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.
Wednesday, August 26, 2009
Monday, October 13, 2008
Comments to SEC for proposed rule 151A
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.
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.
Monday, July 16, 2007
Finally, a Judge with a Brain regarding FIAs
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.
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.
Wednesday, May 23, 2007
Here We Go Again
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.
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.
Monday, May 14, 2007
Did EVEYRONE forget what Annuities Are All About?
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.
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.
Wednesday, March 28, 2007
Dear Ms. Schapiro, It’s NONE OF YOUR BUSINESS!!
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.
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.
Monday, March 26, 2007
The Perceived Evil of Selling ANYTHING
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.
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.
Wednesday, March 07, 2007
What is Suitability, and WHO Should Determine it?
In a previous blog I talked about the legal and contractual nature of an indexed annuity. Their structure is so tight; it has left little room for critics to really pick them apart from a legalities standpoint, so they instead have chosen to go after the events surrounding the sale of an indexed annuity, all under the guise of a concern for “suitability.”
First of all, even in the broadest terms, who can say without question exactly what is suitable or not? Suitability of any sale of any product to a particular individual, or group of individuals, is seldom a black and white issue; and in the case of meeting financial objectives, everyone’s financial circumstances are unique and very personal, and are not an exact science as much as a progressively moving target. Suitability, even on an individual basis, is a very objective concept at best, and for some outsider to peek into an industry, or even just glance at a particular case and believe that, for some reason, THEY have better qualifications to determine suitability, is not only absurd, but is nothing more than arrogant vanity. To take such critical judgments and make a legal case out of them is completely ludicrous.
To demonstrate how bazaar this attack on indexed annuities really is from a suitability position, let’s take a look at another industry and determine if “unsuitable” sales are being made there. Automobiles are getting to be a huge expense for those who choose to buy new vehicles periodically. In order to help facilitate the sale of the more expensive ones, dealers have devised financing deals and leases to allow people, who otherwise could not afford such expensive purchases, to drive home in a brand new car. In the case of long term auto loans, if the buyer wanted to sell or trade their car in the early years of the loan, they find that the depreciation of the automobile has eroded the value of the car well below the balance on the loan, and they would have actually have to “pay” in order to sell their car.
If we apply suitability to auto sales in the same way it is applied to indexed annuities, it could be determined that this would be an unsuitable sale. It puts the marginal buyer in a precarious financial position, first by burdening them with a huge monthly payment, which could impact their entire financial picture. Then, they have to cough up significantly higher premiums to insure this more expensive vehicle, and hope that their driving record stays clean. Finally, this deal greatly restricts their future options to unload this car and virtually “freezes” them in this vehicle and this payment until such time as they can at least break even in paying off the remaining loan with the proceeds of a trade or a sale.
But are you hearing any clamor out there to control the sale of new automobiles based upon some outsider’s view of suitability? No! We accept that the buyer is responsible for making that decision on their own and we assume if the financing is approved, and the buyer is willing, the deal must be ok and we give them the right to make a bad decision if they want, knowing that they are the ones who will ultimately have to suffer the consequences of their decisions, good or bad.
In the sale of an indexed annuity, the client and the agent usually spend hours together over several meetings that could span a time frame of days or often weeks or even months. During those discussions, a thorough agent is finding out, not only the client’s financial picture, but is determining the client’s financial concerns, their needs, and their goals. An agent who sells fixed indexed annuities knows that these products are safer than any security product, have better long term returns than most other fixed products like CDs or bonds, and that annuities are the ONLY product out there that can provide a guaranteed stream of income that the client can NEVER outlive. If the client is seeking safety of their limited assets, or has a concern that they may run out of money, the agent knows that of ALL financial products available, ONLY an annuity meets both of those requirements and will likely recommend the client consider putting a portion of their money in one. The next value decision that has to be made is how much of the client's liquid assets should be placed in such a vehicle. Again, there is seldom a clear answer to this question, and the BEST answer can only be determined after understanding the client and what is important to them.
Ultimately, the buyer of the annuity, regardless of their age, unless they are senile or mentally incompetent, is not only capable of making a reasonable and informed decision, but should be allowed the right to make the decision for themselves, either good or bad. Why is it that just because someone is elderly, annuity critics ASSUME that they are no longer able to make good judgments? If they have reached this state of being unable to manage their own affairs, shouldn’t the concern be more for committing them to some type of supervised care?
Truth is, the critics of fixed indexed annuities are simply playing the empathy card and using the elderly as their pawns for their own personal agendas. If we want to protect our senior population, why don’t we talk about how we can protect them from being used as a political football and allow them to maintain the dignity of independence for as long as possible, and be able to enjoy the quality of retirement they worked so hard to achieve without being insulted and belittled as the constant objects of political power plays?
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?
Wednesday, February 28, 2007
Does Anyone Else See the Double Standard?
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.
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
I am still puzzled by the recent filings of class actions suits against indexed annuity issuers, with claims that the policies were sold to seniors illegally, unsuitably, or unethically. It is important to remember that an annuity, as an insurance product, is a contract between an insurance company and the annuity owner who purchases the policy. To my knowledge, there has never been an insurance company who has breeched their contractual obligations under any indexed annuity contract which has been issued. To really understand this point, let’s review what it takes for an annuity product to be brought to market.
Before any annuity can be offered for sale, first the insurance carrier has to design the product in a way that it believes will have a market appeal, as well as allow the company to make a profit selling this product. The insurance company has to prepare and submit the entire annuity contract, all marketing materials, and all forms and paperwork exactly as they will be used in the presentation and sale of this product, to each state insurance department where it plans to offer the annuity for sale. It is then the task of the state insurance department to review the material, make sure that the product and the materials meet their state insurance laws, return the documents back to the insurance carrier if they require any necessary changes or revisions, and finally, approve the new annuity for sale in its state. If an insurance company wants to sell this new product in every state, it must make 50 different such filings. With each state autonomously controlling their own insurance laws, the insurance company may have to make different changes in each state in order to meet their unique requirements.
Once a product is approved for sale to the public, it is then incumbent upon the insurance carrier, as part of the underwriting process to make sure all required forms and paperwork that were approved by that state insurance department, are properly completed and signed by the purchaser before the policy is issued. If the client willfully makes application to the annuity carrier for the purchase of this product, provides the premium dollars with which to purchase the product, and signs the contractually binding forms with which to enter into this contract, they still have time to get out of the deal, no questions asked. Each state offers a “free look” period where the client can get the actual policy in hand, which is their contract, and do any review of it they choose, or have it reviewed by anyone they choose, and then if they are unsatisfied for ANY reason, they can refuse to accept the policy, return it to the company within the allotted time, and the company is legally and contractually obligated to return all of their money as if the contract never existed.
After the “free look” period has passed, however, the annuity owner is now bound by the terms of the contract which they freely and willfully entered into, and the provisions of which they were provided in complete detail at both the time of application, through state mandated forms, as well as in the delivery of the contract document itself. At this point, the only contractual requirement of the annuity owner, in order to get the full benefits under the contract, is to leave their money on deposit according to the agreement. The insurance company, on the other hand, is now on the hook for guaranteeing the client’s money, tracking and crediting interest, processing statements, providing withdrawals as allowed in the contract, keeping track of the account values, and offering any other policy benefits.
Still, as detailed in the agreement, the annuity owner can fully or partially cancel the contract at any time, with the provision of surrender, which carries with it a early termination penalty called a surrender charge, which was also approved by the state insurance department, disclosed to the client at time of application, and again included in the contract documents. These surrender charges are never assessed unless or until the annuity owner intentially decides to make a withdrawal in excess of the allowed annual withdrawal amount, or if they excercise their contractural right to legally break their contract completely, and get their money back.
So the question is where in the world is there a problem with the performance of the insurance company in this whole process? Since this part of an annuity sale is so carefully controlled and supervised, the only place that anyone has been able to really sink in their teeth and condemn indexed annuities is in the sales process itself, and that focus has been almost entirely on the subject of suitability. But, if suitability is the real question, then either that would be only a case by case consideration, or else, the state insurance departments who approved the sale of a particular product for defined age groups would be the one who would be ultimately liable if it were determined that any specific annuity product were unsuitable for an entire class of people.
Before any annuity can be offered for sale, first the insurance carrier has to design the product in a way that it believes will have a market appeal, as well as allow the company to make a profit selling this product. The insurance company has to prepare and submit the entire annuity contract, all marketing materials, and all forms and paperwork exactly as they will be used in the presentation and sale of this product, to each state insurance department where it plans to offer the annuity for sale. It is then the task of the state insurance department to review the material, make sure that the product and the materials meet their state insurance laws, return the documents back to the insurance carrier if they require any necessary changes or revisions, and finally, approve the new annuity for sale in its state. If an insurance company wants to sell this new product in every state, it must make 50 different such filings. With each state autonomously controlling their own insurance laws, the insurance company may have to make different changes in each state in order to meet their unique requirements.
Once a product is approved for sale to the public, it is then incumbent upon the insurance carrier, as part of the underwriting process to make sure all required forms and paperwork that were approved by that state insurance department, are properly completed and signed by the purchaser before the policy is issued. If the client willfully makes application to the annuity carrier for the purchase of this product, provides the premium dollars with which to purchase the product, and signs the contractually binding forms with which to enter into this contract, they still have time to get out of the deal, no questions asked. Each state offers a “free look” period where the client can get the actual policy in hand, which is their contract, and do any review of it they choose, or have it reviewed by anyone they choose, and then if they are unsatisfied for ANY reason, they can refuse to accept the policy, return it to the company within the allotted time, and the company is legally and contractually obligated to return all of their money as if the contract never existed.
After the “free look” period has passed, however, the annuity owner is now bound by the terms of the contract which they freely and willfully entered into, and the provisions of which they were provided in complete detail at both the time of application, through state mandated forms, as well as in the delivery of the contract document itself. At this point, the only contractual requirement of the annuity owner, in order to get the full benefits under the contract, is to leave their money on deposit according to the agreement. The insurance company, on the other hand, is now on the hook for guaranteeing the client’s money, tracking and crediting interest, processing statements, providing withdrawals as allowed in the contract, keeping track of the account values, and offering any other policy benefits.
Still, as detailed in the agreement, the annuity owner can fully or partially cancel the contract at any time, with the provision of surrender, which carries with it a early termination penalty called a surrender charge, which was also approved by the state insurance department, disclosed to the client at time of application, and again included in the contract documents. These surrender charges are never assessed unless or until the annuity owner intentially decides to make a withdrawal in excess of the allowed annual withdrawal amount, or if they excercise their contractural right to legally break their contract completely, and get their money back.
So the question is where in the world is there a problem with the performance of the insurance company in this whole process? Since this part of an annuity sale is so carefully controlled and supervised, the only place that anyone has been able to really sink in their teeth and condemn indexed annuities is in the sales process itself, and that focus has been almost entirely on the subject of suitability. But, if suitability is the real question, then either that would be only a case by case consideration, or else, the state insurance departments who approved the sale of a particular product for defined age groups would be the one who would be ultimately liable if it were determined that any specific annuity product were unsuitable for an entire class of people.
Monday, February 26, 2007
Where is the REAL Problem with EIAs?
With the sudden onset of several class actions lawsuits recently filed against insurance companies who issue EIAs, (which we now prefer to call FIAs, for Fixed Indexed Annuities), it calls to question why the pursuit against these products is now finding its way into legal channels, rather than through the regulatory agencies who normally handle such concerns. Similar to the thinking used by Mr. Monk when he solves one of the cases he is working on, it helps if you simply ask the question, “who benefits?” In this case that would need to be a three part question, asking who benefits from the action itself, who benefits from the negative publicity about indexed annuities, and who would benefit it the action prevails?
Let’s begin by looking at who benefits from just the simple filing of any of these cases. Already in the new case against Midland National Life, the attorney for the plaintiffs is being quoted and his name publicized in articles that have made it to the press. We see every day how attorneys advertise on TV looking for big personal injury cases to represent. When the potential prize is the deep pockets of an insurance company, it is a lawyer’s dream, and financial windfall, to settle such a big case. Building a reputation as a winning attorney in such cases can increase the size and number of big cases that come to these law firms. Landing a class action suit, that gains national attention and where the awards can reach hundreds of millions of dollars, is the ultimate professional pinnacle for any attorney who practices this type of law. Even if the case ends in an out of court settlement for far less than the original suit, there can still be enough publicity and fees to change the course of the attorney’s career. After years of watching the battle between the securities and the insurance industry over indexed annuities, it is not surprising to see that attorneys now want to cash in on this conflict, and take their piece of the pie.
In spite of this bad publicity, the securities industry is still losing billions of dollars in lost client investment accounts to indexed annuities, which represents hundreds of millions of dollars in lost commissions to brokers and broker dealers every year. After years of very calculated and deliberate attacks in an effort to discredit these products, it has to be a warm reception for the securities industry to see indexed annuities now being suddenly blindsided by a foe which has been attacking them for decades. While it is unlikely this common agenda will make the securities industry best buds with these carnivorous attorney’s, it is clear that they relish in the outside assistance to their cause to either wipe out indexed annuities or gain control over them.
If any of these class actions prevail, it is ironic to really examine who will NOT win. The supposedly thousands of harmed seniors who bought these annuities in the first place will end up being the big losers if all of this goes to trial and the lawyers prevail. This is not a question about ethics, nor really a question about product suitability, as some have indicated. It is, as it always is when large sums are at stake, a question of money.
The criticism has been falsely made that those elderly adults who purchased any of these indexed annuities have had their “assets frozen.” The basis for this claim is because annuity policies have surrender charges, often for more years than the life expectancy of the owner. The assumption that has been falsely made is that this is preventing these annuity owners access to their money. The truth is that these people have access to ALL of their money through a number of contractually protected means beginning in the very first policy year. First, they can make penalty free withdrawals each year of up to 10% with most companies and in most indexed annuity products. In many cases they can access up to 100% of their money free of any surrender charges if they need nursing care for an extended period of time. And, as with ALL annuities, they can convert their contract into a stream of income they can never outlive. So, unless these people are forced, or frightened, into completely canceling their contracts prematurely, there is no better place for an elderly person to put their nest egg, and their money could not be safer than it currently is in their annuity.
Consider what will happen if these attorneys prevail. Do you think for one minute that they are working on this case for free? They may have made their fees contingent, but they are looking for a large pay day when this case is either won, or settled. If the real concern is for liquidity to these seniors, and the attorneys simply succeed in getting the insurance companies to release the original premium dollars with interst to particpants of this lawsuit without surrender penalties, where are the attorney fee going to come from?
Consider the weak arguments that can be made in a class action against indexed annuities and you will find that it will be impossible for any attorney to make a sound argument that any of the annuity owners were materially harmed in the purchase of their annuity. By contract, 100% of their money is guaranteed, they probably have a minimum guaranteed interest return over the life of the contract, and they have all kinds of access available to their money, as I mentioned above. Change of circumstances or buyers remorse by the purchaser is not the substance for a class action lawsuit. Also, if some of the agents were too greedy or aggressive and did not follow approved or ethical sales procedures with their clients; this would indicate an individual case by case concern against those particular agents, not a class action problem against the insurance company. And, if the insurance company product that was sold was approved by the state insurance department and all state required forms and disclosures were used in the sale, how can the insurance companies, or the agents who used the proper paperwork, be held liable for following the approved insurance law.
Insurance companies who sell indexed annuities have shown, by their past actions, that when it is clear that a client bought an indexed annuity under some type of sales misconduct by an agent; in these rare circumstances, they have offered to give this client their money back without penalty. It is unlikely to think that insurance companies would waste money and the bad publicity to legally fight a truly dissatisfied client who believed they were sold their product unsuitably. So, if there are clients of these companies who have valid complaints, they would probably be much more successful getting all their money back directly from the insurance company without the need or cost of an attorney.
IF, on the off chance that this case was won in court, there could be a punitive award made that could result in a small split of that money to each of the annuity owners. But most likely, if there is a settlement it will be for the insurance company to release all premiums plus interest since date of deposit to each party to this class action suit, and they will have to part with a portion of their “refunded” money in order to pay the attorney for helping them get out of their indexed annuity contract early. With typical attorney contingency fees ranging from 25%-50%, how much of a victory will it really be when these seniors get free of the insurance company, only to have a huge chunk of their money stolen away by their supposed knight in shining armor.
Let’s begin by looking at who benefits from just the simple filing of any of these cases. Already in the new case against Midland National Life, the attorney for the plaintiffs is being quoted and his name publicized in articles that have made it to the press. We see every day how attorneys advertise on TV looking for big personal injury cases to represent. When the potential prize is the deep pockets of an insurance company, it is a lawyer’s dream, and financial windfall, to settle such a big case. Building a reputation as a winning attorney in such cases can increase the size and number of big cases that come to these law firms. Landing a class action suit, that gains national attention and where the awards can reach hundreds of millions of dollars, is the ultimate professional pinnacle for any attorney who practices this type of law. Even if the case ends in an out of court settlement for far less than the original suit, there can still be enough publicity and fees to change the course of the attorney’s career. After years of watching the battle between the securities and the insurance industry over indexed annuities, it is not surprising to see that attorneys now want to cash in on this conflict, and take their piece of the pie.
In spite of this bad publicity, the securities industry is still losing billions of dollars in lost client investment accounts to indexed annuities, which represents hundreds of millions of dollars in lost commissions to brokers and broker dealers every year. After years of very calculated and deliberate attacks in an effort to discredit these products, it has to be a warm reception for the securities industry to see indexed annuities now being suddenly blindsided by a foe which has been attacking them for decades. While it is unlikely this common agenda will make the securities industry best buds with these carnivorous attorney’s, it is clear that they relish in the outside assistance to their cause to either wipe out indexed annuities or gain control over them.
If any of these class actions prevail, it is ironic to really examine who will NOT win. The supposedly thousands of harmed seniors who bought these annuities in the first place will end up being the big losers if all of this goes to trial and the lawyers prevail. This is not a question about ethics, nor really a question about product suitability, as some have indicated. It is, as it always is when large sums are at stake, a question of money.
The criticism has been falsely made that those elderly adults who purchased any of these indexed annuities have had their “assets frozen.” The basis for this claim is because annuity policies have surrender charges, often for more years than the life expectancy of the owner. The assumption that has been falsely made is that this is preventing these annuity owners access to their money. The truth is that these people have access to ALL of their money through a number of contractually protected means beginning in the very first policy year. First, they can make penalty free withdrawals each year of up to 10% with most companies and in most indexed annuity products. In many cases they can access up to 100% of their money free of any surrender charges if they need nursing care for an extended period of time. And, as with ALL annuities, they can convert their contract into a stream of income they can never outlive. So, unless these people are forced, or frightened, into completely canceling their contracts prematurely, there is no better place for an elderly person to put their nest egg, and their money could not be safer than it currently is in their annuity.
Consider what will happen if these attorneys prevail. Do you think for one minute that they are working on this case for free? They may have made their fees contingent, but they are looking for a large pay day when this case is either won, or settled. If the real concern is for liquidity to these seniors, and the attorneys simply succeed in getting the insurance companies to release the original premium dollars with interst to particpants of this lawsuit without surrender penalties, where are the attorney fee going to come from?
Consider the weak arguments that can be made in a class action against indexed annuities and you will find that it will be impossible for any attorney to make a sound argument that any of the annuity owners were materially harmed in the purchase of their annuity. By contract, 100% of their money is guaranteed, they probably have a minimum guaranteed interest return over the life of the contract, and they have all kinds of access available to their money, as I mentioned above. Change of circumstances or buyers remorse by the purchaser is not the substance for a class action lawsuit. Also, if some of the agents were too greedy or aggressive and did not follow approved or ethical sales procedures with their clients; this would indicate an individual case by case concern against those particular agents, not a class action problem against the insurance company. And, if the insurance company product that was sold was approved by the state insurance department and all state required forms and disclosures were used in the sale, how can the insurance companies, or the agents who used the proper paperwork, be held liable for following the approved insurance law.
Insurance companies who sell indexed annuities have shown, by their past actions, that when it is clear that a client bought an indexed annuity under some type of sales misconduct by an agent; in these rare circumstances, they have offered to give this client their money back without penalty. It is unlikely to think that insurance companies would waste money and the bad publicity to legally fight a truly dissatisfied client who believed they were sold their product unsuitably. So, if there are clients of these companies who have valid complaints, they would probably be much more successful getting all their money back directly from the insurance company without the need or cost of an attorney.
IF, on the off chance that this case was won in court, there could be a punitive award made that could result in a small split of that money to each of the annuity owners. But most likely, if there is a settlement it will be for the insurance company to release all premiums plus interest since date of deposit to each party to this class action suit, and they will have to part with a portion of their “refunded” money in order to pay the attorney for helping them get out of their indexed annuity contract early. With typical attorney contingency fees ranging from 25%-50%, how much of a victory will it really be when these seniors get free of the insurance company, only to have a huge chunk of their money stolen away by their supposed knight in shining armor.
Tuesday, January 30, 2007
For Seniors: Mutual Funds, or Indexed Annuities?
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.
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.
Thursday, January 25, 2007
Maturity Date Is GOOD for Annuity Owner
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.
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.
Wednesday, January 24, 2007
Fixed Indexed Annuities- FIA
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.
Thursday, January 18, 2007
The TRUTH about Surrender Charges in Indexed Annuities
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.
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.
Thursday, January 11, 2007
There is NO EQUITY in Equity Indexed Annuities
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.
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.
Wednesday, January 10, 2007
Clearing the Confusion Between Variable Annuities and EIA’s
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.
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.
Tuesday, January 09, 2007
Why Indexed Annuities Are CLEARLY Insurance
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.
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.
Wednesday, August 30, 2006
Suitability is a Matter of Opinion. But Who’s Opinion Really Counts?
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?
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?
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