November 17, 2008
Regarding the proposed rule 151A I would like to add my observations:
I have been a licensed securities representative for over 20 years. During this time, I have seen many horrific financial blunders on the part of both advisor and client. In many of these cases, (especially the ones not reported to the firm), losses by the investor were incurred primarily by the investor not being able to ride out declines in his/her account values. Losing sleep over ones portfolio will surely lesson the potential for long term success.
One of the most challenging obstacles to navigate when investing is trying to keep emotion out of the investment decision. Fear and greed have wrecked many investors and advisors. I would almost comment that the appropriate action to take generally, when either of these emotions rule the market, is to go directly opposite of common belief. While waiting for my baggage at the airport carousel in 2000, I overheard two young men in their early twenties discussing a stock each had purchased that day and what each were planning on spending the “profits” on when they sold this stock next week!
Recently when oil hit an all time high last summer, I cannot tell you how many clients called me, wanting to buy oil and energy related investments, expecting the price of oil to assuredly hit $200 a barrel. And is typical, the price of oil has gone exactly opposite of the mass hysteria. Again in technology, real estate gold and other commodities, this trend continues. And unfortunately, when the bottom drops out of the speculative investment, it is the individual that gets injured the most, financially.
If emotion is removed from the investment process, (both greed and fear), I feel that investors would have many more successes and less failures. It is frustrating to see lifetimes of savings evaporate in a short period of time when greed and then fear dictate, involuntarily, investment decisions. It is possibly human nature. I cannot tell you how many of my clients over twenty years have called me, when markets were dropping, frantic but then overwhelmingly relieved when I reassured them their index annuity would lose ground due to market declines.
I am not in favor of proposed rule 151A because of the emotion “of the crowd.” Respectfully commenting, I feel it has been Wall Street and the circumventing of ethics by top executives that have put the economy and the equity markets in turmoil. Is it possible to legislate morals or ethics? The SEC has done a good job over the past half century in protecting investors from the obvious and the discreet schemes of ruthless people. An equity index annuity is not a scheme nor an investment. Beyond the potential for surrender penalties, I have never heard any complaints about their performance.
I have personally experienced utter joy in my profession only a few times in 20 years. And 100% of those experiences were attributed to annuities and their ultimate guarantee against loss of principal, whether from the stock market or law suits or unforeseen emergencies. I have had numerous occasions when a client has passed away during a market decline and saw the look of financial fear on the face of his spouse or her children.
To be able to report to the survivors that Mom or Dad thought ahead and loved them enough to ensure there would be no possibility of loss from family investments, is a wonderful feeling. I have also seen the “other” side too. I was at a funeral in the 1990’s whereby the son of the deceased, hand delivered to his father’s advisor notice of the family suing the broker. What a needless disaster.
There has seemingly been a Chinese wall of sorts between stock brokers and insurance agents forever. They each offer investments or a product that typically the “other” does not. And the client is very aware of this divide between brokers and agents. It is healthy to have two different professionals from different industries helping the client within his/her specialty and expertise. Stock guys need not be insurance agents and vice versa. It is a system that works and could continue to successfully work.
I have dealt with hundreds of clients over 20 years individually and have met, discussed or socialized with literally thousands of investors. I have not once, in all of these interactions, ever heard of an investor or client actually losing one penny in their annuity. I have listened to investors lamenting that they did not earn the alleged return of their neighbor or relative, etc., when the markets were soaring. And I have listened to and accept their apologies and gratitude when they did not lose the majority of their investments, when the markets corrected.
The State’s have done an excellent job of guiding and policing insurance agents in their respective markets. The obviously rare occurrence, whereby an investor lost money in an annuity happens. But in most of these cases, it was due to the client changing their investment time horizon or simply changing their mind as to their asset mix, goals and objectives. The SEC will have no more success in reducing these abnormal occurrences or impetuous investors than do the State insurance boards and commissions.
Insurance agents know their clientele on a much more intimate level than those of stock brokers. I feel that this is because it takes much more time and trust for an individual to tie their money up in an annuity and generally in much larger amounts than a stock or bond transaction. I am licensed both for securities and for insurance products. I can relate to both sides of the rule 151A argument. And I see no reason to change a system of oversight that has worked successfully for 99.5% of the time.
Further, the relationships that the insurance agent generally has with his/her clients are those built on close friendships or other associations. These agents are not employees or salaried advisors but generally independent, small businesses. Adding the cost of excessive or redundant compliance requirements would severely limit the scope of product offering for many agents. Time spent fulfilling new securities requirements would surely negatively impact the revenue of these agents.
The time and cost associated with becoming security licensed is a large commitment and burden on those not already securities licensed. Now is not the appropriate time to negatively impact any industry in America with added scrutiny, cost, and compliance redundancy along with reduced revenues from limiting the product offerings of professional insurance agents. I respectfully request that the SEC allow State Insurance commissions the opportunity to enhance their efforts to control the abuses in their respective states, before irreversible harm is impacted upon an entire industry.
Warmest Regards,
J. Michael Ham