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.

Beware of the Non-Registered Security Label for Indexed Annuities

One of the side effects of the propaganda campaign the NASD is using against indexed annuities is an indirect means to discredit their validity in the financial marketplace. The way in which this is methodically being done will take some time, using several well planned steps. While reading an article on MSN online about the Top 10 investing scams, it became clear to me just how this discrediting scheme is playing out. The first steps have already been launched, as Glauber has started a “misuse of terms” that is trying to mislabel indexed annuities as investments or securities. I have rebutted this use of terms on technical grounds and the fact that these products are legally recognized as insurance products only. But the public misperception, when these incorrect labels are applied, is the side effect I want to warn you about. As the securities industry justifiably gets its own share of “bad press” for the illegal and unethical actions of a number of brokers, fund managers, brokerage houses, and major corporations, any connection to these negative practices can have devastating credibility consequences. The securities industry is beginning a public awareness campaign that is encouraging investors to make sure that both the investment products they purchase, as well as the brokers they use to purchase securities, are properly registered. As a basic fact, this is good advice; however, when you have mislead the public into thinking that indexed annuities are investments or securities, then the misapplication of this advice, in regards to a fixed or indexed annuity, falsely implies that both, this perfectly legitimate insurance product, and, the licensed insurance agents who sell it, must be bogus, and operating a scam of improperly selling non-registered products. We need to continue to insist that, in every mention, indexed annuities are properly identified as insurance products that are completely regulated under the authority of each state insurance department and have nothing to do with the SEC or the NASD.

Don’t Let the Number Fool You

There have been some articles written lately, where comparisons have been made between the potential returns with variable annuities as opposed to indexed annuities. The articles impressively show numbers, when, using a particular fund’s historic returns within a variable annuity, compared to an indexed annuity, which, simply uses the S&P 500 index variations, the client would have had a greater return in the variable annuity. The writer of one article attributes a big part of that difference to the lack of dividends being included in the indexes used to calculate indexed annuity interest credits. Of course, the author of that article is an agent who sells variable annuities, so his bias is very evident. I have done some comparisons myself in historical performances, and I am aware, that, for as many instances as you can find to support the return of variable accounts or mutual funds being superior, you can also come up with at least an equal number of situations that are reversed, and favor the indexed annuity. I have studied the difference that even the purchase date can have upon the potential return on anything tied to the market, including indexed annuities. Since the market moves constantly, having a purchase date on Monday can, over the life of the contract, have a different resulting return, than a purchase date of Thursday that same week. But the important point here is to remind those agents, who are recommending indexed annuities, NOT to get pulled into this kind of trickery, and don’t allow yourselves to fall into the trap, set by your competition, to attempt to equate variable and indexed annuities and thus, fight on their turf, under their terms. Remember, that indexed annuities are, first and foremost, “savings vehicles.” If you choose to take the perspective that they are intended to provide an alternative to the safety and security of bank CDs or government bonds, but with the potential of gaining a significantly greater return than those products, then you can free yourself from the arguments about performance comparisons to securities products. Every time you sell indexed annuities as an “investment” alternative, you set yourself, and your client, up for bottom line comparisons. And since we know that “figures fool and fools figure,” the competition will come up with some set of numbers that will try to discredit the value of your recommendation, if you are playing defense. Indexed annuities are a powerful and unique product, and when sold from an affirmative position of what they WILL provide a client who needs security with a respectable return, the consideration of securities products won’t even become an issue.

Where’s The Beef With Indexed Annuities?

Remember that the only real lasting criticism about Indexed Annuities is coming from a competing industry, the securities industry, and primarily the NASD, whose members have been losing ground, and substantial amounts of money under management, to the growing sales of fixed and indexed annuities. But in a future, that seems destined to remove the security of company pension plans from the retirement equation, it becomes apparent that there are few existing financial products that can offer the individual a similar level of retirement income guarantees and security. As workers nationwide are forced to take up the reigns and responsibility of their own retirement planning, let me remind consumers that it would be fair to say that there is nothing, other than fixed and indexed annuities, that even resembles something an individual can use to provide a guaranteed lifetime income, regardless of longevity, as pensions were originally intended to do. Besides the contractual guarantees, since fixed and indexed annuities are insurance products, they enjoy a level of safety unlike anything else. The insurance industry has proven to be financially resilient through the worst economic times this country has ever seen. Since insurance products are basically contractual promises, the industry has one of the best independent financial review systems of any industry in the country. Moody’s, Weiss, S&P, A.M Best, and Fitch, annually do thorough reviews of each company’s financial ability to pay claims and make their results readily available to the public. Add to that, the need and desire for successful insurance companies to maintain and diligently protect the public confidence, the industry has shown itself strong in taking care of itself, with a history of financially sound companies taking over weak or distressed companies, and assuming all existing contracts, thus protecting the policy holders from loss. This practice has produced a track record of security for fixed annuity holders in America that is spotless. But if all that were still to fail, each state insurance department has a funded Guarantee Association that typically covers $300,000 in annuity assets for each client with each company. Where else can you find more safety and security for your retirement nest egg?

How Secure Is a Retirement That Depends on Corporate Stock, Company Pensions, or Corporate Longevity?

The previous notion, that big corporations were the economic safety net of the American worker, is quickly being dashed, as some of the nations largest, and most stable companies; such as IBM, Verizon, Hewlett-Packard, Sears Holdings Corp., Circuit City Stores, Inc., Hospira Inc., Motorola, Inc., Lockheed Martin Corp., Aon Corp., and NCR Corp., to name a few, are all rushing to free themselves of the escalating expense of providing and maintaining pension plans. The Enron fiasco proved, among other things, that it is risky business to put all of your retirement nest egg in one corporate basket. The subsequent disclosures, of numerous big corporations “cooking the books,” that sent the market into a frenzy, from which it is still reeling, continues to add emphasis that we cannot blindly assume that large companies, in which we either invest or are employeed, are looking out for our best interest. Placing retirement assets into securities products, based in the market, and investing in big corporations, will always carry tremendous risk. While investing in corporate America will remain a major source of potential financial growth and wealth for the savvy investor, the individual needs to be less greedy, and more realistic about their desire, or ability, to take risks with their financial future. Relying on the stock market to grow your 401(k), to make up for your lack of sufficient savings, compounds a risk on money you can ill afford to lose. Counting on your company, or even Social Security, to take care of you at retirement is a foolish risk of another kind. Because of a changing economy, we are entering an age of increased individual financial accountability. While things could continue to change drastically, as we move through this adjustment, presently, there are tools available to help individuals assume this responsibility with confidence. Thousands of INDEPENDENT financial advisors are scattered around the country, ready to assist workers and retirees with making this transition. Products, like fixed and indexed annuities, allow the older workers, and retirees, a suitable substitution for the disappearing certainties and guarantees of company pension plans.

Glauber, Chairman of the NASD, Guilty of Breaking NASD Rules in His Attack on Indexed Annuities

In speeches and quotes, Robert Glauber has repeatedly referred to indexed annuities as investments, a clear violation of SEC and NASD rules. If ANY of the registered agents under the jurisdiction of the NASD were to use the same words as Glauber, in a sales presentation, they would be guilty of misrepresentation, and could be subject to disciplinary action by the NASD. Even insurance agents, who are not registered in securities, are forbidden to represent, to a prospective client, that an indexed annuity is an investment, and must be very careful in any references they use in comparing the two, as part of the accurate disclosure requirement to the buyer, enforced and regulated by each state insurance department. Ask the registered agents in Massachusetts, whose marketing materials for indexed annuities were scrutinized by the NASD, and later found to be unacceptable, if they will ever mix up the use of this terminology again. For their incorrect sales materials and methods, in some cases incorrectly referring to, or comparing, indexed annuities to investments, they were penalized, fined, disciplined, and made a public example to all other registered agents wishing to sell indexed annuities. So, who at the NASD, or other regulatory body, has the chutzpa to call Mr. Glauber on his OWN violations of the policies of the organization he heads? Is this another example of the elite, who sit in power, exempting themselves from their own rules and laws? With the growing resentment building toward the NASD, among registered agents whose primary business is insurance products, over the aggressive and inappropriate intrusion of the NASD into non-securities areas of their business, I hope that if not some individual, then this group as a whole, will speak up and call for Mr. Glauber to be disciplined, similarly to any other registered NASD member, require that he retract his erroneous statements, and perhaps even call for him to step down as chairman of the NASD.

NASD Propaganda against Indexed Annuities Led by Glauber Double Talk

The NASD, and its Chairman, Robert Glauber, are at it again. In a message he delivered on Monday at an NASD enforcement conference in Miami, Fla., Glauber’s words were filled with lies and misleading insinuations. He stated that buyers of fixed annuities think they are buying a product that is the same as a variable annuity and that this should require that the NASD offer their protection to those buyers from agents, he is insinuating, are all misleading their prospects about the facts and details of fixed and indexed annuities. But, Mr. Glauber, as he has often done as of late, is the one to lie and misstate the details and facts about indexed annuities, and incorrectly insinuate that fixed and indexed annuities are the same as variable annuities. His “mantra” that he loves to promote, is that "it is not clear whether indexed annuities are securities or not." Other than erroneous statements like this, made by the head of an agency whose members are having a hard time competing against the popularity of indexed annuities, the public has no question that indexed annuities are savings vehicles and not investments, offered by insurance companies, with guarantees of principal, guaranteed minimum returns, and the potential of earning higher interest than the guaranteed minimum, based on changes in a linked index. Glauber also drops phrases like, “fixed annuity investors,” in his attempts to try to legitimize his claims that fixed annuities are investments, when in fact; they are not investments at all. No one, other than Glauber and his jealous securities industry cronies, claim that they might be. In cases where risky securities products have been replaced by guaranteed products, like fixed and indexed annuities, Glauber incorrectly indicates that the NASD has authority over the fixed products in these cases, because they were used to replace a securities product. If Glauber, or anyone at the NASD or related securities industries want to try to intelligently argue, that it is innappropriate to move a senior’s assets from a risky market investment, where they can and HAVE lost principal value, into a product that offers guarantees of principal and a minimum return, and the potential for a guaranteed lifetime income, I welcome that challenge. Meanwhile, I encourage Mr. Glauber to CEASE and DESIST his propaganda campaign against the insurance industry, and focus on his own sick industry and cleaing up the widespread corruption in the securities industry that has caused so many people to flee its uncertainty and risk, and seek out secure and guaranteed products, like fixed and indexed annuities.

IBM Joins Companies Freezing Pension Plans

IBM recently joined the ranks of major US companies who are attempting to distance themselves from pensions as a means of providing retirement benefits to employees. Similar to the other companies that have already made such moves, IBM will be freezing its defined benefit pension plan in 2008, and plans to encourage greater participation in their 401(k) plan, even to the point of making company contributions for non-contributing employees. While this change is estimated to cost IBM nearly $270 million in the short run, over the next 5 years, even with greater company contributions to the 401(k) plan, it is estimated to save IBM a whooping $2.5 billion, as well as make the expense of providing retirement benefits more predictable. This shift in company policy, away from pensions, however, transfers a great deal of individual retirement planning responsibility and discipline to the employees, especially those who will be relying completely upon their 401(k)s and social security when they retire. Unless company HR departments revamp the level of informed advisory service they currently provide, there will be a great need for outside professional advice to individuals needing assistance in learning how to maximize their retirement security through both company and outside sources. This should provide a great deal of opportunity for brokers, advisors, and insurance professionals who want to pursue this market. The older segment of that working group, who only currently average about $125,000 in current retirement savings, will need to implement some aggressive savings measures to even consider a timely retirement. The need for professional outside planning help with pre-retirement issues has never been greater. I encourage professional planners and advisors to consider this opportunity as a serious responsibility, and always consider the client’s needs and objectives above your own personal preferences, product biases, or potential gain. This trend should take quite a number of years, perhaps more than a decade, to settle down, and during that time, there will be plenty of clients for competent advisors who maintain an ethical and professional reputation.

Keeping Retirement Money in your 401(k) Plan Comes at a Price

The Wall Street Journal recently featured an article stating that people were beginning to favor leaving their money in the company 401(k) plan after retirement, rather than roll those funds into a personal IRA. The primary reason mentioned in the article for leaving 401(k) money in the plan was based upon the probable lower institutional fee structure that a 401(k) plan assesses against the various investments offered. But considering fees separate from potential return is absolutely meaningless. Given the very limited choices for investing within a company plan, versus the virtually unlimited choices available within an IRA, whatever savings you may derive in fees on a plan investment is pointless, if, you would rather have your money invested elsewhere, given the choice. Of course, this argument, centered on investment costs and options with retirement money, presupposes that the retiree wants to, or should, continue to go for maximum growth, even when it puts their limited nest egg at risk, rather than tuck their life savings safely away in something with guarantees and a fair, but respectable, return. Another important consideration that was not mentioned in the article is that of spousal rights. A spouse of a 401(k) plan participant has to sign off on withdrawals or rollovers, where an IRA requires no such spousal approval. This difference could be viewed as a plus or a minus, but it is definitely something that should be carefully understood and considered by the client. Also, it is important to check 401(k) plan documents to see if, when you leave your money there after retirement, you reserve the option of freely rolling the money out of the plan in the future. Finally, when you consider the very favorable tax treatment available for passing unused IRAs to both spousal and non-spousal beneficiaries at your death, which allows them to maintain tax deferred growth and “stretch” distributions over their entire lifetime, I see nothing but huge advantages for retirees to continue to move 401(k) money out of their company plan and into a personal IRA as soon as possible. No plan administrator, or company HR person, who only has their limited plan options to offer, will ever be able to give the same level of unbiased, broad based, and professional advice on how to manage retirement money, as an independent broker, financial advisor, or insurance agent.

The Power of the Deferred Annuity

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

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

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

The Majority of Investors are Flying Blind

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

NASD Twists Definition of "Risk" to Attack Indexed Annuities

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

Securities are Investment Opportunities, Indexed Annuities are Contracts

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

Securities Industry Attacks on EIAs Are Rooted in Finanacial Jealousy

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