One of the criticisms about fixed indexed annuities, often raised by the NASD and others in the securities industry, stems from the liquidation of elderly clients’ stock and mutual fund accounts in order to put the money into an annuity. Moving money from one financial instrument into another is a strategy that has taken on many forms over the years: converting an IRA into a Roth IRA; cashing in a 401(k) early, paying the tax, and investing the money otherwise; removing equity from a home and investing it in a side fund; and liquidating stocks or mutual funds and moving the money into a fixed indexed annuity. Any of these strategies have their supporters and their detractors, but the glaring difference in this list of complex strategies, which need to be evaluated on an individual basis, is that the move of a senior citizens’ money out of a risky stock or mutual fund into a safe and guaranteed fixed indexed annuity, is a financial no-brainer. That is, unless you are the broker or broker dealer who is losing the account and all future commissions to an insurance agent and the company who issues the annuity.
The majority of individuals and couples in retirement begin this phase of their life with a fixed amount of income and assets from which to live on for the rest of their lives. Even those who have done a good job of saving and planning may only have a slightly larger pot from which to dip, and still have to make their limited assets and income stretch for two or maybe three decades. One of the biggest fears expressed by elderly Americans is that they might outlive their resources. With growing uncertainty about the continuation of Social Security benefits, the potential for increases in taxes, the rising cost of medical and prescription expenses, and the looming threat of long term care expenses, seniors have a lot of areas that directly affect the quality of their retirement over which they have no control. To add the possible loss of the principal value of their fixed asset base to this ominous list, due to fluctuations in the market, is not only unwise, but is irresponsible. And any broker or advisor who continues to place these seniors’ assets at risk is the one who should be chastised for endangering the financial security of our elderly population.
Of all the financial avenues available for a senior adult to store their nest egg, there is only one place where their principal is 100% guaranteed, they receive a guaranteed interest return plus a chance to get a higher return, they have good liquidity and access to their money at all times, and they have the ability at any time to create a guaranteed stream of income they can never outlive. This amazingly perfect solution to all of the needs and concerns of retirees is none other than the fixed indexed annuity. This product, and this product alone, resolves the biggest fear of all seniors, that they might outlive their money. While bank CDs and bonds might offer security, they do not have the return potential of a fixed indexed annuity, and they DO not offer a guaranteed lifetime income option.
But this discussion began by pointing out that some in the securities industry suggest that it is inappropriate to move a senior’s money out of stocks and mutual funds into a fixed indexed annuity. The thing that is lacking from these critics is not their condemnation about annuities, but a simple explanation of why securities should ever be construed as an appropriate investment for anyone who is retired or living on fixed assets and income.
Consider that the market continually goes through cycles, and that any senior who lives more than a decade in retirement will likely experience at least one market correction, or downturn. Historically it takes years for the market to return to its original point before it recovers all of the losses incurred in a correction and begins climbing above that previous benchmark. If you are 65, 70, 75 or older, and your asset base, which is providing a portion of your income, suddenly loses a significant amount of its value, your financial security is immediately compromised. First of all, you are no longer earning ANY return on this asset and if your plan was to live off the interest only, that plan is terminated until the market fully rebounds and starts to return a substantial gain. So, the choices to the retiree caught invested in the market are to liquidate principal or reduce their standard of living just to take up the slack caused by the loss of their asset value. The greater the losses in the account value, or the longer the downturn continues, the higher the risk that the asset base can be so badly eroded by the combination of losses and withdrawals, that this person will not live long enough to ever be able to recover financially, and could run completely out of money in a few short years.
When there is a safe alternative that can completely remove all of these negative probabilities, why in the world would any intelligent person ever want to expose themselves to that risk, just for the chance to get a few points more return in a few of the good years? The reason our seniors continue to buy into this false illusion, that the only way they can secure their retirement is to place it at risk, is because of the social pressure to maintain the status quo. Our society carries the greed of our youth to get all the return we can get, right into our later years, when in fact, we should be slowing and making the transition in our investments from risk to security over the last few decades of our working careers. Retirement is not just a continuation of our previous career paths, but it requires a complete shift in goals and priorities, and our financial gears need to shift dramatically from accumulation to preservation by the time we stop receiving earned income.
In discussing this issue of mutual funds for seniors versus fixed indexed annuities, there is no uncertainty. The annuity is the only choice for the retiree. Safety, security, guarantees, versus risk, fear, losses, and potential for financial disaster. There is no argument which considers the complete well being of the senior that can offer any other recommendation than to place their retirement savings in a fixed indexed annuity.
Brokers who continue to prey upon seniors and endanger their retirement security should be held accountable for their bad advice and unsuitable recommendations. Insurance agents, or any other advisors who recommend that a retiree remove the risk from their assets and move their money from stocks and mutual funds into the safety and security of a fixed annuity, should be applauded. The bias of the NASD and the securities industry is rooted in their greed, and ignores the best interests of their clients. I wonder if brokers were made to take fiduciary responsibility for their recommendations, how many would continue to provide such faulty advice to our seniors.
Tuesday, January 30, 2007
Thursday, January 25, 2007
Maturity Date Is GOOD for Annuity Owner
In the recent action taken by the Minnesota Attorney General against Allianz, I read that one of the concerns she raised in the sale of indexed annuities to seniors is that the maturity date is almost always decades in the future. The statement was made that this locks up the client’s money so that they cannot get to it until the maturity date arrives. This misconception is probably one of the biggest misunderstandings about the inner workings of insurance products, and the Minnesota Attorney General is not the first person to make such criticism based on this inaccurate conclusion. Unfortunately, not only is this information completely WRONG, but such false statements unnecessarily fuel the fear in senior annuity owners that they will not be able to access their money when they want, and provides them the motivation to cash in their policies early, which forces them to pay surrender charges for no reason. In an effort to help save some poor elderly annuity owners the trauma and expense of worrying about an issue that is really one of their policy benefits, I want to fully explain what a maturity date in an annuity is all about.
Every insurance contract, whether it is life, health, or an annuity, is a unilateral contract. What that means is that there is no negotiation by the applicant on the terms of the contract. The client is underwritten, based on established qualifying criteria, which by the way are set by the company and approved by the state insurance departments, and then the company makes the offer of the contract, to which the applicant can only accept or reject. In an annuity application, the only underwriting is financial. Someone wishing to purchase an annuity has to provide information that supports that this purchase is “suitable,” a financial evaluation made by the agent, and reviewed and confirmed by the issuing company. This standard of suitability is somewhat arbitrary, but the industry is slowing narrowing its definition into more quantifiable terms.
Once a policy is issued, the client always has a “free look” period, which ranges from 10-30 days depending upon state, whereby they can read the complete text of the contract, have it reviewed by an attorney, a CPA, or anyone else they so desire. If for any reason they decide they do not want to enter into this contract, all they have to do is return the policy as “not taken” before the end of the free look period, and the company will return any premium in full, and cancel the contract as if it never happened. Ironically, once the company offers a contract to an applicant, barring the discovery of false or missing information, the company does not have the right to withdraw the offer. Once the free look period passes, however, the contract becomes binding on both the company and the applicant, and terms of the contract apply.
Once again, the only condition and performance under the contract for the annuity owner is to deposit the initial premium, and to leave that money deposited for the contract term, which coincides with the surrender period. If there is a 10 year surrender period, then the owner is agreeing to leave their money deposited in the contract for those 10 years in order to gain ALL of the benefits of the contract.
Still, every annuity provides three other features during that contract period to give the owner access to their money, even before the end of the contract term. First, there is always some type of free withdrawal privilege, which is clearly stated in the policy. This varies by contract, but in many cases the owner can withdraw 10% of either the account value or the original deposit each year, without incurring any surrender charge. In some contracts, special needs or conditions, such as nursing home stay, or terminal illness may increase the amount of this free withdrawal up to the full account value.
Second, there is a provision for the owner to annuitize all or part of the account. In other words, they exchange the account value with the insurance company for a guaranteed stream of income. Similar to a pension, once they convert the account balance to an income stream, they no longer own the asset, but own the rights to this guaranteed income, based upon the terms of the payout period chosen.
Finally, if the client wants to withdraw more than what is allowed in their free withdrawal privilege, they can surrender all or part of their account. Whatever amounts they withdraw in excess of their free withdrawal will be subject to the surrender charges stated in the written contract they received at the very beginning, and were allowed a free look period to review before accepting its terms. This means that surrender charges should NEVER be a surprise to any annuity owner, unless they choose not to read the contract to which they willingly entered.
Now, on to the maturity date. In every annuity contract, in exchange for the deposit of money by the annuity owner, the insurance company offers a number of benefits. The withdrawal or income benefits mentioned above are part of the insurance company’s contractual obligation. In the case of the guaranteed income, the owner may exchange their account for a lifetime income. In such cases, the insurance company is obligated to pay the client the agreed stream of income, regardless of how long they live, even if it means that the insurance company has to pay out more than the amount that was in the account value.
The client’s principal is always 100% guaranteed throughout a fixed annuity contract, and the value of their deposit can never go down, unless they withdraw money from their account. In addition, the insurance company agrees to pay the owner interest on that deposit. In many cases this interest rate is guaranteed, or a minimum interest is guaranteed. In an indexed annuity, there is the opportunity for that interest credit to increase based upon changes in some stated measurement of an outside index.
The purpose of the maturity date is to specify in the contract the period of time whereby the company has to continue to provide all of the stated benefits to the annuity owner. While the annuity owner has provisions to break the contract early, sometimes with penalty, there is no such provision for the insurance company to break the contract early under any conditions. Their time frame is set for the entire period stated in the contract up until the maturity date. It is ONLY at this time that they can require that the annuity owner take their money back with earnings, either in the form of a withdrawal; which since this date is long past the surrender period, there is no cost to do so; or to annuitize the account balance into a stream of income. Prior to the maturity date, the insurance company may not force the annuity owner to take ANY money out of their non-qualified account if they don’t want to. In practice, unless the financial conditions have drastically changed in a way that disadvantages the insurance company, it is unlikely that any of them would ever force an elderly annuity owner to even take their money out at the maturity date, if they were still living. If you check this date, in relation to the owners age, the maturity date is usually well past the life expectancy of most people.
So, any argument that the maturity date somehow ties up an annuity owner’s money is completely false and indicates a total lack of understanding about insurance terminology. I challenge the Minnesota Attorney General, members of the securities industry, and financial journalists to cease and desist spreading unnecessary fear and panic among our seniors who have purchased, or are planning to purchase some type of fixed annuity, by their continued use of false information or insinuation. This reckless use of pubic visibility is hurting our retirees and is costing them money. If you are sincere about your concern for this segment of our population, stop using them as a political football for your own purposes and advances. Maturity dates are one of the MANY guarantees that fixed indexed annuities contain that make them not just suitable for the senior population, but are the ONLY financial vehicle which can offer them all of the safety and guarantees seniors want, with a reasonable rate of return.
Every insurance contract, whether it is life, health, or an annuity, is a unilateral contract. What that means is that there is no negotiation by the applicant on the terms of the contract. The client is underwritten, based on established qualifying criteria, which by the way are set by the company and approved by the state insurance departments, and then the company makes the offer of the contract, to which the applicant can only accept or reject. In an annuity application, the only underwriting is financial. Someone wishing to purchase an annuity has to provide information that supports that this purchase is “suitable,” a financial evaluation made by the agent, and reviewed and confirmed by the issuing company. This standard of suitability is somewhat arbitrary, but the industry is slowing narrowing its definition into more quantifiable terms.
Once a policy is issued, the client always has a “free look” period, which ranges from 10-30 days depending upon state, whereby they can read the complete text of the contract, have it reviewed by an attorney, a CPA, or anyone else they so desire. If for any reason they decide they do not want to enter into this contract, all they have to do is return the policy as “not taken” before the end of the free look period, and the company will return any premium in full, and cancel the contract as if it never happened. Ironically, once the company offers a contract to an applicant, barring the discovery of false or missing information, the company does not have the right to withdraw the offer. Once the free look period passes, however, the contract becomes binding on both the company and the applicant, and terms of the contract apply.
Once again, the only condition and performance under the contract for the annuity owner is to deposit the initial premium, and to leave that money deposited for the contract term, which coincides with the surrender period. If there is a 10 year surrender period, then the owner is agreeing to leave their money deposited in the contract for those 10 years in order to gain ALL of the benefits of the contract.
Still, every annuity provides three other features during that contract period to give the owner access to their money, even before the end of the contract term. First, there is always some type of free withdrawal privilege, which is clearly stated in the policy. This varies by contract, but in many cases the owner can withdraw 10% of either the account value or the original deposit each year, without incurring any surrender charge. In some contracts, special needs or conditions, such as nursing home stay, or terminal illness may increase the amount of this free withdrawal up to the full account value.
Second, there is a provision for the owner to annuitize all or part of the account. In other words, they exchange the account value with the insurance company for a guaranteed stream of income. Similar to a pension, once they convert the account balance to an income stream, they no longer own the asset, but own the rights to this guaranteed income, based upon the terms of the payout period chosen.
Finally, if the client wants to withdraw more than what is allowed in their free withdrawal privilege, they can surrender all or part of their account. Whatever amounts they withdraw in excess of their free withdrawal will be subject to the surrender charges stated in the written contract they received at the very beginning, and were allowed a free look period to review before accepting its terms. This means that surrender charges should NEVER be a surprise to any annuity owner, unless they choose not to read the contract to which they willingly entered.
Now, on to the maturity date. In every annuity contract, in exchange for the deposit of money by the annuity owner, the insurance company offers a number of benefits. The withdrawal or income benefits mentioned above are part of the insurance company’s contractual obligation. In the case of the guaranteed income, the owner may exchange their account for a lifetime income. In such cases, the insurance company is obligated to pay the client the agreed stream of income, regardless of how long they live, even if it means that the insurance company has to pay out more than the amount that was in the account value.
The client’s principal is always 100% guaranteed throughout a fixed annuity contract, and the value of their deposit can never go down, unless they withdraw money from their account. In addition, the insurance company agrees to pay the owner interest on that deposit. In many cases this interest rate is guaranteed, or a minimum interest is guaranteed. In an indexed annuity, there is the opportunity for that interest credit to increase based upon changes in some stated measurement of an outside index.
The purpose of the maturity date is to specify in the contract the period of time whereby the company has to continue to provide all of the stated benefits to the annuity owner. While the annuity owner has provisions to break the contract early, sometimes with penalty, there is no such provision for the insurance company to break the contract early under any conditions. Their time frame is set for the entire period stated in the contract up until the maturity date. It is ONLY at this time that they can require that the annuity owner take their money back with earnings, either in the form of a withdrawal; which since this date is long past the surrender period, there is no cost to do so; or to annuitize the account balance into a stream of income. Prior to the maturity date, the insurance company may not force the annuity owner to take ANY money out of their non-qualified account if they don’t want to. In practice, unless the financial conditions have drastically changed in a way that disadvantages the insurance company, it is unlikely that any of them would ever force an elderly annuity owner to even take their money out at the maturity date, if they were still living. If you check this date, in relation to the owners age, the maturity date is usually well past the life expectancy of most people.
So, any argument that the maturity date somehow ties up an annuity owner’s money is completely false and indicates a total lack of understanding about insurance terminology. I challenge the Minnesota Attorney General, members of the securities industry, and financial journalists to cease and desist spreading unnecessary fear and panic among our seniors who have purchased, or are planning to purchase some type of fixed annuity, by their continued use of false information or insinuation. This reckless use of pubic visibility is hurting our retirees and is costing them money. If you are sincere about your concern for this segment of our population, stop using them as a political football for your own purposes and advances. Maturity dates are one of the MANY guarantees that fixed indexed annuities contain that make them not just suitable for the senior population, but are the ONLY financial vehicle which can offer them all of the safety and guarantees seniors want, with a reasonable rate of return.
Wednesday, January 24, 2007
Fixed Indexed Annuities- FIA
I recently went to a sales meeting where some of the biggest carriers in the indexed annuity business were present and they all were using the new name of Fixed Indexed Annuity, or FIA for short, and had dropped the word "equity" from the name completely. If you read my recent post of "There is no EQUITY in Equity Indexed Annuities," you can see one of the reasons for this change. Another reason obviously is the volume of negative publicity these wonderful insurance products have received simply by having this verbal reference to equity products. I applaud these companies for this adjustment in the label we use for indexed annuities, and recommend that all agents begin to use this new reference immediately, which accurately describes this insurance product, and never let the "E" word cross your lips again.
Thursday, January 18, 2007
The TRUTH about Surrender Charges in Indexed Annuities
The securities industry opponents of indexed annuities have used the surrender charges, for early termination of an annuity contract, as a claim of high expenses involved with the purchase and owning of an indexed annuity. Besides the fact that this is a complete lie, suggesting that surrender charges are a negative about indexed annuities that should inhibit people from purchasing them, is simply a scare tactic used by the securities industry to try to get back some of the $24 billion a year it has been losing in sales for several years to these fantastic financial products.
The truth is that an indexed annuity is a contract, not an investment, and as with any contract, once you agree to its terms, you have the legal obligation and responsibility to abide by its conditions, and if you want out of a contract early, there is always a penalty. In most contracts, there is either an early termination fee, or the party breaking the contract can be sued for breech of contract. When you are selling your home and someone makes an offer that you accept, a binding contract is created. If that person decides before closing that they do not want to purchase your house, you have legal rights to enforce the contract, or else receive some form of restitution for their breech of your agreement. In most cases, you can at least keep their earnest money deposit for their failure to perform under the contract.
If you have ever gotten one of those nice new cell phones at a discounted price at your service provider, you had to sign a contract stating you would continue service with them for either a one or two year period, depending upon the amount of discount you received. If for some reason you wanted to end that service before the end of that period, you are still legally obligated to continue to pay the monthly service fee until the end of the contract, or else pay them a lump sum termination fee. With my company that termination fee is $175. I wonder how many people, lusting after the latest cell phone technology, really understand what they are committing to when they quickly sign that extra piece of paper, as they get their sexy new phone.
If you sign a lease agreement to rent an apartment or office space for one year, or you join a gym and sign a one year contract, you are legally obligated to pay the entire year’s worth of payments, even if you later want or have to move out of the rental space, or if you want to cease going to that gym. As you can see, we enter contracts throughout our lives, and accept their terms without question; at least until abiding by their conditions becomes an inconvenience for us. Contracts should therefore, never be taken lightly, and ALL terms of a contract should be accepted and understood BEFORE you sign any fine print. Once you sign your name, whether you have read it carefully or not, you ARE agreeing to every single detail that the fine print contains.
With an indexed annuity, the insurance company is committing to a long term set of benefits and guarantees that will cost them money to provide. The only commitment, to which the purchaser of an annuity is agreeing, is to deposit premium and leave it with the company for a stated period of time. If the purchaser wants to get out of the annuity contract early, fortunately, there is a legal provision for that, and that is by way of surrender. In this case, however, if the surrender is made during the surrender period, the insurance company is legally allowed to deduct a previously agreed fee from the client’s account to help cover their lost cost, expenses, and profits that were to be spread out over the entire term of the contract. If the annuity owner holds the contract as agreed, however, and does not seek to end it before the contract term has passed, surrender charges are irrelevant. The only time surrender charges will ever be assessed on an annuity contract is when the client, of their own choosing, reaches in and takes out more money from their contract than the allowed annual “free” withdrawal, or if the client terminates the entire contract early. Even then, the surrender charge has been fully disclosed in writing since day one, and the agreed deduction is only assessed against any contractually excess amounts withdrawn.
For anyone to call a surrender charge an expense of owning an annuity contract is misleading the public and spreading false information about these products. These scare tactics have caused fear and panic, and lead many elderly annuity owners to take rash actions that have unnecessarily cost them money. It is irresponsible for anyone to scare innocent annuity owners by suggesting that they may have these fees deducted from their contract other than as the contract indicates. I am certain that many of the seniors who have hastily cashed in their entire annuities, just because negative publicity gave them wrong information about surrender charges, actually ended up, because of their own action, paying the full surrender charges unnecessarily when they gave up their annuity early, because of the lies being spread by members of the securities industry. If these same annuity owners had known the truth, and had left their money in their annuity, they would continue to have full access to the use of their money in the form of withdrawals or annuitization, they would continue to earn a reasonable interest rate, their money would be safely guaranteed in a secure contract, and they would have never had to pay ANY surrender charges.
The truth is that an indexed annuity is a contract, not an investment, and as with any contract, once you agree to its terms, you have the legal obligation and responsibility to abide by its conditions, and if you want out of a contract early, there is always a penalty. In most contracts, there is either an early termination fee, or the party breaking the contract can be sued for breech of contract. When you are selling your home and someone makes an offer that you accept, a binding contract is created. If that person decides before closing that they do not want to purchase your house, you have legal rights to enforce the contract, or else receive some form of restitution for their breech of your agreement. In most cases, you can at least keep their earnest money deposit for their failure to perform under the contract.
If you have ever gotten one of those nice new cell phones at a discounted price at your service provider, you had to sign a contract stating you would continue service with them for either a one or two year period, depending upon the amount of discount you received. If for some reason you wanted to end that service before the end of that period, you are still legally obligated to continue to pay the monthly service fee until the end of the contract, or else pay them a lump sum termination fee. With my company that termination fee is $175. I wonder how many people, lusting after the latest cell phone technology, really understand what they are committing to when they quickly sign that extra piece of paper, as they get their sexy new phone.
If you sign a lease agreement to rent an apartment or office space for one year, or you join a gym and sign a one year contract, you are legally obligated to pay the entire year’s worth of payments, even if you later want or have to move out of the rental space, or if you want to cease going to that gym. As you can see, we enter contracts throughout our lives, and accept their terms without question; at least until abiding by their conditions becomes an inconvenience for us. Contracts should therefore, never be taken lightly, and ALL terms of a contract should be accepted and understood BEFORE you sign any fine print. Once you sign your name, whether you have read it carefully or not, you ARE agreeing to every single detail that the fine print contains.
With an indexed annuity, the insurance company is committing to a long term set of benefits and guarantees that will cost them money to provide. The only commitment, to which the purchaser of an annuity is agreeing, is to deposit premium and leave it with the company for a stated period of time. If the purchaser wants to get out of the annuity contract early, fortunately, there is a legal provision for that, and that is by way of surrender. In this case, however, if the surrender is made during the surrender period, the insurance company is legally allowed to deduct a previously agreed fee from the client’s account to help cover their lost cost, expenses, and profits that were to be spread out over the entire term of the contract. If the annuity owner holds the contract as agreed, however, and does not seek to end it before the contract term has passed, surrender charges are irrelevant. The only time surrender charges will ever be assessed on an annuity contract is when the client, of their own choosing, reaches in and takes out more money from their contract than the allowed annual “free” withdrawal, or if the client terminates the entire contract early. Even then, the surrender charge has been fully disclosed in writing since day one, and the agreed deduction is only assessed against any contractually excess amounts withdrawn.
For anyone to call a surrender charge an expense of owning an annuity contract is misleading the public and spreading false information about these products. These scare tactics have caused fear and panic, and lead many elderly annuity owners to take rash actions that have unnecessarily cost them money. It is irresponsible for anyone to scare innocent annuity owners by suggesting that they may have these fees deducted from their contract other than as the contract indicates. I am certain that many of the seniors who have hastily cashed in their entire annuities, just because negative publicity gave them wrong information about surrender charges, actually ended up, because of their own action, paying the full surrender charges unnecessarily when they gave up their annuity early, because of the lies being spread by members of the securities industry. If these same annuity owners had known the truth, and had left their money in their annuity, they would continue to have full access to the use of their money in the form of withdrawals or annuitization, they would continue to earn a reasonable interest rate, their money would be safely guaranteed in a secure contract, and they would have never had to pay ANY surrender charges.
Thursday, January 11, 2007
There is NO EQUITY in Equity Indexed Annuities
The fact that someone decided to use the word “equity” in the name, when indexed annuities were first developed, is part of the reason why they have come under attack by some in the securities industry. But contrary to the claims of vocal opponents, use of this term is the only misleading thing about them, and efforts are underway to drop this confusing part of the label from this product. The reason the use of this word in the name is inaccurate, is that in an indexed annuity, the client is not purchasing equity in anything. Their money is not buying into any index either. An indexed annuity is an insurance contract, and every purchaser of one of these innovative financial products is buying a contract from an insurance carrier for a stated list of guaranteed benefits. The only connection an indexed annuity has with any index is that the annuity owner has the option to choose an interest crediting strategy, whereby the percentage of increase in the named index is used as a way to measure how much additional interest they will earn, above the guaranteed interest return stated in the contract.
Since an indexed annuity is a contract, and the client’s purchase money is never placed at risk in the market, indexed annuities are not investments or securities, but are unique savings vehicles with enormous safety, vital guarantees of security of principal, guaranteed minimal interest return, and income options that can provide the annuitant a guaranteed income they can never outlive.
If you are a retired individual or couple and you are now living on a fixed income with fixed assets, the last thing you can afford is to risk the security of either your assets or your income. Placing a chunk of your assets into an indexed annuity is an ideal vehicle for someone who wants to guarantee that their principal can never lose value, get a safe, reasonable return on their money, and have a chance to earn more than they could get at their bank in a CD or money market account. Add to that, if this person were to ever fear that they would not have enough money, they could at ANY time, convert their account to a guaranteed stream of income for life, no matter how long they might live.
Securities regulators and industry spokespeople who challenge the insurance identity of indexed annuities have wrongly used the uncertainty of this “extra” interest crediting, which is based upon the changes in the linked index, as a claim of risk. While the “extra” interest credits in an indexed annuity will fluctuate from period to period, and the results are not guaranteed, the principal deposits and all previously credited interest earnings are NEVER at risk. And the client’s money is NEVER placed in the index.
The insurance company has their own way of ensuring their performance in the contract by investing the client’s money in safe long term bonds and then buying options on the index, not with the client’s money, but from the earnings they make by investing the client’s money. This allows the insurance company to safely guarantee the client’s principal, offer a minimal guaranteed interest return, and provide the potential for a higher rate of return that merely uses the changes in the index as a clear measurement of how to calculate this “extra” interest. This one non-guaranteed feature of an indexed annuity is no more confusing than the potential for a bank to change their CD rates to existing customers upon renewal, based upon market changes. And yet, these securities regulators are not clamoring to have CDs regulated by the SEC.
Think of it like this. The index which is used in an indexed annuity to determine the amount of “extra” interest is simply a yardstick. It could just as easily be the change in the average temperature for a given year, the improvement of the number of points earned by your favorite team over last season. The fact that it uses a known stock index is not accidental, however, but the reasons are, once again, determined by the insurance company who offers the contract. Just like when you sign a contract for cellular phone service, you don’t concern yourself with HOW the company will provide the service; only that they will. If we can start calling indexed annuities what they truly are, a contract, and not an investment, then it will clear up a lot of the criticism and confusion that has been wrongly fueled by the use of the term equity in their name.
Since an indexed annuity is a contract, and the client’s purchase money is never placed at risk in the market, indexed annuities are not investments or securities, but are unique savings vehicles with enormous safety, vital guarantees of security of principal, guaranteed minimal interest return, and income options that can provide the annuitant a guaranteed income they can never outlive.
If you are a retired individual or couple and you are now living on a fixed income with fixed assets, the last thing you can afford is to risk the security of either your assets or your income. Placing a chunk of your assets into an indexed annuity is an ideal vehicle for someone who wants to guarantee that their principal can never lose value, get a safe, reasonable return on their money, and have a chance to earn more than they could get at their bank in a CD or money market account. Add to that, if this person were to ever fear that they would not have enough money, they could at ANY time, convert their account to a guaranteed stream of income for life, no matter how long they might live.
Securities regulators and industry spokespeople who challenge the insurance identity of indexed annuities have wrongly used the uncertainty of this “extra” interest crediting, which is based upon the changes in the linked index, as a claim of risk. While the “extra” interest credits in an indexed annuity will fluctuate from period to period, and the results are not guaranteed, the principal deposits and all previously credited interest earnings are NEVER at risk. And the client’s money is NEVER placed in the index.
The insurance company has their own way of ensuring their performance in the contract by investing the client’s money in safe long term bonds and then buying options on the index, not with the client’s money, but from the earnings they make by investing the client’s money. This allows the insurance company to safely guarantee the client’s principal, offer a minimal guaranteed interest return, and provide the potential for a higher rate of return that merely uses the changes in the index as a clear measurement of how to calculate this “extra” interest. This one non-guaranteed feature of an indexed annuity is no more confusing than the potential for a bank to change their CD rates to existing customers upon renewal, based upon market changes. And yet, these securities regulators are not clamoring to have CDs regulated by the SEC.
Think of it like this. The index which is used in an indexed annuity to determine the amount of “extra” interest is simply a yardstick. It could just as easily be the change in the average temperature for a given year, the improvement of the number of points earned by your favorite team over last season. The fact that it uses a known stock index is not accidental, however, but the reasons are, once again, determined by the insurance company who offers the contract. Just like when you sign a contract for cellular phone service, you don’t concern yourself with HOW the company will provide the service; only that they will. If we can start calling indexed annuities what they truly are, a contract, and not an investment, then it will clear up a lot of the criticism and confusion that has been wrongly fueled by the use of the term equity in their name.
Wednesday, January 10, 2007
Clearing the Confusion Between Variable Annuities and EIA’s
The SEC is presently reviewing the classification status of EIA’s, in all probability, due to the constant clamoring by former NASD chairman Robert Glauber that the identity of them is unclear to him. For those of us in the insurance industry, we do not find the pure insurance nature of indexed annuities difficult to understand nor accept. While there are a few features of EIA’s that are routinely mentioned in detractor’s arguments as they attempt to indicate that these insurance products could be mistaken as securities, it is the misstatements of these features that only confuse the nature of an otherwise very clear insurance contract. One of the tactics used by detractors of indexed annuities, and confused financial journalists, is to describe the features of variable annuities, a hybrid security and insurance product, but refer to indexed annuities, a guaranteed insurance contract.
To make the differences between these products easier to understand, let me first clarify the concept of a variable annuity. The defining features about a variable annuity, which causes it to be regulated as a security, is because of two very important distinctions from its pure insurance cousin. In a variable insurance product, the client assumes ALL of the investment risk, rather than the insurance company. This is why the insurance company is required to put all client funds for variable products in a “separate” account from their general fund. There is no guarantee that a variable annuity holder will earn any return on their investment, their original premiums are not guaranteed, and the value of their account can and does go down with the loss of value of the underlying investments. It is possible for a variable annuity owner to lose some, or even all of their original investment. Within a variable contract, the client chooses specifically how their funds will be allocated from a set of mutual fund-like investments options offered within the variable product.
The few guarantees included in a variable product do not stem from the securities side, but from the insurance side and are provided by a deduction of expense charges from the client’s assets within the separate account, and are charged periodically, regardless of how the investment is performing. It is this catch that has caused so many variable policies to risk lapsing, when their investment losses have reduced the account value to a point where it could no longer pay the insurance premiums for the guaranteed benefits. If this happens, the owner must either pay additional premiums to continue the policy, or the policy will lapse.
Quite different from a variable annuity, in an indexed annuity, the client does not incur ANY investment risk whatsoever. In fact, not only is their initial principal guaranteed, but in most policies, there is a minimum guaranteed rate of interest that is credited over the contract period. In the case of an EIA, unlike a variable product or a securities product, the client does not tell the insurance company how to invest their premium dollars. It is totally up to the insurance company to figure out how to provide the contractual guarantees of principal and interest.
Indexed annuities do not have any fees deducted from active accounts. All of the client’s premium funds are credited to the policy at issue, and no expenses are deducted from that account in the future. Agent sales commissions, company expenses, and profits are all earned by using arbitrage, the same techniques banks use to make money with client deposits. Premiums received for the purchase of indexed annuities are deposited in the insurance company’s general accounts and are invested by the insurance company, at their discretion; in a way that allows them to financially provide all of the contractually obligated policy benefits, pay their expenses, and make a profit for themselves.
Client premium deposits are 100% guaranteed, and interest earnings, once credited, in most cases are “locked in,” and the account can never go down unless the client takes money out. Since an indexed annuity is a contract, there are obligations and responsibilities stated in the policy for both parties to the contract. The insurance company agrees to provide the stated benefits over the policy period, and the client agrees to leave their premiums deposited with the company for a set period of time.
The insurance company does not have any provisions in the contract for breaking or canceling the contract and must provide all of the contracted benefits as agreed for the entire contract term. But in deference to the client, the only provision that is required of them, in order to enter this contract, is the deposit of premiums; and, if the client, for any reason, does not want to continue their part of the agreement, there is a provision in the contract for them to alter, or completely break the contract by way of partial or full surrender.
But like every contract, there is a penalty for such action, and in an indexed annuity that penalty is called a surrender charge. This penalty is never enforced and the fees are never charged until or unless the client withdrawals exceed a contractually allowed annual amount during the surrender period. Surrender charges are clearly stated in the contract, and a schedule of guaranteed surrender values for any future year is provided. This puts the client in complete control of how and when they access their money, and whether or not they will ever incur any surrender charges.
To make the differences between these products easier to understand, let me first clarify the concept of a variable annuity. The defining features about a variable annuity, which causes it to be regulated as a security, is because of two very important distinctions from its pure insurance cousin. In a variable insurance product, the client assumes ALL of the investment risk, rather than the insurance company. This is why the insurance company is required to put all client funds for variable products in a “separate” account from their general fund. There is no guarantee that a variable annuity holder will earn any return on their investment, their original premiums are not guaranteed, and the value of their account can and does go down with the loss of value of the underlying investments. It is possible for a variable annuity owner to lose some, or even all of their original investment. Within a variable contract, the client chooses specifically how their funds will be allocated from a set of mutual fund-like investments options offered within the variable product.
The few guarantees included in a variable product do not stem from the securities side, but from the insurance side and are provided by a deduction of expense charges from the client’s assets within the separate account, and are charged periodically, regardless of how the investment is performing. It is this catch that has caused so many variable policies to risk lapsing, when their investment losses have reduced the account value to a point where it could no longer pay the insurance premiums for the guaranteed benefits. If this happens, the owner must either pay additional premiums to continue the policy, or the policy will lapse.
Quite different from a variable annuity, in an indexed annuity, the client does not incur ANY investment risk whatsoever. In fact, not only is their initial principal guaranteed, but in most policies, there is a minimum guaranteed rate of interest that is credited over the contract period. In the case of an EIA, unlike a variable product or a securities product, the client does not tell the insurance company how to invest their premium dollars. It is totally up to the insurance company to figure out how to provide the contractual guarantees of principal and interest.
Indexed annuities do not have any fees deducted from active accounts. All of the client’s premium funds are credited to the policy at issue, and no expenses are deducted from that account in the future. Agent sales commissions, company expenses, and profits are all earned by using arbitrage, the same techniques banks use to make money with client deposits. Premiums received for the purchase of indexed annuities are deposited in the insurance company’s general accounts and are invested by the insurance company, at their discretion; in a way that allows them to financially provide all of the contractually obligated policy benefits, pay their expenses, and make a profit for themselves.
Client premium deposits are 100% guaranteed, and interest earnings, once credited, in most cases are “locked in,” and the account can never go down unless the client takes money out. Since an indexed annuity is a contract, there are obligations and responsibilities stated in the policy for both parties to the contract. The insurance company agrees to provide the stated benefits over the policy period, and the client agrees to leave their premiums deposited with the company for a set period of time.
The insurance company does not have any provisions in the contract for breaking or canceling the contract and must provide all of the contracted benefits as agreed for the entire contract term. But in deference to the client, the only provision that is required of them, in order to enter this contract, is the deposit of premiums; and, if the client, for any reason, does not want to continue their part of the agreement, there is a provision in the contract for them to alter, or completely break the contract by way of partial or full surrender.
But like every contract, there is a penalty for such action, and in an indexed annuity that penalty is called a surrender charge. This penalty is never enforced and the fees are never charged until or unless the client withdrawals exceed a contractually allowed annual amount during the surrender period. Surrender charges are clearly stated in the contract, and a schedule of guaranteed surrender values for any future year is provided. This puts the client in complete control of how and when they access their money, and whether or not they will ever incur any surrender charges.
Tuesday, January 09, 2007
Why Indexed Annuities Are CLEARLY Insurance
Since the SEC has become involved in the debate about whether or not to reclassify the insurance identity of EIA’s, it is important that they consider a few key elements about indexed annuities which clearly differentiate them from the components necessary for a product to be classified as a security.
The key word in eliminating any confusion on this discussion has to be RISK. Securities are regulated in the manner they are because any investor buying a security accepts a huge amount of risk, and the intense regulation is designed to make sure that an investor only takes on that risk with complete and factual information. EVERY securities product offered has the “potential” for the investor to lose some or ALL of their investment capital. This fact is essential to grasp if you are going to understand the complete difference between an indexed annuity and EVERY securities product.
In any purchase of a security, the client assumes ALL of the investment risk. That means that the investor acknowledges, at the onset, that they realize there is absolutely no certainty that their investment will ever earn them one dime in return, and that they could possibly lose some, or ALL, of their original investment. In an indexed annuity, however, the client does not assume ANY investment risk whatsoever; the insurance company retains it all. The client does not tell the insurance company how to invest their premium dollars in order to make sure that the company can later fulfill the contractual obligations. The insurance company is responsible for managing the premiums they receive in the purchase of indexed annuities in a way to be able to provide the contracted benefits to all policy holders. The oversight responsibility to ascertain the ability of an insurance carrier to financially do this is monitored, not only by the state insurance departments where they do business, but is regularly reviewed by a number of independent rating agencies, such as A.M Best, S&P, and Weiss.
The client’s premium dollars used to buy an indexed annuity are therefore, not an investment in any security, but are the purchase of a very specific and detailed, long term insurance contract between the annuity purchaser and the insurance company. This contract entitles the owner to a group of benefits, including interest credits on money deposited, income options, withdrawal privileges, death benefits, and the terms and conditions for early partial of full surrender of the contract. The policy, along with all of its details are provided to the client up front in writing and the client is even given a state mandated right of refusal period before they are bound by the terms of the contract.
If this is not enough proof, the enormous distinction that labels indexed annuities as insurance are in the guarantees provided in the insurance contract that are completely absent from any securities purchase. The client’s premium dollars are guaranteed not to lose value, within the terms of the contract. In most indexed annuities, a minimum rate of return over the life of the contract is also guaranteed. In addition to the guarantee of premium deposits and the minimum interest credits, the unique feature which gives indexed annuities their name, is that the client is offered the potential to receive a higher rate of interest, determined by a clearly defined strategy of using changes in some named index as the measurement of how much extra interest to credit over given periods of time. And the best feature included in most indexed annuities is that once interest has been credited to an account, it is “locked in.” That means that the only way a client’s account value can ever go down, is for them to personally and intentionally reach in and take money out of their contract.
In a later blog I plan to address some of the rhetorical misstatements and lies used by the opponents of indexed annuities. But for now, just using the above information, I hope that the SEC, and anyone else who has questioned the insurance identity of indexed annuities, now understands why they are in no way a securities product, and should never be brought under the jurisdiction of the NASD or any other securities regulatory agency.
The key word in eliminating any confusion on this discussion has to be RISK. Securities are regulated in the manner they are because any investor buying a security accepts a huge amount of risk, and the intense regulation is designed to make sure that an investor only takes on that risk with complete and factual information. EVERY securities product offered has the “potential” for the investor to lose some or ALL of their investment capital. This fact is essential to grasp if you are going to understand the complete difference between an indexed annuity and EVERY securities product.
In any purchase of a security, the client assumes ALL of the investment risk. That means that the investor acknowledges, at the onset, that they realize there is absolutely no certainty that their investment will ever earn them one dime in return, and that they could possibly lose some, or ALL, of their original investment. In an indexed annuity, however, the client does not assume ANY investment risk whatsoever; the insurance company retains it all. The client does not tell the insurance company how to invest their premium dollars in order to make sure that the company can later fulfill the contractual obligations. The insurance company is responsible for managing the premiums they receive in the purchase of indexed annuities in a way to be able to provide the contracted benefits to all policy holders. The oversight responsibility to ascertain the ability of an insurance carrier to financially do this is monitored, not only by the state insurance departments where they do business, but is regularly reviewed by a number of independent rating agencies, such as A.M Best, S&P, and Weiss.
The client’s premium dollars used to buy an indexed annuity are therefore, not an investment in any security, but are the purchase of a very specific and detailed, long term insurance contract between the annuity purchaser and the insurance company. This contract entitles the owner to a group of benefits, including interest credits on money deposited, income options, withdrawal privileges, death benefits, and the terms and conditions for early partial of full surrender of the contract. The policy, along with all of its details are provided to the client up front in writing and the client is even given a state mandated right of refusal period before they are bound by the terms of the contract.
If this is not enough proof, the enormous distinction that labels indexed annuities as insurance are in the guarantees provided in the insurance contract that are completely absent from any securities purchase. The client’s premium dollars are guaranteed not to lose value, within the terms of the contract. In most indexed annuities, a minimum rate of return over the life of the contract is also guaranteed. In addition to the guarantee of premium deposits and the minimum interest credits, the unique feature which gives indexed annuities their name, is that the client is offered the potential to receive a higher rate of interest, determined by a clearly defined strategy of using changes in some named index as the measurement of how much extra interest to credit over given periods of time. And the best feature included in most indexed annuities is that once interest has been credited to an account, it is “locked in.” That means that the only way a client’s account value can ever go down, is for them to personally and intentionally reach in and take money out of their contract.
In a later blog I plan to address some of the rhetorical misstatements and lies used by the opponents of indexed annuities. But for now, just using the above information, I hope that the SEC, and anyone else who has questioned the insurance identity of indexed annuities, now understands why they are in no way a securities product, and should never be brought under the jurisdiction of the NASD or any other securities regulatory agency.
Wednesday, August 30, 2006
Suitability is a Matter of Opinion. But Who’s Opinion Really Counts?
Today I read a legal document presented by the State of Washington Department of Financial Institutions Securities Division, where they enter a Summary Order to Cease and Desist against Capstone Investments, a broker dealer based in California, and its principle, Anthony Capozza. They additionally seek to have his registration suspended and impose fines and charges. Because this firm had offices and associates in Washington, this action is being taken based upon the activities in that state.
The accusation is that the firm has been illegally helping insurance agents liquidate customer brokerage accounts so that insurance agents could then move the money into an annuity. These insurance friendly transfer brokers have been around for years helping clients easily move money out of brokerage accounts without having to expose them to the attempts of the existing broker to convince them otherwise. While I am not sure if there were actual securities rules violated here or not, and those charged have not yet had a chance to make their defense, it does clearly define another level of the battle between the insurance industry and the securities industry.
When you read the text to this order, it is filled with a “tone” or an opinion about which I want to draw your attention. I have read numerous financial articles that have carried this same “tone” and it has a direct bearing on the credibility of many of the criticisms made against the use of annuities in the senior marketplace. The opinion has to do with an underlying assumption by those writing, that simply moving money from securities into an annuity is inappropriate under any circumstances. In this legal text, the attorney who drafted it implied this very opinion in a number of ways. I want to quote paragraph 14 of the TENTATIVE FINDINGS OF FACT, and let you see what I am talking about. I will comment after each sentence.
“14. Many customers whose securities were liquidated were retired, living on fixed income, and had a limited knowledge of investing.”
Wait a minute! Does that not then make these people unsuitable candidates for accepting risk investments in the first place? Can someone living on a fixed income afford to lose principal value or have negative returns even once? Where will they get sufficient income if there account loses value and their investments are not earning any return at all? And with their limited knowledge of investing, how can any broker ethically place them in risk positions they don’t fully understand?
“Many customers held diversified portfolios of stocks, bonds, mutual funds, or other investments prior to these liquidations. The securities liquidated typically comprised a large percentage of a customer’s assets.”
The implication made here is that these clients had been PROPERLY diversified in the first place, based upon their risk tolerance, which was supposedly accurately assessed by the selling broker. But in reality, there is neither knowledge nor evidence that any of this is true. If you consider the client description shown, and the added statement that the invested assets represented a large part of their assets, it is unsuitable that any such client should own stocks or mutual funds in their portfolio at all, given their fixed income, fixed assets, and limited knowledge of investing.
“After liquidation, many customers were placed in fixed annuities, which were subject to surrender charges, without adequate consideration of each customer’s financial needs, including the need to have sufficient liquidity to meet current or future expenses.”
How in the world does this attorney jump to the conclusion that the customer’s financial and liquidity needs were not properly considered by the insurance agents? If you see the pattern, it is that an assumption is always made giving the securities broker the benefit of the doubt that they have properly assessed the client’s financial needs, but that the insurance agent did not. In this document, with only the facts presented, I would conclude just the opposite. I would hold the broker in contempt for inappropriately putting these innocent seniors’ income and assets at risk in the market, and taking advantage of their naivety in investments to make unsuitable sales.
In any such cases as this, ANY transfer of money by someone from a portfolio with risk securities into a fixed annuity is an immediate improvement in the safety of the financial position of the elderly customer. The annuity has guarantees on the principal value, the securities do not. The annuity can provide a lifetime income the client cannot outlive, the security cannot. The annuity has a minimum guaranteed interest return, the security does not. The annuity indicates up front the minimum guaranteed future value year by year; the securities do not.
As far as surrender charges, if the typical 10% free annual withdrawal provided in most annuities is not enough for a client, it is likely that they will run out of money before they die anyway. At least with an annuity, at any point, they can guarantee a fixed income for life. With the fluctuating values of securities, every time a senior must sell in a down market, they compromise the potential for that remaining asset to generate the amount of future income they need. And if a security is sold when the value is down, that is a very real undisclosed surrender cost of owning any risk investment, that is not being discussed in this concern for the financial well being of seniors.
It is time for the public assumptions about transfers from securities to annuities to change. I challenge any financial journalist, or any person in the securities industry, to present a typical scenario where placing a elderly client with fixed assets, fixed income, and limited understanding of investments into risk investments is EVER more suitable than being in a fixed annuity. Is anyone up for the challenge?
The accusation is that the firm has been illegally helping insurance agents liquidate customer brokerage accounts so that insurance agents could then move the money into an annuity. These insurance friendly transfer brokers have been around for years helping clients easily move money out of brokerage accounts without having to expose them to the attempts of the existing broker to convince them otherwise. While I am not sure if there were actual securities rules violated here or not, and those charged have not yet had a chance to make their defense, it does clearly define another level of the battle between the insurance industry and the securities industry.
When you read the text to this order, it is filled with a “tone” or an opinion about which I want to draw your attention. I have read numerous financial articles that have carried this same “tone” and it has a direct bearing on the credibility of many of the criticisms made against the use of annuities in the senior marketplace. The opinion has to do with an underlying assumption by those writing, that simply moving money from securities into an annuity is inappropriate under any circumstances. In this legal text, the attorney who drafted it implied this very opinion in a number of ways. I want to quote paragraph 14 of the TENTATIVE FINDINGS OF FACT, and let you see what I am talking about. I will comment after each sentence.
“14. Many customers whose securities were liquidated were retired, living on fixed income, and had a limited knowledge of investing.”
Wait a minute! Does that not then make these people unsuitable candidates for accepting risk investments in the first place? Can someone living on a fixed income afford to lose principal value or have negative returns even once? Where will they get sufficient income if there account loses value and their investments are not earning any return at all? And with their limited knowledge of investing, how can any broker ethically place them in risk positions they don’t fully understand?
“Many customers held diversified portfolios of stocks, bonds, mutual funds, or other investments prior to these liquidations. The securities liquidated typically comprised a large percentage of a customer’s assets.”
The implication made here is that these clients had been PROPERLY diversified in the first place, based upon their risk tolerance, which was supposedly accurately assessed by the selling broker. But in reality, there is neither knowledge nor evidence that any of this is true. If you consider the client description shown, and the added statement that the invested assets represented a large part of their assets, it is unsuitable that any such client should own stocks or mutual funds in their portfolio at all, given their fixed income, fixed assets, and limited knowledge of investing.
“After liquidation, many customers were placed in fixed annuities, which were subject to surrender charges, without adequate consideration of each customer’s financial needs, including the need to have sufficient liquidity to meet current or future expenses.”
How in the world does this attorney jump to the conclusion that the customer’s financial and liquidity needs were not properly considered by the insurance agents? If you see the pattern, it is that an assumption is always made giving the securities broker the benefit of the doubt that they have properly assessed the client’s financial needs, but that the insurance agent did not. In this document, with only the facts presented, I would conclude just the opposite. I would hold the broker in contempt for inappropriately putting these innocent seniors’ income and assets at risk in the market, and taking advantage of their naivety in investments to make unsuitable sales.
In any such cases as this, ANY transfer of money by someone from a portfolio with risk securities into a fixed annuity is an immediate improvement in the safety of the financial position of the elderly customer. The annuity has guarantees on the principal value, the securities do not. The annuity can provide a lifetime income the client cannot outlive, the security cannot. The annuity has a minimum guaranteed interest return, the security does not. The annuity indicates up front the minimum guaranteed future value year by year; the securities do not.
As far as surrender charges, if the typical 10% free annual withdrawal provided in most annuities is not enough for a client, it is likely that they will run out of money before they die anyway. At least with an annuity, at any point, they can guarantee a fixed income for life. With the fluctuating values of securities, every time a senior must sell in a down market, they compromise the potential for that remaining asset to generate the amount of future income they need. And if a security is sold when the value is down, that is a very real undisclosed surrender cost of owning any risk investment, that is not being discussed in this concern for the financial well being of seniors.
It is time for the public assumptions about transfers from securities to annuities to change. I challenge any financial journalist, or any person in the securities industry, to present a typical scenario where placing a elderly client with fixed assets, fixed income, and limited understanding of investments into risk investments is EVER more suitable than being in a fixed annuity. Is anyone up for the challenge?
Friday, August 11, 2006
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.
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.
Wednesday, July 12, 2006
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.
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.
Wednesday, June 28, 2006
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
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.
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.
Monday, June 12, 2006
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.
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.
Friday, June 09, 2006
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.
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.
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.
Tuesday, June 06, 2006
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.
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.
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.
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.
Tuesday, May 23, 2006
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.
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.
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.
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