoever; the insurance company retains it all. The client does not tell the insurance company how to invest their premium dollars in order to make sure that the company can later fulfill the contractual obligations. The insurance company is responsible for managing the premiums they receive in the purchase of indexed annuities in a way to be able to provide the contracted benefits to all policy holders. The oversight responsibility to ascertain the ability of an insurance carrier to financially do this is monitored, not only by the state insurance departments where they do business, but is regularly reviewed by a number of independent rating agencies, such as A.M Best, S&P, and Weiss.

The client’s premium dollars used to buy an indexed annuity are therefore, not an investment in any security, but are the purchase of a very specific and detailed, long term insurance contract between the annuity purchaser and the insurance company. This contract entitles the owner to a group of benefits, including interest credits on money deposited, income options, withdrawal privileges, death benefits, and the terms and conditions for early partial of full surrender of the contract. The policy, along with all of its details are provided to the client up front in writing and the client is even given a state mandated right of refusal period before they are bound by the terms of the contract.

If this is not enough proof, the enormous distinction that labels indexed annuities as insurance are in the guarantees provided in the insurance contract that are completely absent from any securities purchase. The client’s premium dollars are guaranteed not to lose value, within the terms of the contract. In most indexed annuities, a minimum rate of return over the life of the contract is also guaranteed. In addition to the guarantee of premium deposits and the minimum interest credits, the unique feature which gives indexed annuities their name, is that the client is offered the potential to receive a higher rate of interest, determined by a clearly defined strategy of using changes in some named index as the measurement of how much extra interest to credit over given periods of time. And the best feature included in most indexed annuities is that once interest has been credited to an account, it is “locked in.” That means that the only way a client’s account value can ever go down, is for them to personally and intentionally reach in and take money out of their contract.

In a later blog I plan to address some of the rhetorical misstatements and lies used by the opponents of indexed annuities. But for now, just using the above information, I hope that the SEC, and anyone else who has questioned the insurance identity of indexed annuities, now understands why they are in no way a securities product, and should never be brought under the jurisdiction of the NASD or any other securities regulatory agency.

Suitability is a Matter of Opinion. But Who’s Opinion Really Counts?

2006-08-30T17:10:00.000-04:00

Today I read a legal document presented by the State of Washington Department of Financial Institutions Securities Division, where they enter a Summary Order to Cease and Desist against Capstone Investments, a broker dealer based in California, and its principle, Anthony Capozza. They additionally seek to have his registration suspended and impose fines and charges. Because this firm had offices and associates in Washington, this action is being taken based upon the activities in that state.

The accusation is that the firm has been illegally helping insurance agents liquidate customer brokerage accounts so that insurance agents could then move the money into an annuity. These insurance friendly transfer brokers have been around for years helping clients easily move money out of brokerage accounts without having to expose them to the attempts of the existing broker to convince them otherwise. While I am not sure if there were actual securities rules violated here or not, and those charged have not yet had a chance to make their defense, it does clearly define another level of the battle between the insurance industry and the securities industry.

When you read the text to this order, it is filled with a “tone” or an opinion about which I want to draw your attention. I have read numerous financial articles that have carried this same “tone” and it has a direct bearing on the credibility of many of the criticisms made against the use of annuities in the senior marketplace. The opinion has to do with an underlying assumption by those writing, that simply moving money from securities into an annuity is inappropriate under any circumstances. In this legal text, the attorney who drafted it implied this very opinion in a number of ways. I want to quote paragraph 14 of the TENTATIVE FINDINGS OF FACT, and let you see what I am talking about. I will comment after each sentence.

“14. Many customers whose securities were liquidated were retired, living on fixed income, and had a limited knowledge of investing.”

Wait a minute! Does that not then make these people unsuitable candidates for accepting risk investments in the first place? Can someone living on a fixed income afford to lose principal value or have negative returns even once? Where will they get sufficient income if there account loses value and their investments are not earning any return at all? And with their limited knowledge of investing, how can any broker ethically place them in risk positions they don’t fully understand?

“Many customers held diversified portfolios of stocks, bonds, mutual funds, or other investments prior to these liquidations. The securities liquidated typically comprised a large percentage of a customer’s assets.”

The implication made here is that these clients had been PROPERLY diversified in the first place, based upon their risk tolerance, which was supposedly accurately assessed by the selling broker. But in reality, there is neither knowledge nor evidence that any of this is true. If you consider the client description shown, and the added statement that the invested assets represented a large part of their assets, it is unsuitable that any such client should own stocks or mutual funds in their portfolio at all, given their fixed income, fixed assets, and limited knowledge of investing.

“After liquidation, many customers were placed in fixed annuities, which were subject to surrender charges, without adequate consideration of each customer’s financial needs, including the need to have sufficient liquidity to meet current or future expenses.”

How in the world does this attorney jump to the conclusion that the customer’s financial and liquidity needs were not properly considered by the insurance agents? If you see the pattern, it is that an assumption is always made giving the securities broker the benefit of the doubt that they have properly assessed the client’s financial needs, but that the insurance agent did not. In this document, with only the facts presented, I would conclude just the opposite. I would hold the broker in contempt for inappropriately putting these innocent seniors’ income and assets at risk in the market, and taking advantage of their naivety in investments to make unsuitable sales.

In any such cases as this, ANY transfer of money by someone from a portfolio with risk securities into a fixed annuity is an immediate improvement in the safety of the financial position of the elderly customer. The annuity has guarantees on the principal value, the securities do not. The annuity can provide a lifetime income the client cannot outlive, the security cannot. The annuity has a minimum guaranteed interest return, the security does not. The annuity indicates up front the minimum guaranteed future value year by year; the securities do not.

As far as surrender charges, if the typical 10% free annual withdrawal provided in most annuities is not enough for a client, it is likely that they will run out of money before they die anyway. At least with an annuity, at any point, they can guarantee a fixed income for life. With the fluctuating values of securities, every time a senior must sell in a down market, they compromise the potential for that remaining asset to generate the amount of future income they need. And if a security is sold when the value is down, that is a very real undisclosed surrender cost of owning any risk investment, that is not being discussed in this concern for the financial well being of seniors.

It is time for the public assumptions about transfers from securities to annuities to change. I challenge any financial journalist, or any person in the securities industry, to present a typical scenario where placing a elderly client with fixed assets, fixed income, and limited understanding of investments into risk investments is EVER more suitable than being in a fixed annuity. Is anyone up for the challenge?

USA Today is Schizophrenic about Annuities

2006-08-11T14:19:00.000-04:00

The real scam, currently being levied against baby boomers that no one is talking about, is the irresponsible manner in which financial journalist confuse and misconstrue fact, with their attempts at sensationalism. It seems that the only thing that is important to journalists, who write about the financial marketplace, is to hit the current “hot topics” and use rhetorical buzz words and phrases as many times as possible. Just like popular financial periodicals love to sell magazines with covers claiming to have the scoop on the "TOP TEN” mutual funds every investor should own, newspapers and dot com journalist are more concerned about getting attention to their articles, than factually representing their information.

USA Today published an article in 2001 by Sandra Block entitled, "An annuity could protect savings." This article discussed the common concerns held by many retirees that they could outlive their money, and then went on to explain how annuities can be used to guarantee a lifetime of income, using whatever amount of assets someone possesses. Ms. Block even described an immediate annuity as a good substitute for the lack of a company pension plan. Her summary indicates that if a retiree is “risk-averse,” or expects to live a long time, an immediate annuity is ideal for them. Remember that in 2001, the stock market was dropping like a rock, and retirees were scrambling to salvage whatever elements of safety they could for the declining balances of their nest eggs.

Today I read a new article in the USA Today online, by Kathy Chu, that "Baby boomers make rich targets," where she states that annuities, (with no distinction of type), are inappropriate for seniors, which she lumped together with oil and gas investments and promissory notes, and later implies that annuities are marketed deceptively by high pressure salespeople using the dreaded “free lunch seminar.” Her generalizations also put annuities in the same category as investment fraud, Ponzi schemes, and scams such as “fake contests”

In five short years, USA Today writers have gone from recommending annuities for seniors as an excellent tool for safely managing assets and guaranteeing lifetime income, to condemning them and all who sell them as “inappropriate for seniors.” What has changed to cause this new perspective by the journalists? While fixed and indexed annuities have evolved somewhat in recent years, they are still the same, safe insurance products they were when Sandra Block so highly recommended them for seniors. The only thing that has changed here are the whims and the attitude of the financial news media. Their beloved stock market is much healthier now than it was in 2001, and the current media trend is to bash annuities, so these journalists are just mindlessly following the leader, whoever that might be.

Fortunately for the baby boomers, they are not the bumbling idiots these financial journalists make them out to be, sitting with pockets full of money, just waiting for someone to take advantage of them. This generation did not accumulate the largest block of private capital in the nation by being stupid or being easily led astray. Baby boomers are as savvy and as well informed as any other, and the fact that the sale of annuities only continues to rise is an indication, not of the increase in strong armed sales tactics by insurance salespeople, but rather, it is a validation of the truth that Sandra Block spoke clearly, five years ago. Annuities are extremely appropriate for seniors to use in their retirement planning if they want to avoid the uncertainty and risk of securities, and provide the only private means to insure that no matter what their life expectancy, their annuity can provide them an income they can never outlive.

National Insurance Regulation?

2006-07-12T11:57:00.000-04:00

In case you have been out of touch with the news for a while, you should know that there is a move afoot to establish a National Insurance Regulatory body to provide more uniformity in insurance laws and practices nationwide. So far it is not clear whether there are any specific areas of insurance that are being targeted for inclusion in this national umbrella, but just in case it could swallow up the life, health, and annuity side of the business, I suggest you become aware of the details sooner, rather than later.

The way this proposal is being presented in Congress is to allow individual insurers to choose to either be become subject to this new federal charter concept, or remain under state regulation. If you think the insurance companies are going to jump to the defense of our current state regulatory system, then think again. Consider that when an insurance company wants to offer a new product nationwide, they must go though a series of product approvals. These include the design and details of the product, the forms and marketing materials, the contract language, and the pricing structure. But if a company wants to offer their new product in every state, they must currently go through this process fifty different times. Each time they must respond to the specific changes required by each state for approval, resulting in minor variations in the same product from state to state, depending upon that state’s conditions. This means that the company must produce specific materials for that product suited for each state, and keep up with this as it disseminates literature and forms to a nationwide sales force.

The NAIC has finally decided to tackle this problem area for insurers and formed an interstate compact, to date including about 27 states, so that insurers can make one submission but get approval in all states which are members of this compact. If the compact is able to finally get the cooperation of ALL state insurance departments, then this would effectively eliminate this problem for insurance carriers, and remove one of their reasons for supporting a national charter system.

But other concerns are for the complications our state system causes for consumers, who find that the same product by the same company may not be the same from one state to the next. This issue arises more often in the property and casualty side of the insurance business, where people moving from state to state are confronted with the impact of these differences in very real life scenarios. But other areas of insurance, like Long Term Care Insurance, can feature quite different levels of benefits from one state to the next, and with a senior population that is prone to uproot and move to warmer climates, keeping up with the differences in coverages offered in the home state versus the retirement state, could become an issue we hear more about.

Today, there are hearings taking place where proponents of each side of this issue, as well as a consumer advocate, will present testimony before the Senate Banking Committee, the organizing entity that is looking into overseeing this major change in the familiar way we have come to assume would always be how insurance would be regulated.

If you are an agent, you may not yet know how to react to the possibility of such drastic change. Quite frankly, I am not sure how it would affect agents either, with the little details that have come forth so far. But change can go both ways, and if you realize that with the attacks by the NASD against the regulatory authority of the states regarding indexed annuities, then you have to assume that the potential for a more stringent control of agent activities would be one of the probable outcomes. Not that our own state departments are not doing their job, but on a national scale, it seems that the only way to effectively regulate such a large group of agents is to intensify the regulation and control, and stiffen penalties for infractions.

If you have opinions about this issue, I suggest you voice them to your Congressional representatives, professional organizations, and your state insurance department. If you don’t mind waking up one day and finding that everything has suddenly changed, keep silent and keep going about your daily business as if nothing is going to happen. I am not sure how all this will play out, but I can tell you that I would be greatly surprised if we did not start to see many adjustments in the regulation of our business in the coming years. For me, I want to be part of the voice that guides and direct how this all evolves, rather than just a follower who is destined to deal with the crumbs of whatever is left.

A Challenge To EVERY Agent Selling EIAs

2006-06-28T16:07:00.000-04:00

If you are reading this blog, you should already know my position on EIAs and my take on the buzz that has surrounded them in recent years. If not, go back and read some of the previous posts and you will find that I am a strong supporter of the current use and present regulation of EIAs and believe that when used properly, they are a valuable financial tool for use with any age market, especially seniors.

Having said that, I want to address ALL agents who are currently selling indexed annuities and I hope that you take seriously what I am about to say. I recently wrote my own state insurance commissioner about my concerns why insurance departments are not being more vocal in defense of the measures they have already put into place to govern the proper sale and use of indexed annuities. I received a personal response from him rather quickly, and it provided me a slight change in my view of this entire issue.

The most shocking comments I read in his response was that he DOES believe there is a crisis in the sales activities of agents, and that his office, the Attorney General, and the Secretary of State Securities Division are opening numerous cases from complaints involving the lack of adequate disclosure with clients, and even some predatory activities of agents for all types of annuity sales, including indexed annuities.

This disturbing news brings the blame back to only one place, in my opinion, and that is with any agent who crosses the line and is less than truthful in describing and disclosing the full details about the products they are selling, is promoting a blanket product solution, without understanding the complete financial needs and concerns of their client, or in any other way is deceiving the client about the full impact of their actions. False statements are not the only way to leave the wrong impression and mislead a client. Failure to give them, or sometimes point out, important information, is JUST as wrong as saying something that is not true or clear. For instance, if you fail to encourage them to review their contract carefully when you first deliver it, because you are hoping the “free look” period will expire before they can raise any concerns or questions so you won’t lose the sale, you are still deceiving them by way of omission.

The entire insurance industry is built upon nothing more than the promises made by the companies we represent and whose products we sell. Think about it. For all the money a client turns over when they buy an annuity, ALL they get back to hold in their hands is a piece of paper which details the promises made by a company they never see, other than through us. If WE break the trust of the prospects and clients we see, then we are actually harming EVERY SINGLE AGENT out there as we lower the confidence of the public about the integrity of buying insurance products. While I know that most agents ARE trying to do a good job, unfortunately, it does not matter if you intentionally or accidentally made a bad recommendation, or failed to provide the client the level of information they needed to be comfortable about their decision. If a client complains to the insurance department about YOU, your livelihood is on the line. If enough of these complaints are made, as indicated by the letter from my insurance commissioner, then all of our livelihoods are on the line.

Let’s be more proactive as insurance agents. If you know of questionable sales activities in your area, don’t be afraid to do some self policing of your territory. Ultimately, doing nothing can have more impact on your business than you care to admit. Individually, I challenge each agent to review every sales action you currently use, and clean up your act. Go to your FMO, your GA, or whoever you view as having some supervision above you, and ask them for help in reviewing the professional and ethical methods of your sales practices. If you have a peer in the business, use each other to more objectively figure out if you have problems that need to be changed. Join professional organizations and become involved in community work, to keep you more focused on the needs of others and less concerned about what is in it for you.

The alternative is that we will only see more paperwork required, more regulatory intervention into our businesses, or worse, we may lose the ability to sell these products at all with just an insurance license and will have to become registered or otherwise further licensed in some way. With further licensing requirements come more opportunities where we will face considerably more oversight and the potential for fines and penalties for all levels of infractions. If we, as agents do everything we can do individually to STOP the concerns of sales practices of indexed annuities from arising in the first place, then we may avoid some of the more serious adjustments that I can assure you are inevitable, if nothing else changes

WIll Someone PLEASE Shut That Man Up?

2006-06-28T15:11:00.000-04:00

InvestmentNews.com recently featured an article whose Headline read, NASD eyes regulation of insurance products. The opening statement of this article is that the NASD "continues to press for more clarity in the oversight of insurance products." If you have been following the comments of NASD chairman and Chief Executive, Robert Glauber, you know that this headline about sums it all up, and the opening sentence clearly identifies the intentions of the NASD are to force their way into the insurance business no matter what it takes. Glauber’s repeated use of the precise statement about equity indexed annuities being a "jump ball" because "no one seems to know whether they are a security or insurance product," is his continued effort to justify his intrusion into a complete industry in which he has no authority or jurisdiction.

In spite of what Glauber keeps repeating, equity indexed annuities are a pure insurance product. That leaves ALL of the regulation of every aspect about them to the individual state insurance departments, headed by a different elected insurance commissioner for each and every state. Within each state, the licensing and supervision of agents who are allowed to sell indexed annuities, the approval of the companies who offer them, the approval of the products and their specific features and designs, along with all sales literature, forms, and paperwork required to be used with buyers, and the handling of all concerns and complaints by consumers, is all under the jurisdiction of the state insurance department in which the product is being sold.

It could not be clearer than this. The only person who keeps raising any question about the identity of indexed annuities and who should be regulating them is Glauber. And in so doing, he is insulting each insurance commissioner from every state, the entire staff of every department that works so hard to provide the review, the approval, and the oversight of the dozens of companies and products who offer them; and every licensed insurance agent who is following each procedure and sales process honestly and professionally when they present and offer indexed annuities to their clients.

Since it only takes an insurance license to sell indexed annuities, Glauber’s only chance at getting back the hundreds of millions his NASD members and broker dealers have lost to these popular insurance products, is to attempt to confuse their identity in his efforts to garner control of them. It reminds me of the political joke about, if it walks like a duck, and quacks like a duck, then it must be a duck. Indexed annuities are pure insurance products and no matter how much Glauber tries to suggest they are otherwise, their true identity is clear to every insurance department and agent in the country. In addition to his constant statements that erroneously and illegally call indexed annuities securities, he also has resorted to harassing every properly licensed insurance agent who is also a registered representative and offers indexed annuities, by trying to scare them into either ceasing sale of them, or intimidating them into believeing that they should only access them only through their broker dealer, when they are actually free to go directly to the issuing company, or use any GA or FMO they desire, to access ANY insurance products they are duly licensed to sell.

It is time for Glauber to cease his attacks on the insurance industry, and spend that effort and energy to clean up the securities industry. Remember the proverb about trying to remove the speck in your neighbors eye, when you have a log in your own eye. Glauber would do well to take note and heed this bit of wisdom. If he wants to protect investors, there is plenty he can do in his own industry. Perhaps after he retires from the NASD, he may want to run for insurance commissioner in some state and maybe then he will finally come to understand about the difference between insurance products and securities, and the real function and purpose for keeping regulation of each insurance department separated by state.

Why Isn’t LTC Insurance Getting the Same Critical Attention as Annuities?

2006-06-12T11:14:00.000-04:00

As I scour all the industry news sources every morning looking for articles to inspire a new blog, I search for the word annuity to appear. Many days I find nothing at all mentioned about annuities. Most days there are some comments about retirement issues in general, but nearly every day there are some articles about Long Term Care (LTC) insurance. These articles are usually about how some company is creating a new version of this product; some reference to how important LTC insurance will be to a secure retirement for baby boomers; or, how planners need to become more fluent in their understanding of these products to make sure they cover all bases.

The thing I find interesting is the lack of critical comments about LTC insurance products. Don’t misunderstand me, I am a strong proponent of this product, and for five years I was a company rep for CNA, then one of the industry leaders in selling a series of top quality policies, where I trained agents in the importance and the techniques of selling LTC insurance. There is a saying that if you really want to understand something, teach it to someone else. During that time, I became a LTC expert, and I found the main reason most agents shy away from offering LTC insurance is that they are intimidated by the intricacies of the product, and they fear they will not be able to adequately explain it in a sales setting.

The reason I mention this is that I want to compare the sale of LTC insurance to that of annuities. Both are sold primarily to the senior market. Both are insurance products that are designed to protect a senior’s assets and provide a degree of control and management to the unpredictability of retirement financial obstacles. Both contain a degree of complexity in their inner workings that require explanation, and the subtle variations in product features from one company to the next can be overwhelming and requires an in depth comparison of all the features to fully understand the differences. And LTC insurance forms have long included a simple suitability statement that effectively puts the burden of the financial appropriateness of the sale on the buyer, and even allows them to purchase the product against the recommendation of the agent, simply by checking a particular box on the form.

Yet, I cannot recall EVER reading of one complaint voiced by the NASD or any other securities regulatory agency about LTC insurance in the way they regularly do about annuities. Given the very similar natures of both products, you would think that if the motivation of the NASD were truly for the concern of the senior buyer, they would be concerned for ALL financial products offered to seniors. But the truth is that the sale of LTC insurance does not directly dip into the pockets of NASD members and broker dealers. Fixed and indexed annuity sales often result in the liquidation of brokerage accounts and moving money from broker dealers to insurance companies. Long Term Care insurance premiums are often paid from current or interest income, but usually do not result in the liquidation of huge blocks of securities business.

So, the bottom line here is that this disparity in the interest of the NASD between these two insurance products is easily identified as a purely financial motivation. Once again, it is clear that the issues the NASD has with indexed annuities are not about the safety and security of the buying public, as it wants us to believe, but it is ALL ABOUT THE MONEY.

Not Concerned About the NASD? You SHOULD Be!

2006-06-09T15:09:00.000-04:00

If you are an agent holding seminars in order to meet new prospects for your senior financial business, it is important that you pay close attention to the clamor that is going on in the media about how luncheon seminars are being used to deceptively sell inappropriate investments to seniors. While I am sure that the majority of seminar sponsors are attempting to follow the appropriate regulations for their type of license or registration, there are some areas you may still be missing.

Agents who are securities licensed have come under extreme scrutiny by the NASD and their broker/dealers for their “non-securities” business, such as the sale of insurance products like fixed and indexed annuities. While the sale of non-registered insurance products are not under the jurisdiction of any securities regulators, the general outside business and ethical practices of registered agents are within some grasp of the NASD and an agent’s broker/ dealer through a number of back door means of discipline. If you don’t believe me, just ask those agents in Massachusetts who were fined and strongly disciplined by the securities regulators when they were promoting indexed annuities through seminars, but because of their registration, they failed to meet all the compliance requirements of sales materials. It is extremely important to check with your broker/dealer for proper compliance requirements for EVERY SINGLE WORD you provide in print or speak to prospects and clients.

Insurance agents who are not securities registered and are only selling pure insurance products may feel they are out of reach of the SEC and the NASD. If that agent is using the proper presentation of financial concepts at seminars and in client interviews that fully discloses the character and nature of indexed annuities as an insurance product, and does not venture off topic, then that is true. But the warning to these insurance agents comes from their possible misuse of terminology and in their illegal comments and evaluations of registered securities' products.

Many have been fighting very hard to maintain the insurance definition of indexed annuities and keep them out of the control of the NASD. But when an agent refers to an indexed annuity as an “investment,” or decides to embellish his descriptions with a few words about how they work that imply that the returns of indexed annuities are “tied to the stock market,” or that you can get “market, or market-like returns,” then this agent is stepping over the boundary of properly identifying an indexed annuity as an insurance product and is implying that it is some kind of investment.

The earnings on an indexed annuity is INTEREST, that just happens to be credited by using the “change” in the measurement of the related index as the measuring stick to determine how much interest is credited in any given period. To refer to the earnings in any other way could be construed as a false representation of an insurance product as a type of investment.

Non-registered agents also need to be careful to what extent you can refer to information regarding the stock market or mutual fund performance. This line is critical and if you cross it, you can find yourself suddenly subject to the authority of the SEC for practicing securities business without the proper registration. Whether they have the full right to intervene or not may be of little concern once you have been publicly humiliated and your local or regional reputation ruined.

When you recommend a client liquidate investment assets and move them into annuities, it may be construed as a violation of SEC law, especially if you provide any opinion about the investments themselves or if your actions hint at you acting as a registered investment advisor without that designation. The fine line of difference between recommending the purchase of an indexed annuity versus the specific recommendation to liquidate securities in order to do so, may only be in the difference of a word or two, but it could make all the difference as to whether you are breaking any laws. My suggestion is that you contact your FMO or general agent, to provide you with “written” explanation about any areas of question you may have regarding what specific comments you are allowed or disallowed to make regarding investments.

Remember the old adage, an ounce of prevention is worth a pound of cure.

In Defense of the “FREE LUNCH” Seminar

2006-06-09T14:41:00.000-04:00

The National Ethics Bureau recently issued a Red Flag Reminder about Government Regulators “Hungry” for Senior “Free Lunches.” I have read references in a number of articles lately that insinuate that if an agent is holding luncheon seminars in order to meet new prospects for their senior financial business, then that SHOULD be a red flag as to their legitimacy and ethics. The fact that this notice is given in the first place is indication enough that there are growing critics who would seek to eliminate, or somehow control the marketing methods an agent chooses to use.

The core of this issue reminds me of the discussion about gun control. The question is whether it is the “free lunch” seminar that is the problem; or, if it is the few agents who choose to use the medium of seminars to fraudulently further their business with misleading information and deceptive business practices. I am all for eliminating the con artists from this industry, since this is a business of trust. The more reputable ALL agents are perceived; the better it will be for everyone. But let’s don’t throw out the baby with the bath water. The luncheon seminar is good for both agent AND seniors.

I find the claims by critics of the luncheon seminar, that simply by filling up the stomachs of seniors they will drop all of their good judgment and somehow lose their ability to evaluate financial decisions for themselves, is a naïve and offensive insinuation. Contrary to the indications in the Red Flag Reminder, the purpose of a financial seminar presented to seniors is NOT education. At least, it is not for the purpose of educating anyone about a particular financial topic. In fact, agents who attempt to provide too MUCH information about some financial concepts will more often do harm than good when attendees believe they have received enough information to make informed decisions and take action on their own. The seminar should merely open up awareness to important topics with the identification of potential problem areas, and the suggestion of possible solutions; but always with the clarification that each person’s financial situation is different and must be carefully evaluated by a professional before suitablity can be determined, and that more detailed information is required before any major decisions should be made.

But the real value of the seminar, lunch or not, is that it allows the senior attendee to privately and anonymously evaluate the agent who is speaking, BEFORE they decide if they want to consent to an individual consultation with them or disclose any personal financial information. At the same time, for the agent, it allows them to reach a large number of qualified people at one time, and THEN only have to spend time individually with the ones who specifically have a stated interest in discussing their detailed financial affairs further with the agent.

The intrusion of the government into the use of seminars as an introductory marketing method is a discriminatory affront to the thousands of honest financial professionals who use them and are diligently working hard to provide the best service possible for their clients and are simply attempting to expand their client base. All industries have used seminars, including legal, financial, investment, as well as insurance. Each industry has the interest and the means to supervise the resulting business practices of the seminar sponsors. Rather than attack the seminar as a structure, why not focus more on the inappropriate business and trade practices? Lets go after the con artists and leave legitimate business professionals alone.

MassMutual's Innovative New Variable Annuity is a Wolf In Sheep’s Clothing

2006-06-06T16:53:00.000-04:00

MassMutual has just introduced a new Variable Annuity product called Equity Edge. That may not seem like news, since nearly every single insurance carrier already offers variable annuities, a hybrid of insurance and securities features (which are often confused with indexed annuities, which are NOT securities but are pure insurance products.) So, what is new about the MassMutual product?

Previously, most variable annuities, regardless of the company who issued them, were similarly structured. In exchange for the ability to choose the underlying investment options and with the potential for market gains, the client assumed ALL investment risk on the value of a variable annuity. The only guarantee in these products was usually a death benefit, for which the client actually paid anyway as an expense deducted regularly from the contract principle to purchase term life insurance. Therefore, the big draw to variable annuities was the high market-based potential return aspects of the securities side, that were also tax deferred as part of the insurance aspects of the product. When the market was rising, those gains could be comfortably deferred inside the annuity and the client could enjoy additional compounding on the earnings they otherwise would lose annually to pay taxes.

For this reason variable annuities became very popular during the huge market increases of the late 90’s. But when the market began to correct in 2000, clients learned that the contract really DID NOT guarantee the account value, and many people suddenly were sitting on an annuity whose value was worth only a fraction of their original deposit. This dissatisfaction in the performance of these products has lead to some variations of variable annuities, the latest of which is this MassMutual version.

The common element of any changes in variable annuities involves the appearance of guarantees. One such product was so confusing that agents themselves were telling clients the product had an underlying guarantee of a fixed rate, at the time about 7%, with the potential of earning more if the market did well. What the truth was, however, was much different. The client only received the guaranteed interest IF, and only IF they left their money in the contract for the full 10 year deferral period followed by a required 10 year systematic withdrawal. When you did the math, essentially what you got was about a 3 ½ % overall return, and then only if you were willing to wait 20 years to get it. Amazingly, this product has been voluntarily withdrawn from the market.

The MassMutual product has similar illusory elements that must be mentioned to avoid client deception. It is called a simplified variable annuity, which in this case means much of the typical flexibility and a number of client options are simply removed. In other words, in the MassMutual product the benefit period is absolute or all guarantees are off. For instance, if someone selects a 10 year period, if for any reason they must withdraw their money before the 10 years is up, they receive NONE of the guaranteed benefits. Ironically one of the simplifications also removes all direction of investment choices from the buyer, previously one of the major selling points of variable annuities. Instead, the product is designed to be managed by MassMutual to integrate fixed interest earnings with equity investments and rebalance them each year in order to attempt to mimic the returns of the S&P 500 on the investement side, with a minimal attempt to just simply preserve the original principle of the entire account.

If you carefully examine it, this product seems remarkable structured like all of the negative aspects that indexed annuities are confusingly accused of having by those who are critical of them, but really don’t. Considering that with an indexed annuity over the contract term you can also get the general potential performance of the S&P 500, BUT the client retains the guaranteed return of 100% of their principle AND a minimum guaranteed interest return, regardless of how the market performs. In addition, with an indexed annuity your gains are locked in annually, and you have penalty free withdraws, usually in the amount of 10% per year throughout the surrender period. If they need more than the penalty free withdrawal, the client can always access whatever amount they need, usually without affecting previous earnings, but simply by paying the applicable surrender charge only on the amount withdrawn over the free amount. Indexed annuities also usually carry a nursing home waiver where in extreme circumstances, such as a nursing home stay, the free withdrawal is increased, or the early withdrawal penalty is removed altogether.

It is clear to me that the MassMutual product is a poor attempt to mimic what the uniformed believes indexed annuities to be on the surface, without really understanding them or how they work. But by missing the REAL features that make an indexed annuity the very appealing and valuable retirement vehicle it is, this MassMutual product is just a piece of crap, and the only way it can be sold is to some unsuspecting buyer who simply trusts the agent or the product because of the MassMutual name. If only that same person was able to have any of the many good indexed annuities to compare to, they would wisely choose the indexed annuity over this MassMutual variable annuity every time.

NASD Needs to Concentrate on the Proverbial Log In Their Own Eye

2006-06-06T15:50:00.001-04:00

I do not understand why the NAIC is not up in arms at the continued slams by NASD chairman, Robert Glauber about their job of regulating fixed and indexed annuities. A quick factual study of the consumer complaints regarding indexed annuities will reveal that these products have the least number of complaints of any other insurance product. So why isn’t Glauber concerned about other insurance products? BECAUSE OTHER INSURANCE PRODUCTS AREN’T TAKING BILLIONS OF DOLLARS OF ASSETS OUT OF THE CONTROL OF BROKER DEALERS!

It was recently reported that the complaints that were made against indexed annuities were not in reference to the product performance, but regarding something about the sales process. With $25 billion in sales last year, I am sure that there are some cases where the agent did not do a good job of explaining the product details or recommending the best product to the client. Still, in each of those cases, if you looked at the facts, it would be found that regardless of what the client claims regarding their questions and confusion, ALL of the product details WERE FULLY DISCLOSED, if not in the agent interview, at least in the required paperwork every client must sign upon application. Then, once again every legal commitment that the client AND the insurance company agree to is furnished upon delivery in the actual contract, where a state mandated “free look” period gives ANY client adequate time to read, review, get outside input, or whatever they need in order to make sure of their decision, and if during this period they are dissatisfied for ANY reason, they can get out of the contract without incurring any cost or penalty.

What comes to mind here is the familiar proverbial passage about the human tendency to find the speck in someone else’s eye when there may be a log in their own eye. For their own financial reasons, the NASD is conveniently finding fault in the sale of indexed annuities, while their own industry is filled with misconduct, fraud, deceit, and mismanagement. There are numerous instances of the mutual funds themselves being bogus; the information provided by the brokers to clients being wrong, the financial reporting of the underlying companies that affect stock and fund values being falsified, or the client’s money being fraudulently stolen in schemes. Besides these obvious illegal activities, we all know the sales habits of brokers to “churn” accounts simply to generate a commission for themselves, all under the guise of making “recommendations.” Investors have been so conditioned NOT to hold their broker accountable for their bad advice, that the securities industry has averted potentially thousands, if not millions of consumer complaints; only because consumers have learned to simply accept losses in their investment account value as part of being in the market. Yet, these same brokers want the credit if their client’s make gains in their accounts.

This double standard by the NASD is a skillful manipulation of the public attention away from the many problems in the securities industry. The underlying goal of Glauber and his cronies is not just redirection, however, but to garner control over indexed annuities and bring those billions in lost assets back to broker dealers, and thus hundreds of millions in lost commissions.

Glauber, Head of NASD, Loves the Assumptive Close

2006-06-06T15:50:00.000-04:00

In a lengthy article I recently read in Financial-Planning.com, entitled “NASD Agenda: Regulatory Harmony for Annuities,” the primary focus of the article is actually on the efforts of the NASD to address the problems with honesty and credibility we all have read about in the securities industry over the past number of years, such as deceptive mutual fund sales disclosure, improper fund management and doctored reporting. According to the article, items on the NASD agenda also include the “harmonization of rules governing fixed, variable and equity indexed annuities.” Glauber once again took this pubic opportunity to breach the boundaries of the NASD authority and make intruding comments about insurance products to which he has no jurisdiction whatsoever.

The article continues that the NASD is “considering the possible integration of regulations for popular financial products…fixed, variable and equity indexed annuities.” Can’t anyone put Glauber in his place and remind him that not only does he not have the right to insist on regulatory changes for fixed and indexed annuities; he does not have the NEED to do so? But once again, by making his regular statements about the need for uniformity of regulation over variable annuities, (which are a securities product), and fixed and indexed annuities, (which are NOT securities products but are insurance products), by making his comments assumptively, as if he had some authority to do so, he is attempting to condition the pubic to assume that he and the NASD do have some power over indexed annuities. But in truth, he is continuing to stick his nose into business for which he has no reason to get involved; unless you are concerned about the loss of $25 billion in assets by broker dealers in each of the past several years to insurance companies through the sale of indexed annuities. That is the REAL and ONLY interest Glauber has in fixed and indexed annuities. It is ALL about the money. It always has been, and it always will be.

NASD head Glauber is the Master of Double Talk

2006-05-23T11:48:00.000-04:00

In a recent speech Glauber made to the NASD Spring Securities Conference in Hollywood, Fla., for some reason he attempted to soften his normal attacks against indexed annuities with some token gestures that his critical comments have “nothing to do with protecting or commandeering turf.” Some of his efforts to not look so territorial included him saying that “We (the NASD) are not proposing any new rule-making or expansion of our jurisdiction.” I only wish I had been able to see video of Mr. Glauber’s face when he spun this BIG one, because the words had hardly left his lips before he went on to say that “If Washington feels there is a void in the way an industry regulates itself, a new government-managed structure is almost certain to emerge.”

This speech reveals much about Mr. Glauber’s intended plan of attack in his attempt to assume control of indexed annuity sales. He is focusing his comments toward bureaucratically minded politicians in Washington for a reason. Indexed annuities are clearly defined as an insurance product and the insurance departments of each state have complete jurisdictional regulation regarding the products, the licensing of agents, and the sales methods approved within their state. We know that this intrusion by Glauber and his cronies from the securities business, who are making very public critical comments about a completely different industry, is all about control of the money. This IS a turf war and what Glauber and the NASD want is to get the billons it has lost to the insurance industry in recent years by the movement of huge amounts of money from brokerage accounts into indexed annuities, back into the hands of its members.

For the NASD to take on one state at a time, however, would be a long and arduous task. But by painting HIS personal concerns about indexed annuities as a national problem, Glauber is lobbying for Washington to do the dirty work of nationalizing control of this facet of the insurance industry and creating a void that would lead to the federal government handing over this new regulatory task to the NASD. There is already a growing debate about forming a national insurance regulatory body for some insurance products. Glauber is simply riding this wave for his own benefit.

From the perspective of the NASD, once this issue is taken from the control of the states and put under federal control, the NASD, as an existing national self-regulatory body, could just step forward and offer to be the saving entity that can solve this manufactured national dilemma about indexed annuities. But Glauber is simultaneously protecting his turf from other possible agencies taking over this task as he further commented that the NASD has to be tough to preserve the current self-regulatory system and ward off the creation of a new federal securities regulatory agency that might be similar.

In a nutshell the tactics Glauber is following to take over control of indexed annuities is to first confuse their identity as insurance products; then criticize their current regulatory structure; followed by alarming the public and thus Washington that there needs to be some uniform national regulation; and finally promoting that a new agency is not necessary since they could just step in and take over the regulation of indexed annuities. And that IS the agenda and ultimate goal of Glauber and the entire securities industry.

Glauber’s Admission of HIS Inability to Understand EIAs Is Telling

2006-05-23T11:22:00.000-04:00

Glauber is at it again, warning NASD members about his concerns over the complexity of EIAs. It is amazing how involved this man has become with a product that is completely out of his jurisdiction at the NASD and is fully under the regulatory authority of a nationwide system of state insurance departments. Nevertheless, at the NASD Spring Securities Conference in Hollywood, Fla., Glauber took the opportunity at this public venue, to once again work his propaganda campaign, to muddy the otherwise clear waters about the regulation and function of indexed annuities. He insists that he, and what he calls, “some of the brightest people in (his) industry,” have put EIAs under a microscope but simply cannot understand how they work. This admission of incompetence by Glauber that he and his securities’ industry peers are clueless about understanding insurance products is exactly why they have no business speaking up critically about them.

The important thing Glauber and his buddies need to realize is that unless they personally are planning on purchasing an indexed annuity, there is no reason that ANY of them need to understand them at all. The good news that should reassure Glauber about his voiced concerns is that those in the insurance industry who sell indexed annuities DO understand how they work, and the majority of the buying public that hears about them also understands them and like what they have to offer. In fact, indexed annuities are so popular that non-insurance companies like Charles Schaub are clamoring to get into the action by developing their own indexed annuity products and the public is moving billions of dollars annually from the lack-luster performance of bank CDs and high risk securities into the safety and guaranteed benefits only available in an indexed annuity.

If Only The NASD Was Held To A Legal Standard

2006-05-16T16:29:00.001-04:00

The big difference between the lawsuit mentioned in a previous post, and the NASD propaganda campaign against indexed annuities, is that the lawsuit requires that eventually the accusers prove their claims with specific evidence. A lawsuit also allows that the insurance side has the complete opportunity to disprove the false accusations, all in an officially supervised public forum with equal rules applied to both sides. The judicial system is supposed to listen to all evidence without bias and without prejudice, and then rule based upon the factual presentation of each party made in the scheduled sessions. Courts specifically attempt to remove all influence of rumor, gossip, and pubic opinion from judicial decisions. After each side gets their say, there is an official determination by a judge or a jury, and if there have been false accusations and the court finds so, this ruling can set aside those false claims and their negative effects once and for all.

Unfortunately, unlike these ambitious attorneys, by choosing to wage their battle in the media, the NASD has found a gap whereby they are not officially being held accountable for their misinformation and false accusations. They are left unchecked when they overstep their authority and intrude into the insurance industry and make inappropriate criticisms of indexed annuities. Despite the best attempts of the insurance companies, and other annuity friendly voices to clear up these misstatements or correct erroneous information, this kind of propaganda attack being used by the NASD forces annuity proponants, the issuing insurance companies, as well as the state insurance commissioners, into a defensive posture. Years of conditioning has made the public weary of defensive positions and caused them to doubt the sincerity of someone who has to constantly fight to defend their dignity and honor. In spite of our legal precident for innocence UNTIL proven guilty, in the court of public opinion, it seems to always work the other way.

When you have a carefully orchestrated effort, such as being put forth by the NASD to steal all credibity from an entire industry sector, then you have an unfair fight that would probably benefit from the balanced and structured processes of our courts. It brings to question the power and influence we have allowed this "voluntary" self-regulatory organization to acquire, where they can so deliberately attempt such a massive influence campaign against an entire industry to which they have absolutely NO authority. The motives of the NASD are the same greed and personal agenda exhibited by the attorneys who are leading this class action lawsuit against the insurance companies. It is all about the money.

The fight that the insurance companies have with the law firm is a very winable battle because of the fair processes of our courts and the triumph that system can afford truth and justice. But the battle with the NASD will be a fight that will likely never conclude. As long as insurance products, such as indexed annuities are taking such massive amounts of money from the securities industry, this fight will continue.

An interesting "tell" in all of this is the fact that so many broker dealers, like Schaub, are beginning to produce their own indexed annuities. This move could be construed as either a validation by these broker dealesr of the value of this financial product, or it could be that these broker dealers do NOT expect the NASD to ultimately prevail, so they are preparing to become part of this fight for that market share in a different way. This competative approach to fighing the gains of indexed annuities is one that the NASD should notice and encourage from their broker dealers who are whining about lost revenue. And it is this kind of competitive approach that usually leads to more and better product selection for the benefit of the buying public. If the NASD was willing to wage a fair fight, everyone could end up the winners.

Insurance Companies Will Finally Get "Their Day In Court" to Defend the Suitabilty of Annuities--Literally

2006-05-16T16:29:00.000-04:00

I was recently forwarded a link to the web site of a law firm who has put together a class action lawsuit against dozens of insurance companies. They are using backdoor claims that seminars sponsored by independent agents, who promote the use of estate planning trusts, were all a conspiracy supported by these insurance companies to abuse and defraud seniors into buying annuities.

But when you read what this firm has posted on their website, you see that this is nothing but another aggressive personal injury law firm’s attempts at getting into the pockets of BIG insurance companies for their own enrichment, not for any moral purpose or for the benefit of the participants. Just like the ambulance chasers who do those dorky advertisements on TV, this firm is trying to make a name, and a lot of money, for themselves by exploiting a popular issue that has a lot of media attention. As attorneys love to do, they can dramatically claim ANYTHING in the lawsuit they want, without having to prove or justify any of it at this point. The more people they can solicit to join this lawsuit only increases the potential amount they can collect for themselves if they are successful in their attempts.

When you see what the thrust of their claims really are, however, you realize that they are based in easily dismissed lies about the practices of insurance companies and the function of annuities. These insurance companies are not going to just lay down and take these false accusations, when defeating them with a good group of defense attorneys would not only save them the expense of an unjust settlement, but it could also prove to provide to the pubic an official validation that shows annuities as being perfectly suitable for seniors. When this case is tried and heard in an unbiased court of law, if it gets that far, the combined resources of all these companies should be able to easily disprove ALL of these false accusations.

The use of seminars to provide general information and bring together prospect and agent is a useful and perfectly appropriate venue that allows interested attendees to learn new information WITHOUT pressure or obligation. Still, if there were any improprieties in the recommendations or sale of trusts, it will be easy to show how those kinds of non-insurance activities by these agents are beyond the control or the responsibility of the named insurance companies. The attorney’s attempts to coin the phrase “Trust Mills” does not change the fact that an agent’s responsibility to the insurance companies to which they are contracted, and visa versa, is limited to the express authorization to sell that company’s products, and nothing further. Since a trust is a legal document, I bet if you looked deeper, the real culprits behind the overzealous use and promotion of trusts are lots of other greedy attorneys.

The final thing here is that these attorneys will have to prove that this group of people was materially hurt in some way, not just dissattisfied with their decisions. Unless the sale of an annuity was done fraudulently, something that no insurance company would condone, and that this action can then be proven to have harmed the purchaser, there is no case. The fact that there are contractual rules and limitations in an annuity contract does not make them an inappropriate product nor does that make the sale of them to willing customers fraudulent or unsuitable. Insurance law requires that all of these contract provisions are properly and fully disclosed LONG before the prospect is “locked” into their contract commitments. Every company mentioned in this suit only has to produce the signed disclosure statements to prove that the prospect was not deceived into anything. Since these attorney’s have chosen to pursue this as a class action suit, I believe it will have to ultimately be proven in court that the entire group has been harmed in the same way for this lawsuit to succeed.

Indexed Annuities are NOTHING like Variable Annuities

2006-04-13T12:04:00.000-04:00

Because both variable and indexed annuities have the term “annuity” contained within their names, they have been linked as similar, but the differences between the two are like night and day. Typically, a variable annuity has NO guarantee of principal so it can and does lose value, but quite the opposite, the principal in indexed annuities is guaranteed never to lose value. Gains within variable annuities fluctuate widely, and losses of principal and previous earnings are gone and must be earned back each time the market swings; but in an indexed annuity, interest credits have a minimum guarantee over the life of the contract, and the extra interest credits earned by increases in the linked index are periodically “locked in” after which they can never be lost. Variable annuities have enormous fees deducted from the principal account value each year, regardless of whether the account experiences gains or losses; but in an indexed annuity no fees are EVER deducted from the account value itself, but only paid by a slight reduction in the extra interest credits in positive years only. This method of “sharing” gains, within an indexed annuity is not that unlike the way “no load” mutual funds, the darlings of the do-it-yourself securities investors and fee-for-service financial planners, deduct their hidden fees off the top from a portion of the overall gains. Both variable and indexed annuities have surrender charges for a stated period of time, but these fees are only imposed if the annuity is liquidated entirely, or in an amount exceeding the allowed annual free withdrawal. But considering that in a downswing of the market, the account value in a variable annuity could also be lower than the starting value, the impact of surrender charges imposed in a variable product only compounds those losses. In an indexed annuity the worse case scenario in any type of market is a flat year with no growth. All annuities have been given tax favored status by the IRS in that all earnings within an annuity are tax deferred. But the exchange imposed by the IRS for that valuable benefit is a 10% penalty for withdrawal prior to age 59 1/2, similar to any other retirement savings vehicle. This makes annuities excellent long term retirement savings instruments for someone of any age. With the ability to defer withdrawals indefinitely, and when taking money from an annuity does become necessary, using either their generous free withdrawal privileges or their unique ability to convert the account to a guaranteed income stream that cannot be outlived, annuities are also the perfect distribution vehicles to use once retirement is reached. Any question of suitability raised by the NASD about replacing a variable annuity with an indexed annuity is simply another part of their deceptive propaganda campaign to get control of these incredibly powerful financial products.

Replacing Variable Annuity with Indexed Annuity is an Exercise in Safety

2006-04-11T15:38:00.000-04:00

The NASD would have the public accept that indexed annuities are the same as variable annuities, not because they really believe this to be true, but because the NASD currently has partial jurisdictional control over variable annuities, but no authority at all over indexed annuities. This attempt to blur the line between these two products is all part of a methodical propaganda campaign being waged by the NASD to wrestle control of indexed annuities from state insurance departments. Interestingly enough, contrary to the accusations of the NASD about owner complaints and agent improprieties, indexed annuities actually have fewer complaints registered with the NAIC than any other annuity or insurance product, and of the complaints filed; none include allegations of failure of their indexed annuity to perform as expected. Unfortunately the same cannot be said about variable annuities, where numerous complaints have been filed with a number of regulatory agencies, and in one instance, the issuing company has not only pulled their variable product from the market, they are settling a class action lawsuit with the existing policy holders. So, when the NASD cites replacement of variable annuities with indexed annuities as a basis for their fears of lack of suitability, exactly what is the real concern? When an indexed annuity moves the policy holder from a position of risk they had with a variable product, to a position of guarantees and safety available with the indexed annuity, unless the client needs to remain exposed to potential losses, an indexed annuity will ALWAYS be more suitable, especially with the older clients who need to reduce or remove their exposure to market risk. But the differences are so dramatic; we will take time in the following post to examine some key distinctions between variable annuities and indexed annuities.

NASD Completely Out of Line With EIA Webcast

2006-04-10T14:05:00.000-04:00

The NASD is now taking on the task of trying to teach its members, in minute detail, about EIAs through the use of a Webcast, presented with all the enthusiasm and energy of a dead fish. But aside from the lifeless way this material on their site is presented, it is wrong of the NASD to even address this topic for two major reasons. First, the NASD does not have ANY regulatory authority over EIAs and therefore has neither the responsibility to educate their registered reps about them, nor the RIGHT to discuss them with such detail, as if they did. I wonder how the NASD would like it if insurance departments, suddenly began to discuss and attempt to educate registered insurance agents about securities products in the same manner the NASD has been forcing their way into talking about the sale of annuities. The SEC is SO controlling when it comes to the regulation of securities, and the NASD, as the self-regulatory body for registered reps, is even more reactionary to any variance from an extremely well defined set of rules and regulations that govern the sale of every securities product. So how is it that the pubic figure heads for this same organization keep illegally calling indexed annuities investments, when a registered representative of the same organization is forbidden by law to call any non-security product an investment? The second reason, this web posting about EIAs by the NASD is out of line, is that they attempt to summarize and explain ALL of the variations of EIA product designs at once. Imagine them trying to explain ALL of the variations of every mutual fund, including all the differences in fees, internal design, and investment objectives, in a single 7 ½ minute video. It is no more necessary that a client understand every possible EIA available in order to make an informed decision about buying one, than it would be for a client to fully comprehend every single mutual fund available before choosing to buy one of them. Part of the agent’s job is to sift through the enormous number of offerings in either of these product lines, and then present the client one or two best matches, based upon their ethical professional judgment and their evaluation of suitability based upon the stated financial objectives of the client. For mutual funds, the broker dealers, the mutual fund companies, and the NASD should be the ones that provide the educational information the agent needs in order to do their job properly. Similarly, the insurance companies, GAs or FMOs, and the state insurance departments, and NOT the NASD are the ones who should be doing all the educating for licensed insurance agents about the details of indexed annuities. And the fact that SOME insurance agents offering EIAs may also be registered reps does NOT give the NASD ANY right or responsibility to intrude into the business of EIAs, any more than then insurance departments have a right to intrude into the business of securities products because an insurance agent is also a registered rep.

The Securities Industry Takes Its Propaganda Campaign to Washington

2006-03-30T15:56:00.000-05:00

The Senate Committee on Aging got an earful from securities industry representatives, as it met on March 29, specifically for the purpose of examining methods con artists use to persuade older Americans to invest in a wide range of fraudulent investments, such as fake promissory notes and fake real estate investments. From this agenda you would think that the securities representatives would have enough concerns about such illegal activities within their own industry and stay on topic. A victim and a convicted con artist, who testified, only talked about schemes that had no relationship to insurance or annuities. But the 3 securities regulators who testified, chose instead, to once again step completely outside their area of jurisdiction, and take this opportunity to continue the misleading statements against indexed annuities we now so quickly recognize as part of their ongoing propaganda campaign, which is meant to eventually wrestle control of indexed annuities from the insurance industry. Patricia Struck, president of the Wisconsin NASAA, Elisse Walter, executive VP for regulatory policy and oversight at the NASD, and Susan Ferris Wyderko, director of the Office of Investor Education and Assistance at the SEC, all chose to devote from 10 – 20% of their written testimony to emphasize the need to keep seniors from buying unsuitable annuities. Besides the same false and misleading statements about the product details we have seen so often from securities regulators, their illegal references to categorize indexed annuities as investments, and the vague generalized statements, they also managed to attack the “free lunch” seminar as a sure way of spotting a con artist who is selling unsuitable annuities to seniors. Ironically, these securities representatives found a way to get it on record that “variable annuities are legitimate and suitable investments,” although they go on to provide their required disclaimer about potential risk and costs. As I read about this hearing, it reminds me of the way Hollywood actors have been brought in to testify about some social issue, not from their overwhelming knowledge or expertise, but simply because one of the character roles they played in a movie portrayed some knowledge about the issue. In the case of this hearing, in their comments about indexed annuities, the three securities reps don’t even have that credential to fall back upon. It is not surprising that the securities industry is taking its propaganda campaign to Washington, where misleading and confusing statements, insinuations, and deception are normal ways of doing business; and where having a strong financial concern about some issue is sufficient to earn an individual or a group, the title of expertise. Even though many of these securities reps’ comments and statements are false and misleading insinuations, in Washington, at least, they simply call that “spin.” And we have come to see how the NASD and others in the securities industry are becoming very skilled at this kind of political “spin.”

Generalizations Can be Harmful to Consumer’s Financial Health

2006-03-28T13:21:00.000-05:00

In a USA Today article, written by Greg Farrell, entitled SEC targets investment scams aimed at seniors, he has fallen hook, line, and sinker into the journalistic trap of allowing previous misstatements and generalizations about this topic to fuel inaccuracy and misleading assumptions in his own article. The subject of his piece is addressing concerns that, as baby boomers continue to reach retirement, there will be increasing motivation for scammers to come up with ways to profit from this enormous amount of retirement money looking for a home. Since the first use of currency, preying upon opportunity has been a given practice of the underside of human nature, and it would be surprising if there were not swarms of deceptive practices meant to get rich from this rising tide of retirees. But besides his stating the obvious, as Farrell tries to explain with examples, he resorts to generalizations in a way that implies that all such practices similar to the ones he cites are scams aimed at harming seniors. He mentions seminars that “promise” to provide a free lunch, as if the scam he is concerned about is that the promise of lunch would not be fulfilled, and the seniors would go away hungry. The other inference Mr. Farrell makes is that seniors are an “increasingly vulnerable group,” as if when this group grows older, they also grow stupid, making them more likely to make bad choices and decisions when confronted by any shyster who offers them a free meal. The generalization that really provides the greatest amount of disservice by misleading the readers is his accusations that “high-pressure sales pitches (are) designed to get older Americans to put their assets into unsuitable investment programs, such as annuities.” Since the only annuity product that is classified as an investment is a “variable” annuity, we have to assume Farrell is insinuating that they are an unsuitable investment program for senior adults. I wonder if the SEC or the NASD would agree with this broad assumptive statement. And of course, if you hear about such a financial product at a “seminar” where there is also free food, then there must be something rotten afoot, so beware. This kind of article, in such a prominent publication is irresponsible journalism. Seminars provide a perfect venue for someone to anonymously check out any type of program without obligation or commitment. At a seminar someone can evaluate if they want further information or if they like and believe the presenter, all from the safety and comfort of the back row, if they so choose. If Farrell is insinuating that simply because you provide a free lunch, that you will suddenly impair a lifetime of intelligence and the ability to made good judgments in a senior, then the next article he writes should be an apology for insulting a complete generation of people whose lives have proven that they get wiser and more street smart with age. Scams come and scams go, but the wise will always survive. Perhaps the real answer is that these people are willingly making decisions to buy these products with no coercions whatsoever, because they have evaluated them, they understand them, and they believe them to be exactly the product that meets their needs. Let’s give the seniors some credit and stop generalizing them as stupid, weak, and vulnerable individuals who will fall for anything when their stomachs are full. It is Mr. Farrell who is the one who has provided the scam in this instance.

Glauber Continues His Personal Vendetta to Control Indexed Annuities

2006-03-28T12:38:00.000-05:00

With the announcement of a planned Annuity Roundtable in Washington, DC on May 5, by exiting NASD CEO and Chairman Robert Glauber, he continues to be the strong voice of misstatement and propaganda, meant to weasel control of fixed and indexed annuities from state Insurance Departments, and place it with the NASD. The March 23rd press release, not surprisingly issued by the NASD, lists an impressive group of participants from both the securities industry and the insurance industry. But this call to discussion is not initiated by the insurance side, which has sole authority over the regulation of fixed and indexed annuity sales and marketing practices, but rather, it is an intrusive move by the outsiders in the securities industry to force their involvement into an area which is none of their concern. The first striking impression of this announcement appears to be as oddly misplaced as if Baptists leaders were to invite Catholics to attend a summit for the purpose of discussing their concerns with the liturgical practices within the Catholic Church. The parties who are putting together this Roundtable are completely outside of the regulatory circle of authority of these pure insurance products. But that does not stop Glauber with his statements of misleading propaganda. He continues his rhetoric of illegally calling fixed and indexed annuities investment products, which they are not, and stating that “equity-indexed annuity sales are a jurisdictional jump-ball, because it isn’t clear whether they’re securities, insurance products or something in between.” To everyone but Glauber, it is very clear that fixed and indexed annuities are completely within the jurisdictional domain of the state insurance departments, and are not subject to ANY authority of the NASD or any securities regulators. But since Glauber and the NASD members are not happy with that answer, they continue their lies; all with the purpose of confusing this well know fact in order to justify their intrusion into an industry outside of their legal authority. Fixed and indexed annuities are not investments but are insurance products, and only insurance products. Glauber may claim that he is not proposing new rulemaking by the NASD or any expansion of its regulatory jurisdiction, but he continues to insist on their involvement in such discussions about indexed annuities using his propaganda about their uncertain identity and that for the protection of “investors” the NASD and these other “interested parties” need to speak up. As long as the proper authorities allow his lies and misstatements to influence their actions, he will continue to get attention for his propaganda campaign. But my suggestion is that the insurance industry not kowtow to his rhetoric any longer, and suggest to Glauber that he sit down and forever hold his peace.

Does Charles Schwab Want to be the Pot, or the Kettle?

2006-03-23T14:10:00.000-05:00

I recently became aware of the fact that discount brokerage house, Charles Schwab, is promoting a couple of indexed annuities of its own design, called Index Rewards and Index Rewards 5. It is interesting to see such a prominent member of the NASD family, using the same marketing "catch phrases" that so many registered insurance agents have been criticized, and even punished for using. Reading from their own web site, I see a section labeled: Potentially higher returns, and, Guaranteed minimum interest. The information provided is technically accurate, in that it states that, "interest rate is linked to a formula that uses the performance of either the S&P 500 or the Dow Jones Industrial Average," and that “a minimum guaranteed interest rate floor…preserves principal and credited interest when held to maturity.” Still, I fail to see how the Schwab site differs from the highly criticized methods of so many agents who have been offering indexed annuities for years making similar marketing claims, only to be severely attacked by the NASD for doing so. These descriptions only hint at the full details of how those indexes will be used to calculate that interest, as most marketing materials only provide highlights. The amount of missing information yet needed to help a client understand the products fully is enormous. Usually that is where the sales agents steps in and can help fill in the blanks, when the literature is insufficient or confusing to the average layman considering the purchase of an indexed annuity. The real question I have, is simply this: how does a brokerage house, that grew to its current level of prominence by offering inexpensive, self-directed trades, and provides little or no investment support or advice to its customers, expect to be able to sell indexed annuities with ANY level of explanation or service such as the NASD has so vehemently clamored needs to be extended from the current level provided by sales agents. Is Schwab planning on being a clearing house for people who are simply shopping annuities and find their offer enticing? I have no problem with a major brokerage house getting into the indexed annuity business. It is a type of confirmation that the product is both viable and desirable enough that they want a piece of that market. I do, however, have a problem with a brokerage house getting into the insurance business, when they do not possess the experience, the knowledge, the understanding, or the manpower to provide what the public needs, in order to make informed choices. This shortcut step by Schwab could be interpreted as an admission by a powerful member of the securities industry, that the current marketing materials, forms, and contracts are sufficient for many people to educate themselves before buying an indexed annuity. If this is so, then where did all this recent criticism we have been hearing from the NASD and others in the securities industry come from? I am curious to see how, or if, the NASD will have negative comments on how Schwab is marketing their indexed annuities.

Is There Finally Some Hope for the NASD Regarding Indexed Annuities?

2006-03-23T12:48:00.000-05:00

New NASD Chairman, Mary Schapiro appears to sound a little more reasonable about her view of the role of the NASD regarding insurance products. When a planned notice to members is released soon, regarding the position of the NASD on life settlement transactions, we will know more definitively how balanced her positions really are. But in her recent talk at a conference in Hollywood, Fla., organized by the compliance and legal division of the Securities Industry Association, Washington, Ms. Schapiro was quoted saying that, "equity indexed annuities may not be securities" and further stated that “plain vanilla annuities are not securities.” While this may not be a full admission that EIAs are purely insurance products, it is a few steps back from the confusing double talk of her predecessor. Her other comments, about the need for brokers to carefully weigh the alternatives before recommending the sale of an existing life insurance policy through a life settlement company, at first may seem somewhat an intrusive interference by the NASD into a business which is not under their jurisdiction. But if this is as far as her comments go, I have hopes that maybe some of the recent attacks by the NASD on fixed and indexed annuities may be slowing to a manageable discussion. I strongly agree with her explanation, that while variable, fixed, and indexed annuities are often purchased to provide a similar purpose, the inherent differences in each of each of these products do not equally fulfill the needs of every client. Nevertheless, this does not provide the NASD an invitation to participate in the decisions regarding the regulation or the sale of non-registered insurance products such as fixed and indexed annuities. The truth has to be accepted that registered representatives, who are also insurance licensed, will have to answer to two different masters, depending upon which products they are presenting. The NASD certainly does not accept that a licensed insurance agent, who is registered to sell mutual funds, must also answer to their state insurance department regarding their activities in the sale of these registered products. That portion of their business clearly does not fall under the domain of insurance regulators, but the NASD. Likewise, fixed and indexed annuity sales by a registered broker do not fall under the jurisdiction of the NASD, but are only subject to the authority of each state insurance department.

Are EIA's Really That Hard to Understand

2006-03-15T14:04:00.000-05:00

I have been reading a lot of commentary lately that accuses EIAs of being extremely complicated and difficult to understand, with the implication, that, perhaps this makes them unsuitable for elderly consumers. Compared to a bank CD, which simply adds the stated interest over the agreed time period, perhaps this accusation may at first appear to be true. But even in the simplicity of CDs, consumers have had to learn the differences between simple and compound interest, and the effects it has on real returns. With any stock or mutual fund, the complexities of the inner workings go up exponentially. Do these people, who accuse EIAs of being so complicated, really believe that the majority of mutual fund purchasers understand the complete workings of all the fees, the risks, the commissions, the full potential for gains AND losses, the strength or weaknesses of the underlying stocks and bonds, or even something as vitally important as the primary investment objectives of the fund? The truth is that people blindly buy securities based upon such feeble information as a feature article they read in a prominent financial magazine or newspaper, a comment by a friend or family member, or the unsupported suggestion of their broker. Often the basis for their interest in a particular fund is so shallow, that if they really understood the full details of how that investment worked, they would know that this fund does not actually achieve what they are looking for. But because every investor receives a prospectus, which is rarely read, it is assumed that they are therefore, fully informed. With EIAs there are complete detailed disclosures required to be provided by the agent, and signed by the purchaser at the time of application. Additionally, the client receives the same complete disclosure information again in the contract when the annuity is issued, with which they are always given a “free look period” of 10-30 days; in order to do all the reading of this detailed information they desire. The new standard that is being called for with EIAs, by its critics in the securities industry, is not just proper disclosure of all facts and details, as is the only requirement with securities products, but, rather, they want certainty of complete client understanding. If insuring understanding is a feature that is to be required of annuity sales, it should also become a requirement for the sale of every securities product. Then, if client’s ultimately only purchase the product they completely understand, I think we will then see just whether it is really the annuities that are complicated, or if it will finally reveal the deceptive veil of confusion with which the securities industry has effectively masked the buying public of securities instruments for years. If a standard of insuring client understanding is then equally applied, before the sale of an annuity OR a security is allowed, it will become quickly evident just how easy to understand annuities really are, compared to ANY security product offered on the market.

Journalists Continue to Miss the Mark

2006-02-17T16:28:00.000-05:00

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?

2006-02-08T12:11:00.000-05:00

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

2006-02-07T16:14:00.000-05:00

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

2006-02-06T17:27:00.000-05:00

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

2006-02-05T17:11:00.000-05:00

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

2006-02-03T19:04:00.000-05:00

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.

Beware of the Non-Registered Security Label for Indexed Annuities

2006-01-24T15:27:00.000-05:00

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

2006-01-23T15:28:00.000-05:00

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?

2006-01-13T13:42:00.000-05:00

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?

2006-01-13T13:30:00.000-05:00

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

2006-01-11T12:23:00.000-05:00

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

2006-01-11T11:44:00.000-05:00

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

2006-01-09T18:42:00.000-05:00

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

2006-01-04T18:39:00.000-05:00

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.

The Power of the Deferred Annuity

2005-12-22T13:19:00.000-05:00

Originally, annuities were used as a source of personally providing a guaranteed income. Today most people who buy an annuity never plan on “annuitizing” their contract, but intend on maintaining their annuity in a “deferred” status. With most deferred annuities, there is not a requirement to ever annuitize the contract. If the owner needs access to some of their funds, they may do so with a contractual provision to make periodic withdrawals. Some companies even provide the convenience of checkbook access for this benefit. Up to a contractually specified amount, withdrawals are without cost or penalty. Surrender charges only apply during a stated surrender period of the contract, and then only on amounts withdrawn in excess of the “free withdrawal” amount. If an owner utilizes the free withdrawal privileges of a deferred annuity, usually in the range of up to 10% per year, they can enjoy significant flexibility and control in the management of their money to provide regular retirement income, or money set aside for special or emergency uses. Deferred annuity contracts are usually structured to earn significantly higher returns than most guaranteed bank products. Unlike an annuitized contract, that ends upon the death of the owner, or after a limited fixed period of time, in a deferred contract, the entire unused account balance remaining at the death of the owner is easily and quickly passed on to the named beneficiaries, without passing through probate.

Are Annuities Filling the Void Left by Lack of Pension Plans?

2005-12-19T16:28:00.000-05:00

In January 1981 the birth of the 401(k) began to change the face of retirement planning forever. Since that time, the traditional pension plans, with their guaranteed income options, have all but disappeared. In their place, the individual has now become responsible for driving their retirement savings through a company sponsored 401(k) plan and any other means personally available. While most 401(k) plans may include some company matching funds, still, in order to qualify for any company input, it requires that the first contribution be made by the participant. And within these plans, the worker never has a growing guarantee of retirement income, based upon years of service, but has an account balance with a limited number of investment choices. At retirement this nest egg, whatever size it has become, is then to be managed by the individual in a way to make it last for the rest of their life. When a retiree rolls their 401(k) into a personally managed IRA account, and then purchases an annuity within that IRA, they have the opportunity to restore a number of the guarantees that pension plans used to offer, such as guaranteed lifetime income. They can even provide that their surviving spouse or beneficiaries will be able to maintain this IRA account in a tax favored manner after their death. Perhaps the enormous public interest in fixed annuities, which includes indexed annuities, is partially a desire to return some of those lost assurances our grandparents' pension plans provided. If the individual is now the driving force behind their own retirement, we need to make sure that they can maintain these familiar and guaranteed options that only annuities provide.

The Majority of Investors are Flying Blind

2005-12-14T13:28:00.000-05:00

In a National Underwriter's article recently, some surprising results were listed from a survey to determine how well informed the typical investor is about his investments. The Securities Investor Protection Corp., Washington, and the Investor Protection Trust, also from Washington, conducted the survey in November of this year among 927 U.S. investors. Some of the more interesting statistics were that only 61% of the participants understand that stock brokers and financial planners receive commissions on product sales. A whopping 64% of those surveyed had not bothered to check into the disciplinary backgrounds of their stockbrokers or financial planners and 61% of this group who did not do background investigation chose not to do so because they trusted the individual. Another 9% did not check out their broker or advisor because the advisor assured them that there was nothing for them to be concerned about. One of the more shocking numbers is that only 8% of participants understand that their portfolio is not insured from investment fraud. And finally, one number that is not surprising is that only 58% of the respondents had ever read a prospectus. With the recent uproar by the securities industry about the lack of proper sales methods used with indexed annuities, it seems that these figures show that there is much work they need to be doing in their own house, in order to improve their own sales methods for securities products to better inform and protect their own investor clients.

NASD Twists Definition of "Risk" to Attack Indexed Annuities

2005-12-12T12:04:00.000-05:00

One of the complaints about Indexed Annuities, that has the NASD and others in the securities industry clamoring for control of the sale of these products, is in their suggestion that indexed annuities carry similar risk to variable annuities and other securities. In an article from the NASD web site posted July 30, 2005, entitled Equity Indexed Annuities-A Complex Choice, they indicate that since the return on an indexed annuity varies, the indexed annuity carries some risk, but less risk than a variable annuity. Taking a quote from approved study material, published by the Securities Training Corporation, used in preparation for the test to become series 7 registered, the definition of "risk" is "the potential for loss of an investment due to many factors including, inflation, interest rates, default, politics, foreign exchange, call provisions, etc." The missing fact that EVERY argument AGAINST indexed annuities fails to include is that the principal of an indexed annuity is not subject to loss from those factors and therefore, indexed annuities do not carry market risk. If you apply the correct definition of "risk" to securities, such as variable annuities, mutual funds, stocks, and even bonds, you quickly understand that the value of the original investment CAN and DOES go down due to fluctuations in market conditions. In an indexed annuity, however, the worse that can happen in a declining market is no growth and no interest credits for that period, but the principal value is contractually guaranteed, as well as, in most cases, all previously credited interest. Simply put, risk involves loss of value, the very negative characteristic of securities that indexed annuities were designed to overcome, and that is what has made them so appropriate and so appealing to millions of retirees.

Securities are Investment Opportunities, Indexed Annuities are Contracts

2005-12-07T23:29:00.000-05:00

When someone buys an investment, they are purchasing an opportunity. Neither the broker, the mutual fund, the company in which they are buying stock, the NASD, nor any other entity, offer them any promises, no guarantees, nor any certainty of how that opportunity will ultimately pan out. If you buy a security, you do not get anything in writing that tells you what your investment will be worth at ANY point in the future. In fact, the only performance information that a broker is even allowed to give you is a review of past performances. When someone buys a fixed or indexed annuity, however, quite different from an investment, they are not buying an opportunity; they are purchasing a contract from an insurance company. In essence, they are exchanging their sum of money, for a specific set of benefits, clearly detailed in a written contract. ALL of the guaranteed provisions of that contract are not dependant upon the performance of the stock market, but are backed by the financial strength of the issuing insurance company. Within the pages of an indexed annuity contract, the purchaser is provided with a list of the guaranteed minimum values of their contract for any given year, for the life of the contract. The owner of an indexed annuity assumes NO MARKET RISK and has no potential for market conditions to devalue his contract. With the unique methods used within indexed annuities, in order to determine interval interest credits, the owner simply has the potential to earn a greater interest than the guaranteed minimum, when the linked index increases, but is contractually protected from a reduction in his contract value, when the index goes down.

Securities Industry Attacks on EIAs Are Rooted in Finanacial Jealousy

2005-12-07T02:03:00.000-05:00

When the stock market began its slide in 2000, investors were routinely looking for alternate ways of preserving and protecting their assets from further losses, and thus the sale of indexed annuities began increasing at a record pace. This flow of money, from brokerage accounts, into these fixed insurance products, was so dramatic, that it quickly got the attention of the NASD and the broker dealers, who were losing hundreds of millions in commissions, and tens of billions in assets under management. In 2004, the sale of indexed annuities grew to a whopping $23 billion, up 64% from the previous year. With the loss of so much business, so suddenly, into one single competitive product, the securities industry decided to respond with a vengeance, but not with new and innovative products, in order to effectively compete with indexed annuities. Rather, the securities industry chose to start a methodical propaganda campaign against indexed annuities. The NASD Notice to Members 05-50, attempts to force registered agents, who want to sell non-registered indexed annuities, to only use their broker dealers to access a short list of “approved” indexed annuities. This action clearly exposes their true intentions of trying to return all of that lost commission money to their broker dealers and registered agents, by ultimately garnering complete control of this rapidly growing market sector. In spite of the questions you may have heard raised by the NASD, about questionable sales methods and the suitability of indexed annuities in certain markets, their real concern is not about the sales process, it is about the money!

NASD Has Created the Indexed Annuity Identity Crisis

2005-12-07T01:07:00.000-05:00

At a conference in Boca Raton, Florida, sponsored by the Securities Industry Association, New York, Robert Glauber, chairman of the NASD, stated that equity indexed annuities are "subject to utterly ambiguous regulation because it isn't entirely clear to anyone whether they're insurance products or securities." This must come as a complete surprise to the 50 state insurance commissioners, who are completely clear about their state appointed responsibility and authority over the approval, marketing, and sale of indexed annuities by the licensed insurance agents in their state. With only a few exceptions, indexed annuities ARE fixed annuities, a category of insurance products Mr. Glauber correctly admits are subject to state insurance commissioners' regulation. But the NASD is muddying the public perception about the true nature and identity of indexed annuities, in their efforts to mount a propaganda campaign, in an attempt to get the SEC to transfer control and regulation of these products from the insurance departments, into their arena, for reasons which we will discuss in the future. While Mr. Glauber is apparantly confused about whether indexed annuities are insurance or securities products, the SEC and the insurance departments are not confused, and unless and until there is some official change in that definition and ruling, this kind of verbal attack against indexed annuities is uncalled for, and this interference and criticism, by the NASD into the business of the insurance industry, is completely out of line.

NASD Head Needs a Lesson in Etiquette

2005-12-06T16:12:00.000-05:00

The NASD chairman, Robert Glauber, recently stated, regarding indexed annuities, that, "I think what we need to do here is invite the state insurance regulators to work with us on harmonizing and clarifying the rules for fixed and equity-indexed annuities sales." Since fixed and equity indexed annuities are not under the jurisdiction of the NASD, but are completely under the authority of each state insurance department, Mr. Glauber is doing some party crashing here. If the insurance deparments wanted to invite the NASD to help them with fixed and equity indexed annuities, then it is their party to offer the invites, not the other way around. But so far, I don't think the insurance departments are interested in Mr. Glauber, or any of his securities industry associates in attending. So, why aren't the insurance commissioners at least a little offended by Mr. Glauber's remarks? Where is the uproar from the insurance departments of each state that have been so cleverly insulted by these remarks?