The sale of Equity-Indexed Annuities has increased 45% the first 6 months of this year. I'm concerned that the vast majority of those sales are unsuitable for the investors buying them. Oversight by the Securities and Exchange Commission (SEC) and the National Association of Securities Dealers (NASD) is desperately needed to protect retirees from being taken to the cleaners by agents hungry for the large commission. Read on to find out how this oversight will benefit you.
For almost 2 years now, I've been warning people against buying Equity-Indexed Annuities. Hopefully, my articles have caused agents all across the country to lose sales. That's why I am regularly attacked and berated by agents. When I started, I was a 'lone voice in the wilderness'. Now, the SEC and the NASD are interested in the situation. The national media are covering the story more regularly. The chorus of voices calling for change is growing. For example, The Wall Street Journal had an article on October 15th that echoed my complaints.
Greater regulation and oversight of these products is needed because, even though they are technically an insurance product, they are being sold as an investment. Anyone looking at their sales literature can plainly see that. With promises of market gains and the 'guarantee' that you won't suffer any losses, this investment is promoted as the answer to all your concerns. Investors are buying it as an investment, not insurance. Therefore, they should be regulated as investments and not as insurance.
Investors will benefit if Equity-Indexed Annuities are classified as an investment. It will reduce, but not eliminate, the potential for abuse. Here's why.
First, being classified as an investment will result in better disclosure of the risks involved with this product. Equity-Indexed Annuities are complex products. Many of the agents selling them don't even understand their intricacies. Consumers are not adequately warned of the dangers they face in these products. Most think they can't lose money in this investment and that's simply not true.
For instance, many of those purchasing one of the most popular Equity-Indexed Annuities fail to realize that if they pull their money out of the contract when the contract matures that they won't receive the index-related returns they thought they would. In fact, those wanting a lump sum from this specific product after 10 years would be GUARANTEED of making a total return of about 1.5% for the entire 10 year period. Few would ever buy this investment if they clearly understood that.
Second, those selling investments are required to make sure that the investment they sell is suitable for the person they're selling it to. When a commission-based investment is sold, it is reviewed by compliance officers to verify suitability. Compliance officers closely scrutinize investment sales because it's their job to protect their firm from lawsuits and regulatory fines. And they know that their firms may be audited by the SEC.
No compliance officer would approve the sale of an Equity-Indexed Annuity for 100% of a person's investable assets--but I see those recommendations all the time. No compliance officer would approve of a transaction where the investor pays a large penalty on one annuity contract to transfer the money into an Equity-Indexed Annuity. This has become such a problem, though, that the NASD has issued warnings about it.
Third, the high commissions equity-indexed annuities offer create a huge conflict of interest for the advisor. If you were an advisor and had the choice of making 2% or 15% on an account, which would you choose? Is it any wonder equity-indexed annuities have become so popular?
The Wall Street Journal article arrives at the same conclusion that I have--older investors should avoid equity-indexed annuities. And yet, who are these agents going after the most? Older investors, of course, because they're the ones with the most assets.
Don't be surprised if in the not-too-distant future, new regulations emerge to reign in the wild-west world of equity-indexed annuities. Until that day arrives, don't fall for the equity-indexed annuity sales-pitch. There are much better ways to earn a decent market return with low risk, and you don't have to give up control of your money to do it.
After a chorus of complaints, the National Association of Securities Dealers (NASD) and the Securities and Exchange Commission (SEC) are finally taking notice. In a recent securities conference in Chicago, NASD officials pointedly warned brokerage firms that they are opening themselves up to civil liability where equity-indexed annuities are concerned.
The NASD also clearly asserted its authority to oversee the suitability of transactions involving equity-indexed annuities. "Whenever unsuitable recommendations are made, we have jurisdiction", said Jim Shorris of the NASD.
This is good news for investors and bad news for the charlatans that have been using this product to milk seniors out of thousands and thousands of dollars. Now, those investors can turn to the NASD for help. The actions of the NASD also increase the potential success of civil lawsuits brought by investors.
It's not just the NASD that is taking notice. Recently, I was invited by the Financial Planning Association to participate in a conference call with several SEC officials. The SEC had looked into equity-indexed annuities several years ago but failed to take action. Let's hope that this time it will be different.
You might not think that NASD or SEC involvement is all that revolutionary, but it is. Let me explain. Brokers who are licensed to sell investments are regulated at the Federal level. The NASD and SEC police their actions. Equity Indexed Annuities, though, are not regulated at the federal level, but by each state's Insurance Commissioner. Even though Equity Indexed Annuities are technically an insurance product, they are being marketed as an investment. But all an agent has to do to be able to sell them is sit through a five-day course and pass a simple test on health and life insurance.
It used to be that Equity-Indexed Annuities were mainly sold by independent insurance agents. Now, they are being sold by brokers who work for the larger brokerage firms. The high commissions these products pay are simply too enticing. Worse, these brokers aren't selling them under the umbrella of their firm. They are selling them as what is termed an 'outside business activity'.
That means that even though you are talking to a person that works for a big brokerage house and that person is recommending you sell your variable annuity, pay a penalty and move the money into an equity-indexed annuity, the firm is not policing that transaction. Every other trade done by the broker must meet strict compliance and regulatory standards. The sales of equity-indexed annuities do not.
If an advisor were to place 100% of a client's investable assets into a variable annuity or a single stock or mutual fund, they would likely face fines and possible revocation of their license. At the very least, they would be opening up themselves and their firm to potential lawsuits. Yet, I often hear of advisors telling a client that they should put 100% of their money into Equity Indexed Annuities.
Under federal regulation, an advisor can't recommend a client pay a 7% penalty to get out of one annuity and move then move that money into another high commission product. That's just like a stockbroker getting you to constantly buy and sell stocks so they can earn a commission-it's called churning. Yet, I see advisors using the 'bonus' offered by some Equity Indexed Annuities to do just that.
Now that the NASD has clearly stated that these advisors can no longer sell equity indexed annuities outside of their firm's regulatory umbrella, hopefully some of these unethical sales practices will be put to a stop. But investors need to beware! The high commissions these products offer, sometimes as high as 13%, are just too tempting for many advisors to ignore. Don't expect them to change their ways overnight.
The increased scrutiny of equity-indexed annuities can only be good for the investor. Carefully research this and any other investment before you buy. Otherwise, it might be an investment you quickly regret.
Jeffrey Voudrie has sinced written about articles on various topics from Financial Planning, Investments and Health Insurance. Nationally-syndicated financial columnist and Certified Financial Planner Jeffrey Voudrie provides personal, in-depth money management services and advice to select private clients throughout the USA. He will answer your financial question FREE at. Jeffrey Voudrie's top article generates over 165000 views. to your Favourites.