Response: Equity-Indexed Annuities on Roll at Banks, With SEC’s Help
March 4, 2010 by Sheryl J. Moore
ORIGINAL ARTICLE CAN BE FOUND AT: Equity-Indexed Annuities on Roll at Banks, with SEC’s Help
Dear Mr. Garmhausen:
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 am writing to you about an article that was published in American Banker in December of 2009. This article, “Equity-Indexed Annuities on Roll at Banks, with SEC’s Help” had several inaccuracies and misleading statements in it. I am contacting you to draw your attention to this misstatements, so that you can ensure your readers have access to accurate, unbiased reporting on indexed annuities in the future.
First of all, Kenneth Kehrer does specialize in the bank distribution, but he is not an authority on indexed annuities. We are the only third-party market research firm that tracks every indexed annuity product on the market. We track the sales quarterly through our AnnuitySpecs.com’s Indexed Sales & Market Report and we have relationships with the insurance companies and distributors in this business. For that reason, I would encourage you to contact us in the future, should you have questions on indexed annuity products. This will ensure that the data you are receiving is accurate AND unbiased.
Next, I would consider it a great favor if you did not refer to these products as “equity-indexed annuities.” 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.
Sales of indexed annuities in banks actually exceeded $930 million in the third quarter of 2009 and accounted for 12.3% of all indexed annuity sales that quarter. Please see the chart below for bank sales of indexed annuities for the past couple of years.
Although Ken Kehrer cannot tell you the name of a bank that lets their platform staff sell indexed annuities, I could. There are quite a few actually. I reserve that information for my retainer clients, but I assure you that there are platform reps selling these products.
I am a little uncomfortable with the statement “have been selling equity-indexed annuities instead of the variable annuities that they are prohibited from selling.” I understand that Mr. Kehrer made this statement. However, it makes it sound like insurance agents are not allowed to sell variable annuities. In actuality, any insurance agent may sell a variable annuity if she/he takes the proper exams to do so. Selling these products is at the agent’s discretion, not something they are prohibited from doing.
Mr. Kehrer may feel that there are “some terrible products out there” and that some have “extremely long surrender periods and enormous commissions.” However, it is important to note that this is HIS OPINION, it is not based on facts. If you are interested in the facts on this matter:
- 75% of all indexed annuities pay less than 8% street level commission
- The average street level commission for indexed annuities as of 4Q2009 was 6.47%
- 82% of indexed annuities have a surrender charge of ten years or less
What Mr. Kehrer doesn’t mention is that millions of Americans have protected all of the retirement dollars, while the S&P 500 declined nearly 50% over a one-year period from March of 2008 to March of 2009, by simply owning an indexed annuity. Product features may vary based on what the client needs (for example, a bonus in exchange for a longer surrender charge), but not a single indexed annuity purchaser has lost a penny as a result of the market decline. This value proposition is hard to beat, particularly when you couple it with the potential to outpace traditional fixed money instruments by 1% – 2%. Our nation might not be in a retirement crisis today if more seniors were informed about indexed annuities and their benefits.
The perception that indexed annuities are “too complicated” stems from on an old practice of developing new crediting methods and ways of calculating potential indexed gains. This is a practice that is no longer used; in fact there have been no new crediting methods developed in the indexed annuity market for over three years. As far as the indexed interest crediting is concerned, 95.2% of indexed annuities offered today have crediting methods based on the simple formula of (A – B)/B.
These are not complicated products. They are merely fixed annuities with a different way of crediting interest. Truly, complexity is relative to your audience. Some would say that fixed annuities are complex. However, 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. My grandmother didn’t even attend college, and she understands indexed annuities.
I would be remiss if I didn’t bring to your attention that indexed annuities do not have fees. The only fee that may be applied to an indexed annuity would be if the client selects an optional rider on the contracts. Such features have only been available on indexed annuities for less than five years. As far as surrender penalties not being “beneficial to customers,” they actually are. A surrender penalty is merely a promise by the annuitant to not withdraw all of their monies during a stated period (the surrender charge period). This allows the insurance company to invest the annuity payments for a specific duration, earn a competitive rate of interest, and pass on competitive interest rates to the annuitant. This is one of the most largely misunderstood features of an annuity, in fact.
And although these products may “a good fit for only a small sliver of” First Bank’s customers, they are a good fit for a large percentage of the general population. And the products that are being sold in banks today are not new, they have existed for many, many years. In reality, it is not a situation of “carriers hav[ing] responded to pressure from bank broker-dealers and produced products that address those problems.” It is a fact that banks and broker dealers are just starting to ask about these products because they are now having to address client’s needs better in the wake of losing their retirement dollars in stocks and mutual funds.
If you have further questions about these products, or are interested in the facts about indexed annuities in the future, please do not hesitate to contact my firm. Thank you!
Sheryl J. Moore
President and CEO
Advantage Group Associates, Inc.
(515) 262-2623 office
(515) 313-5799 cell
(515) 266-4689 fax