October 24, 2008
As I understand SEC 151A, it appears to be an ill conceived regulation.
When I started in the insurance business in 1989, there were three distinct branches of the financial industry: Securities, Banking, and Insurance. Through deregulation, these have been merged, with knowledge aforethought of the policy makers that they are very different, as well as that they require practitioners with both a different skillset as well as a different mindset. This merging is a significant contributing source of the disastrous financial results we are now experiencing.
Securities are INVESTMENTS, with an opportunity for gain or loss, including loss of principal. Insurance is distinctly different. Insurance is RISK MANAGEMENT, with guarantees against loss of principal. Risk management can also be used to protect against uncertainty issues for rate of return and for protection of gains to date. Most everyone who currently has securities in a 401-k is painfully aware they have no insurance against loss of gains, or even loss of principal.
Annuities (excluding Variable Annuities, which are, indeed, securities) are not investments. They are insurance products that are savings accumulation vehicles which fulfill the role of protection against inflationary losses, and in some cases, a vehicle for net gains after inflation. When annuitized, they provide a contractual stream of payments. Annuities, as savings vehicles, are also given favorable tax treatment.
An "Indexed Annuity", in its various name forms, is an insurance product, where there is a contractual consideration for risk management in addition to the typical features of an annuity. The consumer offers a portion of the upside gain potential in exchange for the insurer to contractually INSURE the consumer against downside loss of principal and, in many cases, against downside loss of accumulated gains. This is as opposite to a security as is possible, which, as stated above, has no such consumer protections. The fact that the contractual mechanism used for determining how gains are calculated is based on an equity index, reflects on the insurers cost of providing the options to provide their end of the consideration, not on any risk exposure to the consumers principal (or accumulated gains).
Registered Representatives are in the business of securities management. Insurance Agents are in the business of risk management. By definition, these roles are at opposite ends of the financial spectrum. A Registered Representative (should) recommend a portfolio of holdings where some of the consumers holdings are likely to offset the losses that may (and in statistical probability, will) occur in some of their other holdings, hopefully (but certainly not guaranteed of) generating a long term growing portfolio. This requires a level of investment aggressiveness that is totally inappropriate to an insurance product. Insurance products (including indexed annuities), in contrast, deal in guarantees.
The paradigm of a Registered Representative, including how they are compensated, is, by its nature, a direct conflict of interest with what an Insurance Agent should be doing. While someone can obviously be both a Registered Representative and an Insurance Agent, it would be incumbent upon such a person to take the respective conflicting roles of each part of the financial spectrum. This is not a wise idea. If anything, returning to the three tier financial model (Securities, Banking, and Insurance) would be materially better policy. Going back to Registered Representatives sell securities but not insurance, Insurance Agents sell insurance but not securities, and a financial professional can be one but not both, was sound policy in the past, and would be equally sound policy for our currently stressed future.
In conclusion, I recommend against reclassifying the various forms of Indexed annuities as securities products.
Thank you for your consideration of my recommendations,
W. F. (Far) Farley
Insurance Agent
Austell, GA
770-675-6500
10/24/2008