November 14, 2008

Subject: Equity Index Abuses File No. S7-14-08

Oops, I forgot to spel chk the previous e-mail

File No. S7-14-08

Aloha,

I see the problem as one of excess compensation. If you offer a large enough stick then larceny will likely ensue. This played out in the Limited Partnership tax shelter era and more recently with the advent of the Equity Indexed Annuity.

The parallel that I see is that both the Limited Partnership and the Equity Indexed annuity are simply product shells that were designed with excess commissions and fees. They both have/had the potential to provide the client with real benefits. In addition they are/were both complex animals and as such require more explanation and work on the part of the agent.

Here is my take on the present problem.

A. The insurance company that will go to any lengths to secure long term business and will design a product that none of the creators would ever buy for themselves or their loved ones. It would be interesting to see how many insurance company executives would pay an agent upwards of 15% commission to buy their own product.

B. Compensation arrangements that rival the vacuum cleaner sale. All the money up front to the agent with no incentive to monitor the results in the future. By the time the client trips over a huge surrender charge or realizes that the market interest rates never materialize the agent is nowhere to be found.

C. Any compensation package that pays over 3% or 4% up front is just begging for churning and replacement. Bump that puppy up to 10% or more and you really invite unethical behavior.

One man's opinion.

Mahalo,

F. William McRoberts CFP CDFA EA