Subject: File No. S7-14-08
From: Kelly O'Brien
Affiliation: CFP

November 20, 2008

The proposed Rule 151A requirement that sales for indexed annuities be sold exclusively through broker-dealers and not through traditional and established agent networks would severely limit, if not polarize, sales of these products which are very much in demand by the American public (25 billion a year for the past 3 years). Prior to seeking regulation of these products, FINRA and the NASAA voiced strident disapproval of the product as a whole as well as its specific benefits and features (see FINRA and NASAA Alert on Indexed Annuities). The NASAA even filed a report with the SEC that goes into detailed, yet fundamentally flawed, analysis of their perceived disadvantages and harmful effects of the indexed annuity (NAFA has since published a Study repudiating the analysis). There is no evidence that the same people who have voiced disapproval of these products and under 151A would the exclusive distributor, will now offer them to their clients. Is it not far more likely that consumers wont be given a fixed annuity as a savings alternative?
The notion that a securities license puts the seller in a better or more informed position is patently false. A review of this authors Series 6 course material (Series 6 Dearborn license exam manual 24th edition) has exactly TWO pages on annuities describing the two types of annuities as fixed and variable. The Series 63 course material has no mention of annuities whatsoever (63 Dearborn student notebook 20th edition). Furthermore, the tests themselves only mentioned fixed annuities in a few multiple choice questions of whether they were securities or not. So in the end all of the broker-dealers knowledge and expertise to sell fixed indexed annuities will come, as it does today, from the insurance licensing exam, state and carrier indexed annuity certification programs, and ongoing continuing education requirements. Given this information, what evidence is there that a representative of a broker dealer is better trained to sell fixed annuities to the American public? The answer is none, and in fact, the licensed insurance agent has far more training in this product line.
So who will offer indexed annuities to the American public? Of the 184 billion of annuities sold in 2007, 50% of it was sold by broker dealers and wirehouses. A staggering 93% of their sales were variable annuities and about 3% were indexed annuities. The independent insurance agent sells 23% of the total and splits their sales between variable, declared rate and indexed at 26%, 17% and 51% respectively. Given the lop-sided variable annuity sales by the registered community it is doubtful they will reverse course and offer them to their clients.
In the end, the BIGGEST LOSER will be consumers. Todays retirees have less money in savings, longer life expectancies and greater exposure to market risk than any retirees since World War II. Even before the turmoil, 39 percent of retirees said they expected to outlive their savings, up from 29 percent in 2007, according to a survey by the Employee Benefit Research Institute. Fixed annuities, including indexed annuities, can guarantee a stream of income that you cannot outlive and you may make the decision to take that income at any time during your lifetime, but should you find you do not need it, you are not required to take it. Declared and indexed rated have traditionally been purchased for the insurance protection, guarantees and tax deferral but today more than in any other market decline , the protection from market downturns will be what motivates consumers. We are already seeing indexed annuity sales rising in the first half of 2008 about 5.5% and variable sales declining by more than 11%. During this rough and tumble market ride, many more individuals are considering fixed annuities for the first time and existing annuity policyholders are putting more of their retirement savings into annuities. Being the biggest loser may be good on television, but not when it comes to retirement savings.