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?

USA Today is Schizophrenic about Annuities

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

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

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

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

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

National Insurance Regulation?

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

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

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

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

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

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

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

A Challenge To EVERY Agent Selling EIAs

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

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

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

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

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

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

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

WIll Someone PLEASE Shut That Man Up?

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

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

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

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

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

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

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

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

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

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

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

Not Concerned About the NASD? You SHOULD Be!

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

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

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

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

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

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

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

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

In Defense of the “FREE LUNCH” Seminar

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Glauber, Head of NASD, Loves the Assumptive Close

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

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

NASD head Glauber is the Master of Double Talk

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

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

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

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

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

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

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

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

If Only The NASD Was Held To A Legal Standard

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

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

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

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

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

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

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

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

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

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

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

Indexed Annuities are NOTHING like Variable Annuities

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

Replacing Variable Annuity with Indexed Annuity is an Exercise in Safety

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

NASD Completely Out of Line With EIA Webcast

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

The Securities Industry Takes Its Propaganda Campaign to Washington

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

Generalizations Can be Harmful to Consumer’s Financial Health

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

Glauber Continues His Personal Vendetta to Control Indexed Annuities

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

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

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

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

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

Are EIA's Really That Hard to Understand

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

Journalists Continue to Miss the Mark

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

Where is the Professionalism and Common Sense from Annuity Critics?

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

STOP Feeding the Frenzy with Comparisons to Market Gains

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

Professional Ethics Become Increasingly Important as Attacks on Indexed Annuities Continue

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

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

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

Annuities Have Always Had Complete and Full Disclosure

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