July 16, 2008
I started in the financial services business in 1981. I am series 7 and 65 licenced. I also am insuranced licensed and do a goodly share of Fixed Indexed Annuity business.
In the middle 90's when the Fixed Indexed Annuities (FIA's) came available they were deemed an insurance contract. What has changed in that time period with this insurance contract? NOTHING.
FIA's are insurance contracts. They have a guaranteed principal if held to maturity. They have a guaranteed rate of return, even if every year the linked market index goes down. They have the potential to make a higher return by the linking to the market index. But is this really any different to a Fixed Annuity that has a 3% minimum floor for an interest rate when we can currently offer a 5 year 5% rate. If it looks like a duck, quacks like a duck it probably is a duck.
In the SEC proposal it says that "people buy Index Annuities for many of the same reasons they buy Mutual Funds." I sell million of dollars a year of FIA's. Potential clients buy them-first because they can't lose money if they hold the insurance contract to maturity and secondly they want the potential to earn more than other guaranteed financial strategies. If sales people are selling it wrong, to compete against market returns-shame on them not shame on the product.
I know there are sales people who are not marketing these conservative alternatives in the correct manner. But being in the security business for all of these years, I can tell you there are security sales people that are not selling their products in a compliance manner either.
The insurance idustry needs more mandatory continuing education to keep the salesperson informed. Education and training is everything. What I have learned in the last 25 years is that regulation doesn't protect people from making ill choices with their investments. Professional, well informed salespeople who have the prospective client's best interest at heart does.
SEC Chairman Cox said that these financial vehicles were being marketed inappropritely to elderly investors, particularly since the products have longer accumulation periods and can mature after the investor has died. After the investor has died, the FIA's I market gives the benificiary the full ability to cash in with no surrender charge. Am I missing something here?
Also he said they were riskier than a traditional Fixed Annuity. Is he talking about the principal? Because that's guaranteed by the insurance company just like the Fixed Annuity contract. Is he talking about the Minimum Guaranteed Benifit? Because that is exactly the same as a Fixed Indexed Annuity contract. If they are talking about the earnings linked to a market index...in my world of investing, risk is usually associated with risk of loss...of principal, not the risk of gain as in the linking to the market index for potential gains.
Personally it will not affect my clients or me in anyway with the ill advised proposed ruling change with the exception that my Broker Dealer will take a part of my commission which they will rightly deserve because of the compliance overview they will now have. But let me ask you, if you change this product to a security where will this slippery slope stop. How about attacking Fixed Annuities, Life Insurance or let's make Reverse Mortgages securities.
Keep Fixed Indexed Annuities...what they are-an insurance contract regulated by the State Insurance Departments.
PS: I just finished a yearly review with one of my clients today. Year to date the SP 500 Index is down 16%. Their stock portfolio is down 15%. Their other money is in a FIA. In the last 12 months the SP 500 Index was down 17% and their FIA lost nothing. In fact there was a 5% premium bonus, so in reality her account has grown 5% in the last year with no chance for loss if held to maturity. Not a bad deal for someone who wants the guarantees against loss which this insurance contract delivers. Stocks can't, Mutual Funds can't, Variable Annuities can't...why not? because they are securities with chance for principal loss. Use some good ole common sense and keep the Fixed Indexed Annuity what it is...A GUARANTEED INSURANCE CONTRACT