October 29, 2008
Fixed Indexed Annuities are exactly as the name implies - "FIXED" insurance products and not equity products. The SEC should abandon attempts to make these fixed insurance products into equities that fall under their rule. It is absurd to imagine that someone could interpret that a product which guarantees principal plus a minimum interest rate could be confused with an equity product which has no guarantees and looks a lot like it belongs in Las Vegas.
With the current market situation, it is obvious that the SEC should focus more regulatory attention to their own broker/dealer members, who for whatever reason have convinced so many people to invest in risky products. After 36 years in the insurance business, which were mostly spent dealing with retirees, I have concluded that the vast majority of seniors have absolutely no understanding of their variable annuities and other investments sold by "brokers". The only thing that they believe is that if you are a "broker", you must know what you are doing.
It should be obvious to anyone with reasonable sense, that no one, not even the most astute "broker" has any idea of the future course of the market and the subsequent possible peril that they place their clients in. If you give a senior a risk tolerance test that is standard procedure in all market transactions, you are miscalculating the actual risk that an individual is willing to take. However, if you ask a simple question - "How much, in dollars, are you able to lose without any effect on your current standard of living?" - you get an entirely different answer. Most seniors aren't comfortable with losing anything, therefore are not risk takers.
They like the possibility of upside potential, but are not comfortable with the down side. This is why FIXED insurance products have been popular vehicles for retirees and other risk averse individuals. The idea that these are not suitable for seniors or retirees is just plain BS. For the SEC to infer that these are too complex to understand, they need to take a second look at variable products. Most clients that I have talked with over the past 36 years that own variable products are under some false impression that they have true principal guarantees, like a fixed product. It is true that they may have purchased some type of rider to enhance the product,like a death benefit or income rider, but I have yet to see any variable product that absolutely guarantees no downside risk to principal and previous gains if the market tanks, just as it has recently done.
If you want to talk about complexity and the difficulty of understanding a product, just try reading through a variable annuity prospectus, which is the size of a small phone book - NO client ever reads these and I doubt that most "brokers" could not explain them to a client.
The other thing that the SEC lacks is the apparent ability to police their "brokers", by imposing penalties if a client files a complaint. You generally have no recourse from the SEC, except to file a lawsuit against a "broker". How will this be of any value to a client that purchases a fixed annuity under SEC oversight? At least now, a client can file a formal complaint to their state insurance department and get some type of immediate response. Making a fixed indexed annuity into an equity product would also remove a layer of protection for all consumers, which is found in the state guaranty funds. Only fixed products are protected, not anything sold by prospectus.
I think that all "brokers" should have to give a disclosure to their potential clients which states: "Warning - I do not know what might happen with the market and whatever I say has absolutely no relevance in fact, since I am only speculating. I represent my broker/dealer and sell what they are marketing at any given point. I may or may not have any formal education, including a high school or college diploma and to get my license, I had to pass a test". This might give clients a more honest view of their trusted "broker".
I am proud to say that no client that I have ever sold a fixed annuity to has never called me with concerns that their money has been lost in a market downturn. In fact, I have gotten a number of calls from clients thanking me for putting their hard earned retirement money in a safe place.
All in all, the insurance departments in each state, have done an excellent job in policing their agents. It is a well known fact that statistically speaking, very few complaints are ever filed regarding a fixed annuity, however the SEC makes it a point of concern, even though they are unwilling to disclose how many complaints come in regarding variable annuities and "brokers". This would be an important statistic to know, to get an accurate view on who needs more regulating and policing.
It is an absolute shame that so many retirees, who depend on their 401(k)'s and other retirement funds have lost so much in the recent stock market fiasco. They may never have the chance to make the losses back. If they had put their money in a safe place - i.e: FIXED annuity, they would not be suffering any losses because of the market conditions and would be positioned to make some nice gains if and when the stock market rallies.
Please bear in mind that all of the recent "exotic" investment schemes, regarding credit default swaps and sale of bonds that included sub-prime mortgages came under SEC oversight. If they were doing their job correctly, maybe much of this could have been avoided. I don't see how turning over a major portion of an unrelated industry to them would be of any value to consumers. Maybe this hostile takeover is all about the money involved.