NAFA Response: Beware of the Equity Indexed Annuity blog – Could it be merely a Siren Song?
June 18, 2014 by NAFA President
NAFA Response: Beware of the Equity Indexed Annuity blog – Could it be merely a Siren Song?
NAFA Response to Zamansky LLC Posted: May 07, 2014
As an organization exclusively dedicated to promoting the awareness and understanding of fixed annuities, NAFA, the National Association for Fixed Annuities, is compelled to share its concerns regarding the way your recent article both inaccurately explains fixed indexed annuities and makes false statements regarding fees.
Zamansky: Brokers have been pitching their clients who have been seeking yield, “indexed annuities”, a confusing product which really doesn’t fit the clients’ needs.
NAFA: In our world of fixed annuities, fixed indexed annuities in particular, we are bound by a very important consumer protection feature called the Suitability Standard which requires that BEFORE you make any recommendation you review with each and every client a long list of over a dozen client-specific pieces of information, including: financial objectives, retirement goals, financial timelines and risk tolerance, just to name a few. It is interesting that a law firm who has not reviewed each individual’s needs and therefore does not know what they are, can make the broad and unsubstantiated claim that “indexed annuities don’t fit clients’ needs.” Certainly, they do fit some clients’ needs. Sellers of fixed indexed annuities are prohibited from making ANY recommendation to purchase UNTIL they do a complete suitability review of the individual’s needs and situation. And then each insurer must review A SECOND TIME the same information to double check the recommendation before they can issue an annuity contract.
Zamansky: Indexed annuities, which appear to simulate the returns of stocks, have come under the scrutiny of FINRA according to a report over the weekend by industry newspaper InvestmentNews. FINRA is looking for red flags such as the cost to clients, as high as 6-8% and whether these complicated fees were adequately disclosed by the broker to clients, according to reporters Bruce Kelly and Darla Mercado.
NAFA: Indexed annuities DO NOT appear to simulate the returns of stocks. In fact they DO NOT simulate the returns of stocks. They simply and transparently calculate the amount of interest that is credited, based on the positive performance of a market index. When the stock market loses, the fixed indexed annuity owner DOESN’T. The indexed annuity owner does not participate directly in the market index and does not receive all of the gains of the market index. That is simply a tradeoff, as the indexed annuity promises that you will not incur any of the LOSSES of the market indexed; this allows the purchaser to turn their deferred indexed annuity into a series of payments they cannot outlive, guaranteed and insured. Also, it is unclear where you came up with costs of 6-8%. It was not mentioned in the article you cite nor does FINRA state it in their announcement. MOST IMPORTANTLY, indexed annuities do not have fees that the client must pay unless they add on a rider for an additional, optional benefit; notably, there is no rider available today that is anywhere near 6% in cost.
Zamansky: Indeed, stock brokers are becoming more of a force in the world of equity indexed annuities, which have typically been sold by insurance agents.
NAFA: Wrong – indexed annuities can ONLY be sold by insurance agents. You must hold an insurance license to sell indexed annuities. This has been always true and is true of any broker selling fixed annuities. You can also hold a broker’s license or be an investment advisor, but you must be a licensed insurance agent to sell indexed annuities. And according to LIMRA, the brokers selling fixed indexed annuities are not just “stock brokers” but brokers who also sell mutual funds, variable annuities and set-rate fixed annuities or immediate annuities.
Zamansky: One positive note regarding this trend is that brokers are more highly regulated than insurance agents. Those agents have no central self-governing and regulatory organization like FINRA to watch over the hundreds of thousands of insurance agents currently pumping out expensive and confusing equity indexed annuities. Instead, they are regulated solely by individual states.
NAFA: If brokers are more highly regulated, why then does FINRA feel the need to step-up their regulation and focus? Is it because almost 35,000 complaints were lodged in 2012 (latest statistic available) against sellers of securities versus only 57 in 2013 for fixed indexed annuities? This statistic is despite the fact that over 335 billion were sold since they were introduced almost 20 years ago. Because individuals who buy fixed annuities can call their own state insurance department (who are charged to protect consumers and aggressively oversee agent sales practices, disclosure, suitability, compliance, etc.) must work with the consumer to directly resolve the issue without the consumer having to hire a lawyer for arbitration as FINRA would require, your siren call of this blog may not bear fruit. ONLY FIXED ANNUITIES require:
- State laws and regulations that require insurance companies to review the sale of each and every fixed annuity before a contract is issued to determine the suitability of the recommendation based on an individual’s financial situation and retirement goals.
- A “free look” period so that the purchaser can be certain they want to proceed with the purchase.
- Product-specific training for each annuity salesperson before making a recommendation.
Also note, the term “equity” is no longer used in conjunction with indexed annuities. After the first few indexed annuities were introduced (almost 20 years ago), other market indices were quickly added, rendering “equity” archaic and inaccurate. The NAIC Annuity Buyer’s Guides, marketing materials, insurance forms, disclosures and annuity contracts have all removed the term to eliminate consumer confusion and we encourage you to do the same. None of the above is true for salespeople who sell securities. So let’s turn off the sirens, and help people understand – accurately and factually, without prejudice or the desire to drum up business – the benefits and limitations of fixed indexed annuities. Perhaps then, Americans planning for retirement can make informed decisions that benefit their financial needs.
Sincerely,
Kim O’Brien
President & CEO
NAFA
