July 19, 2008
I am an attorney that educates security licensed advisors, CPAs, financial planners, insurance agents, and mortgage planners through upper level educational courses.
I have over 100k advisors who receive my weekly e-newsletters and I have had many comments and concerns e-mailed to me over the last several months on whether FIAs will be regulated as a security.
As an expert in this field, I understand the concerns about how FIAs are sometimes sold. Having said that, FIAs, unlike the vast majority of security based products (which an FIA is not), do not allow a client's money to go backwards due to a market decline.
Are there surrender charges? Sure, but that is the case with variable annuities as well except in most VAs if the market goes backwards 20% - 40% like it did from 2000-2003, the money in a VA or stock portfolio would go down accordingly.
If a client had money in a FIA, that money would not go backwards. The reason being that the money is not invested in securities, it goes into income producing bonds which are very secure and the income from the bonds are used buy options on the SP 500 (typically) to generate the returns in positive years.
The number one reason FIAs should not be regulated by FINRA or the SEC is because they are NOT securities and have no market risk.
Also, the attorney generals in several states who are all up in arms have it wrong. Yes there are FIAs with 15 year surrender charges sold to seniors who are 75 years old and have no business being in such a product.
However, generally speaking the longer the surrender period in the FIA the better the terms for the client. The key is fitting the client to the product. If an advisor ladders several annuities, that's proper advice (5, 7, 10, 15 years surrender charge annuities).
Because there are abuses in all industries with isolated examples, that doesn't mean that a product is a security when it is not or that FIAs need oversight by a body that has its own problems with regulating advisors selling securities where people can lose their money when the market takes a downturn.
I'd much rather see a senior client in a FIA where they can't lose money than have their money actively traded in the stock market where it could go down way more than the surrender charge in only a matter of months (like the 15% downturn in the market so far in 2008).
Hopefully calm and smart minds will come to the conclusion that the insurance industry does need to do a better job to make sure that the right FIAs are sold to the right clients, but to have them treated like a security would be bad for the industry and ultimately bad for consumers
If they are treated as securities the amount of advisors selling them will decrease by 80% and if you don't know, security licensed advisors hardly know anything about the values of FIA and that's too bad as they are a very good fit for many senior clients.