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  • Response: Annuities: Equity-Indexed Annuities: Putting Lipstick On A Pig

    December 31, 2009 by Jeffrey Voudrie

    PDF for Setting It Straight with PymntsAnnuity

    ORIGINAL ARTICLE CAN BE FOUND AT: Annuities: Equity-Indexed Annuities: Putting Lipstick On A Pig

     Web administrator,

    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.

    I recently had the occasion to read your blog, “Annuities: Equity-Indexed Annuities: Putting Lipstick On A Pig.” While reading your blog, I noticed an alarming number of inaccuracies and false information. I am reaching out to assist you in light of these errors.

    First, 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.

    Second, indexed annuities are NOT investments. They are insurance products, similar to fixed annuities, term life, universal life and whole life. Stocks, bonds, mutual funds, and variable annuities are investments. Insurance products are regulated by the 50 state insurance commissioners of the United States. Investments are regulated by the Securities and Exchange Commission (SEC). Insurance products do not put the client’s money at risk, they are “safe money products” which preserve principal. Investments, by contrast, can put a client’s money at risk and are therefore appropriately classified as “risk money products.” Investments do not preserve principal. In the future, it would be greatly appreciated if you would make the appropriate distinction between indexed annuities, which are insurance, and investment products.

    You contest that a “financial advisor” receiving compensation from commissions creates a conflict of interest between the advisor and the client. Is this compensation arrangement any different than a car salesperson? A real estate agent? A shoe salesperson? Do people know that these professionals are going to be paid a commission in exchange for the services rendered? YES. Does that mean that the salesperson is going to only look out for their best interests? NO. Sales jobs are built on relationships; the cornerstone of these relationships is repeat business and referrals. So, if the shoe salesperson sells me a crummy pair of shoes (where they received a high commission), what is my likelihood to suggest that salesperson to my friends and neighbors? What is the likelihood that I’ll buy my next pair of shoes from that same person? Not good in either scenario. I think you get the picture. Insurance agents and financial advisors NEED the client loyalty and referrals. Anyone who makes an inappropriate sale is obviously going to lose out on business, not to mention face potential fines, license revocation, and imprisonment.

    The average indexed annuity commission as of 2Q2009 was 6.46%. How many consumers do you think know this information? We BLAST this data out on a quarterly basis, yet the news media outlets continue to publish inaccurate information when it comes to indexed annuity commissions. So, what do you think are the chances of a consumer being able to judge if the commission their agent is receiving is fair, or better than average? The consumer knows that their insurance agent is paid for the sale, and their relationship with the agent is what guides their decisions on which products are most appropriate for them. Disclosure of commissions paid does not change this transaction; it is unwarranted.

    You say that there are “huge incentives designed to motivate an advisor to recommend an [indexed annuity].” I’d be interested to know what incentives you are referring to. The primary motivation for sales in this market is safety of principal and guarantees. I’d venture to say that the incentive you refer to is the ability to protect one’s client’s best interest. Indexed annuities provide a minimum guarantee, a guaranteed protection of principal, and the protection from market losses. Every agent wants to avoid having a discussion with their client on why their retirement fund values are down; indexed annuities protect agents from having to have that conversation.

    It is also inaccurate to allude that indexed annuity commissions are more generous than other products. Consider the fact that products such as mutual funds are paid consistent, generous commissions. An agent selling an annuity is only paid one time, at the point-of-sale. This one-time commission (average 6.46% on indexed annuities) is intended to compensate the agent to service the contract for life. For that reason, it is inappropriate for you to compare the commissions paid on these products to the commissions paid on mutual funds. I’d hardly consider this an unfair arrangement, or any more lucrative than commissions paid on other financial services products.

    You infer that indexed annuities should be federally-regulated, rather than state insurance commissioners. Please provide evidence of the supreme regulation of the Securities and Exchange Commission (SEC). This is the organization that let Bernard Madoff swindle $50 billion from American’s retirement nest eggs. Clear warning signs of Madoff’s fraud began to emerge as much as a decade before he was caught, and yet SEC did nothing. This is the same organization that you would suggest regulate an insurance product? I think you should rethink your inclinations. Indexed annuities are regulated by the 50 state insurance divisions of the United States. These insurance commissioners regulate indexed annuities with rigorous standard non-forfeiture laws, advertising guidelines, suitability regulations, and other rules. The states hold the authority to take sanctions against insurance agents including, but not limited to, license revocation, penalties and fines. An interesting comparison of state in federal regulation exists relative to annuity complaints specifically. If I need to make a complaint on an indexed annuity, the state insurance division has to respond to me within ten days; and I incur no cost in my efforts to resolve the problem. Compare this with the exhaustive complaint process on the securities side; delays, lawyers, and a lot of my money spent. Yes, SEC regulation  is different, but it most definitely is not better!

    You claim that indexed annuities are marketed as investments, despite the fact that they are insurance products. I’ve never heard of these products being marketed in this manner, and I’ve been working in it for more than a decade. I’d be interested to see your evidence of your claim. In an effort to search for any evidence of this claim, I did a quick review of the top three indexed annuity (IA) carriers’ IA consumer sales guides. For example:

    ● With [Company Name] [Product Name], you benefit from a portion of the Indices’ upside performance without the downside risks associated with investing directly in the stock market. Indexed annuity Premiums are not invested directly in the stock market or in individual stocks.

    ● When you buy a fixed index annuity you own an insurance contract- you are not buying shares of any index fund, any stock, or bond investments.

    ● When purchasing an indexed annuity, you own an annuity Contract backed by [Company Name], you are not purchasing shares of stock or indexes.

    I believe it is QUITE clear that these companies promote these products as being insurance, and most definitely NOT an investment. Please refrain from inferring otherwise in the future.

    You say that “all an agent has to do to be able to sell them is site through a five-day course and pass a simple test.” You don’t mention that they must also adhere to strict market conduct regulations, apply rigorous suitability standards to each sales, attend constant continuing education, and go through frequent company and product-specific training. You obviously know little about the topic upon which you are speaking. Please be certain to do your homework in the future, before disseminating such misleading information.

    The reason that sales of “commission-based investment product[s]” such as “mutual funds, stocks, bonds, and variable annuities” are regulated by the Securities and Exchange Commission (SEC) is because they are INVESTMENTS. A client has a risk of losing all of their principal in these products. An indexed annuity is not an investment, it is an insurance product. Indexed annuities do not risk a single dollar of the client’s principal as a result of market losses. NO INDEXED ANNUITY CONSUMER HAS EVER LOST A DOLLAR AS A RESULT OF THE MARKET DOWNTURN. Consumers owning these other products cannot say the same. That is why the insurance commissioners regulate IAs, and not the SEC.

    You inaccurately speculate on the suitability review process of the indexed annuity industry. Every company selling these products has an exhaustive annuity suitability process, and forms that go along with it. Not one of these companies would approve the sale of an indexed annuity if the suitability form disclosed that “100% of a person’s investable assets” were going to be placed in the product. It is patently false for you to allude that such sales exist.

    “Those in Congress” believe AIG’s insurance subsidiaries are responsible for the collapse of the United States economy, while these insurance subsidiaries have been perfectly sound. Their hasty decision to question federal regulation of insurance is based on this false premise.

    Perhaps you should “think twice” before blogging on indexed annuities. If you did, you’d have your clients’ and readers’ best interests at heart. No one appreciates inaccurate information; it reflects poorly on the writer and their credibility.

    Sheryl J. Moore

    President and CEO



    Advantage Group Associates, Inc.

    (515) 262-2623 office

    (515) 313-5799 cell

    (515) 266-4689 fax

    Originally Posted at PaymentsAnnuity.com on September 26, 2009 by Jeffrey Voudrie.

    Categories: Negative Media