November 13, 2008
I support SEC oversight of Equity Index Annuities.
I have been a licensed insurance agent and licensed securities rep since 1991 and I have seen many cases of abusive sales practices in regards to Equity Index Annuities.
A typical sales pitch for an EIA goes something like this:
“If the market goes up…… you get 70% of the return, if it goes down …… you can’t lose”
However, the agents neglect to tell the client that there are the following problems:
1) The participation rate can change after the first year at the discretion of the insurance carrier
2) There is a long surrender period and they can’t get their money back without substantial penalties
3) The participation rate is based on the index minus the dividends. For example, most EIAs use the S&P 500 which excludes dividends. (Note: Not the S&P500 total return)
4) There are different calculation methods including point-to-point, caps, etc.
If the consumer understood all of the fine print, I can’t imagine why anyone would do one.
In my opinion, an EIA is simply a wealth transfer vehicle that transfers wealth from consumers to the insurance company and the agent.
I have also found that many insurance agents tell their clients that they can provide market based returns. These agents are not licensed to sell mutual funds or variable annuities but are promoting themselves as full service financial advisers because they have the ability to do EIAs.
Finally, these EIAs offer enormous commissions that promote a conflict of interest in our industry.
I recently spoke with an adviser that had a client inherit $1,000,000 when her husband died. She said that she wanted to be very conservative with that money. A money market account or CDs would pay no commissions. A fixed annuity typically pays 2-4% commission. However, by recommending an EIA, the agent was able to receive a $100,000 commission. Although it was not in the best interest of the client, the huge commission created a huge incentive to recommend an EIA.
Please continue to regulate this very shady area of the financial services industry.
Gregory J. Hinkson, CFP®
CERTIFIED FINANCIAL PLANNER™, professional
Hinkson Financial Services