Response: How Well Do You Know…Indexed Annuities?
December 31, 2009 by Leslie Schism
PDF for Setting It Straight with WSJ 2
ORIGINAL ARTICLE CAN BE FOUND AT: How Well Do You Know…Indexed Annuities?
Leslie,
I know that you know who I am, but for the benefit of those copied on this email, I’ll provide a refresher. I am an independent market research analyst who specializes exclusively in the indexed annuity (IA) and indexed life markets. I have tracked the companies, products, marketing, and sales of these products for over a decade. I used to provide similar services for fixed and variable products, but I believe so strongly in the value proposition of indexed products that I started my own company focusing on IAs exclusively. I do not endorse any company or financial product, and millions look to us for accurate, unbiased information on the insurance market. In fact, we are the firm that regulators look to, and work with, when needing assistance with these products.
You and I have had a relationship for nearly a year, as my firm has been providing you with factual data on indexed annuities since we first recognized that The Wall Street Journal (WSJ) was reporting inaccurate information on indexed annuities over a year ago. I personally respond to, and correct, every negative and inaccurate article on indexed annuities. The perpetuation of misinformation relative to annuities has been a problem in the media for years. My firm is doing all that we can to correct this predicament, in the small and growing niche that is the indexed annuity market.
I am specifically contacting you today about your recent article in The Wall Street Journal, “How Well Do You Know… Indexed Annuities?”
Leslie, I have had the occasion to read four inaccurate articles about indexed annuities, which have been published by The Wall Street Journal in just the past year. I panic at the thought of estimating how many times this periodical has published such disparaging pieces during the 14+ years that these products have existed. In all fairness to you, your name was not on the byline of all four of these WSJ articles. It is important to note, however, that one of these four inaccurate articles was not only written by you, but is nearly identical to the article I am contacting you on today. “How Well Do You Know…Fixed Annuities?” was published in Wall Street Journal exactly six months ago today. I took the occasion to correct you on this piece back in March, and you’ve already published information that blatantly disregards the corrections that I provided to you, in response to that article. I’ve attached a copy of my email to you (with my corrections to your article), and your response from March 2, 2009.
Today, I am very disheartened; more than that, I am angry. In the past, I have shrugged off WSJ’s inaccuracies and misstatements relative to these products because I chalked it up to a lack of education. After all, how can you report the facts, if you do not know them. Moreover, how can you seek out the facts, when your “sources” are wire houses, brokerage firms, and registered representatives that do not sell indexed annuities, and in fact SELL AGAINST THEM? I took these things into consideration in the past. I am not inclined to do the same today, as my firm has not only corrected you about these products in the past, but we have also been providing you with press releases and sales data, so that you have access to statistical, and factual information on these products, as well as a reliable indexed annuity source. Now, you are twisting those facts (if taking them into consideration at all), and I can only conclude the following:
1. The Wall Street Journal has no regard for the FACTS, or
2. The Wall Street Journal puts the truth aside, in order to forge ahead with sensationalistic headlines, or
3. The Wall Street Journal puts the truth aside, in order to better-serve their mutual fund advertisers
With that said, let me draw your attention to the most recent mistakes, inaccuracies, and twisting of the facts that you have crafted with, “How Well Do You Know…Indexed Annuities?”
First, indexed annuities are not “investments.” They are fixed insurance products. Other fixed insurance products include term life insurance, fixed annuities, universal life and whole life insurance. Products such as stocks, bonds, mutual funds, and even variable annuities are properly classified as “investments.” It would behoove you to note the difference.
Second, if you want to quote sales data, it would be in your best interest to get the most accurate and complete data. My firm reports 99% of the total indexed annuity production on a quarterly basis (only one small insurance company has historically abstained from our survey). We are not only experts on how indexed annuities work, but we have had relationships with the companies in this market for more than a decade. LIMRA, on the other hand, is strictly a market research firm. Not only are they not indexed annuity experts, but they do not even report sales for ten of the 47 companies that sold indexed annuities as of 2Q2009. For that reason, I would strongly suggest that you contact our firm in the future, should you be inclined to report on sales trends in this industry.
Third, you say that “not knowing the fine print [on indexed annuities] may leave you very disappointed when the annuities deliver less during market rallies than you expected.” You must not realize that there is no “fine print” on these products, Leslie. The insurance commissioners that regulate these products not only require the full and proper disclosure of these products (at a minimum font-size, no less), but also apply rigorous standard non-forfeiture laws to these annuities. They manage producer licensing, enforce continuing education requirements, implement advertising guidelines, apply suitability regulations, and hold the authority to take sanctions against insurance agents including, but not limited to, license revocation, penalties and fines. In fact, I’d venture to say that a consumer purchasing an indexed annuity today would have a far easier job with disclosure than the consumer purchasing a variable annuity today (considering that the average indexed annuity contract fully-discloses the product features in an average 26.7 pages, but the average variable annuity prospectus exceeds 200 pages).
Fourth, indexed annuities have not been referred to as “equity indexed annuities” since the late 1990’s. The insurance industry has been careful to enforce a standard of referring to the products as merely “indexed annuities” or “fixed indexed annuities,” so as not to confuse consumers. This industry wants to make a clear distinction between these fixed insurance products and equity investments. It is the safety and guarantees of these products which appeal to consumers, particularly during times of market downturns and volatility. Your help in avoiding any such confusion is so greatly appreciated.
Fifth, as I clearly pointed out to you in the correction to your March 2 article, “Limiting the potential interest credited [on an indexed annuity] is the means for the insurance company to continue offering a minimum guarantee on the products. If there were no limit to the potential interest, it would be a variable annuity with no minimum guarantees.” So, although it is correct for you to say that “[an indexed annuity] contains restrictions on how much of the index’s gain you receive” it is misleading. You present this as a negative feature of the product, when in fact it is a positive. You do not give your clients the rationale for the limiting of this interest, however, so they don’t have a chance to analyze this product feature for themselves. I, for one, am very happy for this limiting of interest on indexed annuities. I am not willing to risk my money in the market, at the cost of losing some or all of my principal investment. As an indexed annuity policyholder, I can say that the limiting of index-linked interest on my contract has enabled my insurance company to provide me with a minimum guarantee while the market has been down consistently. My grandparents cannot say the same, as they have lost half of their retirement savings in their variable annuity. Had they received the opportunity to read accurate an unbiased articles on indexed annuities in The Wall Street Journal, maybe this would not be the case.
Sixth, I find it laughable that you and so many other reporters keep citing the fact that indexed annuities are not backed by the Federal Deposit Insurance Corporation (FDIC). You talk about it as if that is a negative! Did you know that 81 banks have failed so far this year? Did you also know that the FDIC fund is in danger, and currently down 20% this quarter? I’d be remiss if I didn’t point out that the state guaranty fund associations are not experiencing the same difficulties. In addition, NOT A SINGLE INDEXED ANNUITY PURCHASER HAS LOST A PENNY AS A RESULT OF THE MARKET DECLINES, BANK FAILURES, OR GENERAL WEAKENING OF THE ECONOMY. Maybe that will put your comparisons of the guaranty fund association and the FDIC into perspective.
Seventh, indexed annuities are appropriate for all sorts of people: “a customer who has never invested in stocks for fear of loss,” as well as someone who has been burned by stocks or market losses. They are also suitable for those wanting the safety of principal protection, with additional interest crediting. Another potential- consumers looking for slightly better interest crediting than fixed annuities and Certificates of Deposit (CDs) can provide. There are all sorts of people out there, just like me, who would be better-served by an indexed annuity. It is just a shame that there is not enough of us out here to educate everyone on the benefits of these products.
Eighth, it is absolutely disingenuous for you to imply that indexed annuities “simultaneously” apply participation rates, caps, and spreads to the same product. NO INDEXED ANNUITY USES ALL THREE OF THESE PRICING LEVERS. I will draw your attention to my email correction to you dated March 2, 2009- “To clarify, caps, participation rates, and spreads are merely three different ways of limiting the potential interest credited on indexed annuities. Each of these pricing levers performs the same function, and most indexed annuities only use one of these methods as a means of limiting the potential indexed interest.” Although I did not explicitly say to you that no product uses all three of these methods of limiting interest, one would think it is obvious from my comment that most indexed annuities use only one of these methods. Did you check your facts on that? That does not appear to be the case.
Ninth, you ask in your piece what “method” insurance companies “commonly use” to calculate the indexed interest on these products. You inform your readers that “Annual reset, point to point, high water mark, and index averaging are the primary methods. WRONG. The most common methods are annual point-to-point, monthly/daily averaging, or monthly point-to-point- all of which are based on a simple (A – B)/B mathematic calculation. Annual reset is not a crediting method- it merely means that the indexed gains are locked-in annually. Furthermore, there is not ONE indexed annuity available today that uses a high water market crediting method. Again, knowing the subject that you are reporting on is incredibly helpful. In lieu of having this knowledge, seeking out a knowledgeable source is a plus.
Tenth, although the Financial Industry Regulatory Authority (FINRA) may say that “One of the most confusing features of an EIA is the method used to calculate the gain in the index,” they are not an authority on that matter. Exactly 95.2% of indexed annuities offered today have crediting methods based on the simple formula of (A – B)/B. In fact, indexed annuities are relatively simple. If someone can understand that they have the ability to deposit their money with an insurance company, defer taxes on the monies until they begin taking income, receive 10% withdrawals of the account value annually without being subject to penalties, and have the ability to pass on the full account value to their beneficiaries upon death- then they can understand nearly every indexed annuity sold today. In addition, despite what FINRA says, it is quite simple to compare every indexed annuity available today against any other indexed annuity at my firm’s website, www.annuityspecs.com. For future reference, I would not use FINRA as a credible source for information on indexed annuities. Not only do they have no regulatory authority on fixed insurance products, but they have a vested interest in indexed annuities being regulated as securities. In the future, if you are looking for a reliable regulatory resource on these products, I encourage you to seek out Susan Voss, the insurance commissioner of the state of Iowa. Not only is she reliable, but 49.93% of indexed annuity sales flow through Iowa-domiciled insurance companies; for that reason she has become an authority on the products.
Eleventh, it is patently false to say that “some issuers won’t credit you with any index-linked interest [if you surrender your annuity before its maturity.” Let me educate you on what a maturity date is- it is the LATEST point at which an annuity owner MUST take income from the annuity. Most indexed annuity owners have the luxury of withdrawing funds from their annuity as early as the first year. In turn, most annuity owners are not FORCED to take their money out of their annuity until past age 100. This is to their benefit. In addition, there is only one indexed annuity available today that recaptures the indexed interest on the contract, in the event that the client surrenders without annuitization; that product isn’t even one of the top-selling products in this market.
Twelfth, of course “some insurers dislike the products!” Companies like New York Life, which do not sell indexed annuities, are consistently losing sales to them. This is like saying that McDonalds stockholders don’t like the food at Burger King. It really looks like you are trying to create a story here, Leslie.
Thirteenth, although insurers can “reduce participation rates, impose stiffer caps, and widen spreads” on indexed annuities after product purchase, they can do it no earlier than the second year. This is NO DIFFERENT than how an insurance company can reduce the rates on a fixed annuity, or increase the mortality and expense charges on a variable annuity. Insurance companies must price these products appropriately, and that means building-in the ability to reduce rates, should the volatility of the markets require it. However, just because the insurance company has the ability to change these rates, does not mean that they DO. In addition, Mr. Hamlin’s suggestion that insurance companies can “back to the 50-yard line when they are about to score a touchdown” is misleading. The insurance company can never adjust these rates in the middle of the crediting term; they must wait until the policy anniversary to do so, and they must inform the annuity owner of their actions.
Fourteenth, I am constantly amused that reporters like you continue to site the fact that indexed annuity crediting calculations exclude dividends as a weakness of the product. In fact, a little education about the basic concept of an indexed annuity would go a long way with this concept.
1. An indexed annuity is an insurance product, not an investment.
2. The annuity owner is never directly invested in stocks, or a stock index, when they purchase an indexed annuity.
3. The insurance company holds the money that backs their indexed annuities in their general accounts, not a separate pass-though account (like a variable annuity).
4. Because the client is never directly invested in the index, they cannot gain from the dividends on the index.
5. The insurance company’s general account assets cannot gain from the dividends on the index for the same reason.
Hope that is helpful to you. Indexed annuities are not intended to compete with securities or the index itself, Leslie. These are “safe money products” which provide a preservation of principal and a guarantee. They are intended to be compared against other safe money instruments such as fixed annuities and CDs. Indexed annuities are only intended to provide 1% – 2% greater interest crediting than these traditional fixed rate products. Although some years an IA may receive double-digit gains, others it will receive zero. Over the life of the contract, the index annuity should outpace today’s fixed annuity rates by 1% – 2%. To compare this product to any equity investment is ignorant.
Fifteenth, neither you nor Scott Stolz understand the minimum guarantees on indexed annuities. The Minimum Guaranteed Surrender Value (MGSV) on indexed annuities is not appropriately compared to the guaranteed annual return of a fixed annuity or CD. An indexed annuity MGSV provides a guaranteed minimum value, in the event the client cash surrender the contract or if the index does not perform favorably over the duration of the annuity contract. A fixed annuity guarantee, by contrast, credits a minimum amount of interest every single year. A guarantee this rich is costly for an insurance company to purchase. Insurance companies offering indexed annuities must be able to afford the index linked interest on the contract, in addition to the guarantee. For that reason, the minimum guarantees on indexed annuities are slightly lower than those provided on fixed annuities. By contrast, indexed annuities provide slightly higher interest crediting potential than fixed annuities. In fact, the average indexed annuity would receive a return of premiums paid, plus nearly 18% interest at the end of the contract. Millions of Americans today would likely agree with Mark Twain’s famous quote, “I am more concerned with the return OF my money than the return ON my money.” Having a guaranteed return of 118% would be the icing on the cake for these folks!
Sixteenth, I can see that you’ve been reading the data I send you, but you are twisting it. I reported that the average street level commission for indexed annuities for the second quarter is 6.46%. This commission is paid a single time, and yet the agent is expected to service the contract for life. Compare this to the generous, consistent commissions that are paid to brokers selling mutual funds, and I think you’ll agree that indexed annuity commissions are quite reasonable. So, technically, you are correct that “typical commission” on these products falls in the 6% – 10% range, as opposed to the 4% – 5% range; you are setting-up your readers. It would have been more genuine of you to range the commissions in groups of 4% – 6% and 7% – 10%. This would appropriately classify the commissions on these products, while not giving the impression that they offer exorbitant commission.
Seventeenth, to dispel your inference that commissions of 6% or below “virtually never exist,” I’ll draw your attention to the fact that 48% of indexed annuities offered today pay a commission of 6% or less. In fact, there are 181 indexed annuities that would fit into Raymond James’ requirements of 7.5% or less commission.
Let’s review your sources for today’s article:
1. FINRA, a self-regulatory organization that has no regulatory authority on indexed annuities. On the other hand, they DO regulate broker dealers, who coincidentally account for 1.9% of indexed annuity sales.
2. New York Life, an insurance company that not only does not sell indexed annuities, but sells products that compete against them.
3. Raymond James, a broker dealer that oversees registered representatives who sell stocks, bonds, mutual funds, and very rarely- indexed annuities.
In the future, I would suggest using sources such as insurance companies that sell indexed annuities, marketing organizations that distribute IA products, and insurance commissioners that regulate these annuities. Even better- contact my firm; we’ve been experts in the indexed annuity market for more than a decade. I think you’d be hard-pressed to find a greater authority in this market.
Today, more than five major insurance companies contacted me about this piece that you published. You are definitely getting the insurance industry’s attention, Leslie. Consider: a newspaper as “reputable” as The Wall Street Journal could serve an entirely new demographic, the insurance market, if they’d only commit to reporting accurate information about this industry. Think about all of the potential subscribers and advertisers that you are alienating with your biased and inaccurate “reporting.” I am sorry to say that I have lost faith in the integrity and reputation of this once-fine financial services publication. Why, when millions of Americans are looking for information on how to protect their money, do you consciously make the decision to mislead them? You do your readers a great disservice, as does The Wall Street Journal.
I can only hope that your readers do not take your “reporting” at face value, or they may make financial decisions that result in their financial demise.
Should you change your mind, and decide that you’d like to report the FACTS about indexed annuities, you can always reach out to my firm. We are more than happy to assist ALL individuals with their understanding of these products.
Thank you.
Sheryl J. Moore
President and CEO
LifeSpecs.com
AnnuitySpecs.com
Advantage Group Associates, Inc.
(515) 262-2623 office
(515) 313-5799 cell
(515) 266-4689 fax
