August 14, 2008
I have been doing all types of annuities with clients for over 20 years. Though I am also a Registered Rep, I strongly object to the proposed regulation which would classify Equity Indexed Annuities (or fixed indexed annuities) as securities products.
Clearly, variable annuities are securites products. Why? There are direct investment sub-accounts that policyowners must select from. There is a clear possibilty of a gain or LOSS. Recent waivers available from insurance companies have somewhat reduced the risk to prinical or income to owners or beneficiaries, but no one suggests that underlying securities risk has been eliminated.
Equity Indexed Annuities (EIAs)on the other hand are pooled insurance products. The only risk to policyholders is the life insurance company solvency risk. It is NOT the responsibility of the SEC or FINRA to police this solvency risk. It simply resides with the State Insurance Commissioners. There is no downside market risk with Equity Indexed Annuites. I have been doing EIAs since they were invented around 1994. Not one of my 200+ EIA clients has ever lost a penny What broker or agent of mutual funds, stocks, variable annuities can say the same? All of the life insurance company investment mechanics are internal. That is, the life insurance companies invest enough premium in US Government 10 Year bonds to provide the minimum principal and interest guarantees, while they invest the remainder of premiums into futures such as S P 500 Stock Index Futures, which will provide the positive INTEREST crediting guarantees. EIAs are clearly a type of fixed annuities.
EIAs are now in the fourth generation of development. They are somehat more complex now, but they are much more flexible, and, in my view, a much better value to clients than earlier EIA products. Why? There has been much Competition to take a basic insurance produt and financial concept and improve upon it. This product would never have come to market until a robust futures market developed however, as described in the paragraph above, policyholders do not directly invest in the futures or the bonds. Life insurance companies have always invested in US Government Bonds. They took on too much risk in the junk bond era, but state insurance commmissions have done a good job the last 20 years in protecting policyholders from bad life insurance company management. SEC regulation will certainly inhibit the creativity and growth of EIAs. In this same regard, if this regualation is adopted, broker/dealers will quickly place only select insurance companies on their approved list of EIA providers. Broker/dealers will also require minimum production requirements that will put many well qualified insurance agents out of the EIA market.
The SEC and especially FINRA see that EIAs are very attractive retirement assets. They offer safety, no downside market risk, good upside interest crediting potential, and no upfront sales charges or administrative charges. FINRA is simply an industry organization for securities broker/dealers. Dollars were flowing out of stocks, bonds, mutual funds, and variable annuities -- all securities based products -- into EIAs, and FINRA wanted to be sure they got a piece of the pie. They got SUITABILITY religion. Why hadn't there been this same religious fervor during the decade of the dot.coms?
There is also a large measure of inconsistency. Why does the SEC and FINRA want to name EIAs as securities but not mention whatsoever the closely related Universal Life Indexed Life Insurance products that are becoming very popular? Maybe not enough profit for broker/dealers.
Where hsve the big financial scandals occured? Not with the sale of EIAs, which are an EXCELLENT choice for people to put a PORTION of their retirement assets. Built-in, incidentally, into most EIAs are product features that allow tax-advantaged accumulation and flexible payout methods. There are no such options with most securities investments. By the way, the income tax treatment is VERY different. Will there be long-term capital gains or dividends with EIAs? No.
And the SEC and FINRA seem to be so concerned about seniors. I am a senior now myself. I never heard them to be too worried in the past with protecting seniors from volatile stocks, mutual funds, and aggressive variable annuity investment fund sub-accounts. The truth is that seniors do not want MORE protections than anyone else. They don't want to be considered "handicapped" when it comes to making their own financial decisions. No one wants to be defrauded, so the more clear product information out there on securities and annuity products the better. The real danger I see is that if regulators make it too onerous for honest, knowledgeable agents to work with seniors, only dishonest, fraudulent agents will be there to service them.
I have over 200 EIA policy holders. I have always clearly explained that while there are no upfront EIA sales charges or administrative fees, EIAs are long-term retirement assets. I have always disclosed that there are a certain amount of penalty-free withdrawals available, and that there is a clearly listed schedule of surrender charges that will apply for a period up to 10 years when more than the free withdrawal amount is taken out. Seniors at ANY age can understand this. I make sure that no client ever puts all of their retirement assets into an EIA. This is not a SECURITIES issue -- it is a sound financial planning issue. Incidentally, universal life insurnce has surrender charges also. Why are these too not securites products?
Protect us also from overregulation, and in FINRA's case from encroaching insidious self-serving regulation. SEC, make sure the markets we depend upon work smoothly, dependably, fairly, openly, and do not become petrified with too much regulation. Find the bad guys and stop them. But allow agents, suitably licensed and trained, to offer EIAs, the best retirement asset product addition added in the last 40 years, to aging Americans who sorely need all of the financial and retirement asset information they can get.