November 17, 2008
As a licensed CPA, I have an adequate understanding of the financial complexities that face todays consumer. To my understanding of common law, the epitome of a security is risk of loss of principal. When I person purchases a security there is a specific risk (market risk) as to the market value of said security after the purchase. Additionally, there is company specific risk as to the ability of the issuer of said security to continue as a going concern and repay funds due, should said security require funds repayment, example convertible debt. The only risk related to an annuity is company specific risk. The sole risk is in the default on the insurance company for loss of principal. Note also I use the term principal as this is not an investment. The investment is conducted by the insurance company not the owner of the annuity. As annuities are issued by licensed insurance companies there is considerably less company specific risk as the state regulator requires reserve amounts far in excess of any SEC requirements. The results in considerably less risk of default of repayment, company specific risk, than in the general stock market. Therefore, there is quantifiably less risk in the purchase of an annuity as compared to a common stock.
A real concern is this is a thinly veiled approach to federalize the regulation of insurance via rule making rather than action on the part of our elected representatives. There have been problems with the sale of annuities in the past. Both the NAIC and state regulators have taken recent action to curb these abuses. My concern is the resulting open door to regulate all cash value insurance, where a policyholder turns over principal for investment by the insurer in the markets, such the SEC go forward on this issue. I am amazed the is no empirical evidence presented that supports the Commissions claim that widespread abuses in selling the product exist. I called my states insurance commissioner to inquire about the actual number of complaints they have received. The number of complaints received is only a fraction of a percent of the number of annuities sold within this state for the period reported. Maybe someone in the securities industry can accurately predict the number of perceived abuses along with accurately timing market highs and lows. After all a guess is a guess, if you dont believe a CPA then ask an actuary.
I currently hold both an insurance license and a securities license. Therefore, the decision has little impact on the operation of my practice. I can tell you I have sold annuities in 2008 and sold no securities. My clients have not lost a thin dime I sleep well knowing my clients are not afraid to open their account statement. Based on what they tell me they have slept well also without market risk. However, my broker- dealer is on my back about FINRA. They tell me because I refused to advise clients to accept market risk, my license appears to be parked which is a FINRA violation. This appears to pressure me abuse my clients best interest even though in another section of their rules I have a fiduciary responsibility to that same client. Maybe we should have a new rule for them? Is there more concern about the health of the broker-dealers and the securities industry than the client? In conclusion an annuity is not a security.