Response: When comparing investments, put performances in context
April 2, 2010 by Sheryl J. Moore
ORIGINAL ARTICLE CAN BE FOUND AT: When comparing investments, put performances in context
As you well know, 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.
For the second occasion in the past 30 days, I am in the position of having to correct you on inaccurate and misleading statements you have made in your articles about indexed annuities (see previous article correction attached). For that reason, I am copying the editorial staff at the Dallas Morning News and the Texas Statemen. I think it is very important that the media outlets which host you as an “expert” on financial services products understand how grossly inaccurate your editorials are.
Yesterday I had the occasion to read your most recent article “When comparing investments, put performances in context.” I wanted to bring to your attention the mistakes that were made in this piece, which was published by the Dallas Morning News. I do this in the hopes that you do not continue to make the same mistakes in future pieces that you author. I am certain that you must be quite embarrassed about the number of inaccuracies in these pieces, and I want to help you avoid such awkwardness in the future.
First, I want to stop you dead in your tracks before you make comparisons against indexed annuities and investments. As you should well know, indexed annuities are a “safe money place,” which protect the purchaser’s original payment. These products should be compared against other safe money places such as certificates of deposit (CDs) or fixed annuities. They are regulated by the 50 state insurance commissioners of the United States. Products like stocks, bonds, mutual funds, and variable annuities are “risk money places,” where the client is subjected to both the highs and the lows of the market. These products are regulated by the Securities and Exchange Commission (SEC) because they are investments. It is inappropriate to compare any safe money place, such as an indexed annuity, to risk money places and it is most certainly not appropriate to compare safe money places to the market index itself. Indexed annuities are not intended to perform comparably to stocks, bonds, or the S&P 500 because they provide a minimum guarantee where investments do not. Indexed annuities are priced to return about 1% – 2% greater interest than traditional fixed annuities are crediting. In exchange for this greater potential, the indexed annuity has a slightly lesser minimum guarantee. So, if fixed annuities are earning 5% today, indexed annuities sold today should earn 6% – 7% over the life of the contract. Some years, the indexed annuity may return a double-digit gain and other years it may return zero interest. However, what is most likely to happen is something in between. All indexed interest on these annuities is limited through the use of a cap, participation rate, or spread. Were the indexed interest NOT limited, the insurer could not afford to offer a minimum guarantee on the product, and THAT is a variable annuity- not an indexed annuity. On the other hand, the client is guaranteed to never receive less than zero interest (a proposition that millions of Americans are wishing they had during the period of 03/08 to 03/09) and will receive a return of no less than 117% worst-case scenario on the average indexed annuity. In fact, every single indexed annuity ever developed has returned at least ZERO to the client in the event of a market decline. This is a value proposition that products such as stocks and bonds cannot offer.
Second, and perhaps most importantly (for the reasons cited above), the risk tolerance of someone purchasing a “safe money product” such as an indexed annuity is not the same as someone who would purchase mutual funds. It is reckless to suggest that someone interested in the benefits of an indexed annuity consider a mutual fund without knowing their specific risk tolerance. Furthermore, a diligent suitability review is necessary before one can advise which product is most suitable for ANY person.
Third, all annuities have surrender charges, if this is what you are referring to as a “restriction” or “limitation.” Everyone who buys retirement income products should be aware of any limitations on liquidity in their contracts- indexed annuities are no different from any other retirement income product in this regard. Yet, you paint indexed annuities as inflexible, illiquid products. In fact, indexed annuities are available with surrender charges as short as three years. Furthermore, indexed annuities are some of the most flexible, liquid products available today. All indexed annuity purchasers are given access to 10% of their annuity’s value, annually, without being subject to surrender penalties (some even allow as much as 20% to be taken annually). In addition, 9 out of 10 indexed annuities provide a waiver of the surrender charges, should the annuitant need access to their money in events such as nursing home confinement, terminal illness, disability, and even unemployment. Couple this with the fact these products pay the full account value to the beneficiary upon death, and I think you would have difficulty implying that these products are illiquid.
If more people understood surrender charges, they would see that they actually benefit from the surrender charge on an annuity. The surrender charge on a fixed, indexed, or variable annuity is a promise by the consumer not to withdraw 100% of their monies prior to the end of the surrender charge period. This allows the insurance company to make an informed decision on which conservative investments to use to make a return on the clients’ premiums (i.e. 7-year grade “A” bonds for a seven-year surrender charge annuity or 10-year grade “A” bonds for a ten-year surrender charge annuity). Investing the consumer’s premium payment in appropriate investments allows the insurance company to be able to pay a competitive interest rate to the consumer on their annuity each year. In turn, it also protects the insurance company from a “run on the money” and allows them to maintain their ratings and financial strength. I personally appreciate the value of the surrender charge on an annuity and if more consumers understood them, they would too.
Fourth, it appears that your selection of funds are heavily biased. You have selected funds that are 3, 4, or 5-star funds based on Morningstar’s rating system. Obviously, anyone can select the best funds in hindsight, Mr. Burns.
Fifth, it is interesting that you discuss “many well-known balanced funds” that “would have done better than” an indexed annuity. However, in the same sentence you admit that the indexed annuity “did better than the average balanced fund over the same period.” Why must you pass your own bias on to your readers? Obviously, the American Equity Investment Life Index-5 indexed annuity performed well when compared to your pet product- why can’t there be a possibility that indexed annuities are a good choice for the consumer?
Sixth, you ignore the risks of the bond fund in your discussion, Mr. Burns. You never have the guaranteed exit price with the bond fund. Furthermore, you fail to point-out that the 10-year period that you were using for your comparison was likely a 10-year bull market period for fixed income investments. So, the bonds likely appreciated in value, thereby enhancing the total return. Based on current expectations for increases in interest rates (due to heavy U.S. Treasury supply), and the fact that corporate spreads are at historical lows, a repeat of those 10-year returns is not very likely. Also, if rates do spike up in the next few years, the 10-year return and total value for the periods ending in 2010 and beyond for the bond funds may decline from those stated while the indexed annuity, at worst, will hold its current value.
I hope that the Dallas Morning News considers clarifying this to their readers both in print and online. I am appalled at your lack of credibility on the things that you write about, Mr. Burns. It also concerns me that you have a blatant disregard for simple fact-checking in regards to your commentary. As both a former Texan and a former subscriber of the Dallas Morning News, I would hope that the editorial staff at DMN reconsiders you as a “expert” source of financial information in the future.
As I have offered previously, should you ever have a need for fact-checking on indexed annuities, I remain ever humbly yours. Thank you.
P.S. Ask us about our new TOTALLY FREE website, www.IndexedAnnuityNerd.com!
Sheryl J. Moore
President and CEO
Advantage Group Associates, Inc.
(515) 262-2623 office
(515) 313-5799 cell
(515) 266-4689 fax