August 11, 2008
I support this legislation because most often EIAs are sold to unsavvy investors who end up with a confusing product that pays the selling agent handsomely. Investors do not understand how these products work and they are not offered alternative investment choices because many of the sellers do not have securities licenses.
"You can't lose money" is a particularly disturbing statement. The actual return of an investment can be measured by comparing the amount invested with the amount returned. Not just a number on a statement. For example, if an investor puts in 100,000 and a year later the purported value of the annuity is 115,000 but the surrender value is 85,000, the real return to the investor is calculated using the amount the client would receive if he liquidated the contract. In this example, the client has a loss of 15%- certainly not a gain of 15%. Yet, largely because they can currently get away with it, an insurance salesman can highlight the annuitization value and brush off the surrender value.
"Participate with market gains but not losses" is another bothersome statement the insurance salesmen employ. Does the investor truly capture market gains? Go ahead and try to figure out how the return is calculated based on the contract verbage (don't bother reviewing the glossy brochures showing the gray-haired couple walking on the beach). It's a math maze. Never mind the fact dividends are not included when determing the market percentage change. The client gets a percentage of the market change and it is typically capped. Given that the market atypicapply appreciates 8-12 percent a year, but more typically does exceedingly better or worse, the cap reduces the clients opportunity to fully participate with the market. And, with some EIAs the caps can be changed annually to further manipulate participation.
In the end, investors have no out once they invest and the insurance salesman gets his 7-10% cut. The investor has little option but to draw out the balance at a rate of 10% a year or pay hefty surrender charges.
I believe the more restrictions placed on the sale of EIAs the better. I also believe that investors should have a forum to voice their complaints, perhaps before an arbitrator, because as the system is structured today, the insurance salesman is not being held accountable for his recommendations. The investors need the SEC to take a stand for them.