July 30, 2008
AmericanAnnuityAdvocates.com responds to the SECs release of proposed Rule 151A, providing the legal reasons Chairman Cox should lose his court battle, (if it comes to that), along with the real reason this is happening, and what it means to agents and the industry
I am of the opinion, the SEC Chairman will be proven to be unfounded in his desire to grasp FIAs from the insurance industry. It appears he wants to hand FIAs over to what many will site as Wall Street friends, securities marketing firms known as FINRA
Relative to all of this, is HR 5840 06/08, the Insurance Information Act. If it passes, it would establish the Office of Insurance Oversight (OIO) that was outlined in the US Treasury Blue Print for a Modernized Financial Structure. This Federal Oversight would actually be a positive for the sovereignty of the insurance industry, spurring the creation of our own self regulatory organization, working alongside the Treasury. Were this federal body already in place, it would stop FINRAs crusade. Until this federalization of the insurance industry occurs, we will have to fight to keep what is, and should legally remain, ours.
The NAIC has been working on the issue, and the various DOIs have been handling consumer complaints, and if deserving, clients got their money back, plus interest. Interesting, considering that the consumer rarely comes out whole when they complain about the handling of their investments, and find that their only resource for handling an SEC/FINRA complaint is forced arbitration. Thus, the states did protect seniors who complained that they did not understand what they had gotten into. The securities industry is living in glass houses, and throwing stones at an industry that has protected the lives, property, and nest eggs of people for a long, long time. Its all ridiculous, again, greed, imperialism on the part of the Rulers of the Universe, FINRA. Thank you SEC, for giving the NASD that prominent sounding financial title.
Chairman Christopher Cox will encounter intense scrutiny from Iowa Insurance Commissioner Susan Voss and the rest of the insurance industry. This article will deal with the SEC Open Meeting, which addressed the issue of whether or not fixed-indexed annuities should be re-titled as a security. AmericanAnnuityAdvocates.com, along with many others interested in the sovereignty of our industry, is attempting to provide clear commentary in an effort to fight off FINRA.
This is a turf war, and just like political fights, this will be spirited, and reveling. There will be questions, which will be difficult for the Chairman to answer, as the only judicial decision on record, directly contradicts the SEC proposed rule change. Hence the insurance industry has real evidence and facts on its side, and the Chairman does not. SEC Chairman Cox has an obvious bias to a market orientation, which would benefit friends of the same persuasion.
The judge in this high profile case Malone v. Addison Insurance Marketing (2002), in accordance with the Securities Act of 1933, found that EIAs are not securities, based on a determination that they are insurance products that fall within the statutes section 3(a)(8) exemption, and therefore no securities license is required, as these are insurance products regulated by the state insurance commissioner.
This case validates and clarifies that FIAs are insurance products. As a result, the supervision of an insurance regulator was deemed to be appropriate.
Also, SEC Rule 151 makes the status of EIAs/FIAs certain. The safe harbor elements, specifically point to the safety of principal, and a base interest rate. Insurance products are not subject to SEC registration if they meet three "safe harbor" guidelines under Rule 151.
The first guideline is that the product be issued by a corporation subject to the supervision of a state insurance commissioner, which they are, as all index products are issued by companies subject to state insurance regulation and registration.
The second guideline is that the insurance company assumes the investment risk, not the customer. Unlike variable annuities and variable life contracts, which are securities, a fixed-indexed annuity guarantees a minimum annual return and guarantees that once interest is credited, it is locked-in and cannot be lost, even if the stock market index declines.
In addition to the minimum interest rate, an index product may credit additional interest beyond the minimum guarantee. All fixed-indexed annuities may credit additional interest, often talked about as an interest-linked credit above the minimum guarantee.
The third requirement is that the fixed-indexed annuity is not marketed as an investment, and they are not, as each state insurance department approves the product material, brochures, suitability forms etc. Fixed-indexed annuities are not benchmark indexed mutual funds with principal protection, are they? No. Consumers who place their savings in fixed-indexed annuities do not have any direct or indirect ownership of any security or shares in any index fund. They would receive dividends if they did, would they not?
Hence the judge refused to accept the argument by the plaintiff, that the indexed-annuity purchased was actually a variable annuity, a security. The judge found the insurance company contractually guaranteed the plaintiff a minimum guaranteed interest rate, irrespective of the performance of the SP 500 index. The district court also found that the insurance company took the investment risk and not the plaintiff. In regard to the opportunity for annuitization, the court further pointed out that the payments were not dependent on the benchmark SP 500 market performance, that the payments were not variable, but again, had contractual guarantees.
In Malone vs. Addison Insurance Marketing, the judge found that the Insurance Company contractually guaranteed the plaintiff a fixed amount of her premium, plus interest, less withdrawals, and that her assets were not kept in a separate account, which would be the case, if she bought a security. This point regarding separate accounts is important as separate accounts are characteristic of all variable annuity contracts, which are investments, mutual funds called sub-accounts, securities, according to the judge.
The clients attorney argued that her return over and above the minimum guarantee was variable, as it was linked to the performance of the SP 500, a stock market index, and therefore did involve market risk. The plaintiffs attorney failed to convince the judge.
The judge determined that the insurance company was the entity that bared the market risk, not the plaintiff, which is a crucial point in Rule 151 /Safe Harbor. The plaintiff's risk was not that she would lose the value of her initial premium, but only that another opportunity, an alternative investment or savings product, might have been worth more than the indexed annuity she had purchased – might have been.
The NAIC has pro-active consumer protection regulations already in place. The insurance industry is already committed to good market conduct practices which the SEC/FINRA refuses to acknowledge.
Kim Obrien of NAFA states:
NAFA has always agreed with the stated motivation of the proposed rule which is to ensure consumer protection and enforce suitability standards for selling and buying fixed annuities. However, NAFA supports the many state regulators, insurance commissioners and insurance companies who have enacted and are enforcing suitability and disclosure standards, are monitoring product marketing and selling activities in their state, and continue to prosecute fraudulent, misleading or unsuitable practices or sales. NAFA and its member companies, as well as state insurance regulators, are committed to removing individuals and parties who violate the laws and requirements set forth by the laws.
The value of the fixed indexed annuity - now more than ever in these turbulent economic times – is self-evident.
With the uncertainty of todays economic outlook – the mortgage crisis, gas prices, auction-rate securities and stock market instability - selling the guaranteed insurance of fixed annuities could not be more important to your customers, clients, family and friends.
Things really are coming to a head this time. All those wishing to remain insurance agents, and not be part of the gambling and speculation inherent in the share markets, and all insurance companies wishing to retain market share in fixed indexed annuities, and remain a viable company, should hail Iowa Insurance Commissioner Susan Voss as their champion for the cause.
We are singling out Iowa Insurance Commissioner Susan Voss, the chief insurance regulator in a state with a large indexed annuity industry, for expressing strong disappointment with the SEC proposal, for naming names, and speaking her mind. Below is her response to Chairman Coxs Open Meeting Speech in June.
At no time have any of the securities commissioners engaged insurance regulators in the nature of our regulation, Voss says in a statement. Letters have been sent to Commissioner Cox, and Im hopeful for a meeting.
State insurance regulators have passed intensive suitability standards and continuing education requirements. We take very seriously our consumer protection role, including issuing bulletins restricting use of senior designations that are without merit, Voss says. We monitor our companies very closely. In addition, an insurer backs an indexed annuity with its general fund, and the contract is not a security. Of course there can be unsuitable sales with any product, including mutual funds, life insurance, variable annuities and stock purchases, Voss says. It would appear that those criticizing the most are those that dont regulate indexed annuities or dont sell them. We should all be working to protect consumers in regard to the products we regulate, not spending time arguing over who regulates what.
Since FINRA (previously the NASD) cannot apply the old adage if you cant beat them join them (in terms of producing a product that actually works like a FIA), what can they do to stop what is sure to become an increasingly popular product of the consumer?
Apparently, SEC Chairman Christopher Cox believes utilizing the issue of the abusive sales practices of a few bad apples, as good enough reason to consider making FIAs a security. Again, per Susan Voss, and as any reasonable persons understands, unsuitable sales practices can occur with the presentation of mutual funds, stock purchases, and variable annuities.
If the SEC simply decides they are going to try to hand over FIAs to FINRA, and then actually wins the ensuing court battle with the insurance industry, this would entail the handing over of a market created by the insurance industry, to the securities industry.
To logical people, the FIA can never be deemed a security in a financial dictionary, according to the 1933 Securities Act, 3(a) 8, and Rule 151, (where SEC Rule 151 makes the status of EIAs/FIAs certain). There is no risk of loss to the clients principal, and the clients principal is guaranteed to grow at a minimum interest rate over the term, and all credited interest gains are locked-in. Securities, unless sold, do not lock-in gains, do not protect your principal, and may or may not help you keep pace with inflation, as the securities exam study books imply they do, but thats another piece of misinformation, another matter for another time.
Again, Commissioner Voss points out that At no time have any of the securities commissioners engaged insurance regulators in the nature of our regulation (if the SEC were to examine the steps taken by the insurance regulators they would find appropriate, meaningful suitability requirements, and forms, and continuing education for agents). When Chairman Cox and Susan Voss meet, I doubt Mr. Cox will be able to stand up to her cross examination, in that he may not be able to present a logical answer to her questions, as the oversight he talks about in sound bites, is already in place via the NAIC consumer oriented safeguards. The Chairman appears, perhaps embarrassingly, not to be aware that these consumer safeguards are already in place. In this respect, Commissioner Voss may not receive any real answers.
Christopher Cox appears willing to apply nonsensical new rules in order to deem what is clearly an insurance product, a savings product, with guaranteed interest on principal returned to the client, even in the worst of times, a security for supervisory reasons.
Consider the new rule change:
Scope of Proposed Rule 151A. Proposed rule 151A would exclude from the coverage of Section 3(a)(8) in the 1933 Securities Act, fixed indexed annuity contracts regulated as annuities under state insurance law, if those annuities have the following characteristics:
(1) the amounts payable by the insurer under the contract are calculated in whole or in part by reference to the performance of a security, including a group or index of securities, and
(2) the amounts payable by the insurer under the contract are more likely than not to exceed the amounts guaranteed under the contract (more-likely-than-not test).
In regards to (2)What?
Who came up with this nonsense, this characteristic?
CDs, fixed annuities, and FIAs, (because they are savings products), all guarantee that the amount payable by the insurer to the insured, or consumer, will definitely return principal and/or interest. How ridiculous sounding is the more likely-than-not test. People are just making stuff up here. In FACT, the Supreme Court provided the leading discussion on this subject in a pair of cases that distinguished between variable and fixed annuities. In VALIC, 359 U.S. at 69-70 SEC v. United Benefit Life Ins. Co, the Court concluded, in a fixed annuity "the insurer is acting in a role similar to that of a savings institution, and state regulation is adjusted to this role."
Isnt the world of securities, for which the Chairman is responsible, having its own issues? I know the problems are massive, and the origin of the myriad of these economic crises, with which he is responsible for managing, emanated a long time ago, and not all of these problems occurred under his watch. The point is, as Commissioner Voss infers, the SEC has not shown itself to be effective in regulating its own products, so why would they try and remove fixed annuities from the oversight of the insurance industry, who has already put in place the consumer safeguards to insure proper, suitable sales. Is it possible, that the division between savings/insurance and investments, instills competition between the insurance and the securities industry, and therefore is healthy for America and its economy?
In 2006 I detailed the imperialistic encroachment of the NASD, over the line drawn in the sand by The 1933 Securities Act, and Rule 151, -Safe Harbor, in 1986. I wrote The NASD may not win their struggle to legally have the SEC deem EIAs/FIAs a security. That was always a long shot, but they may be able to stifle EIA sales within their ranks, and indirectly profit, as these insurance products become increasingly popular. We all knew they would not give up, as FIAs grew in popularity.
The NASD, now FINRA, have never liked the competition they encounter when consumers are faced with considering, the benefits, risks, and costs, associated with securities products, as compared to FIAs. Have your client, your friend, your family member look at the benefits, the risk, and costs, side-by-side. If these folks are conservative/moderate in regard to their risk tolerance, I bet a majority today would be likely to choose FIAs over securities, if they were actually given the choice.
Many believe the SEC cannot deem FIAs a security today, not if the existing laws/rules are applied as legal precedents. I think Iowa Insurance Commissioner Susan Voss is one of those believers.
Because the securities industry manufacturers and markets (as FINRA is a group of securities marketing firms), different products than the insurance industry, they cannot produce a similar product. This is a problem for FINRA. If they did, it would be called a FIA, which is an insurance product (stay with me). Securities products subject consumers to market risk, and market losses, allowing people to not only lose principle, but prior market gains. Consider that consumer losses are compounded by additional costs, such as fees, spreads, and loads. If the consumer is taking withdrawals, amidst negative market/product performance, the consumers situation gets much worse. The products are distinctly unrelated.
FINRA, a self regulatory organization, has been courting the SEC even prior to NTM05-50, attempting to usurp the insurance industrys power, as it relates to governance by the NAIC. Consider the fixed indexed annuity is fast becoming a distinct market within the insurance industry, and the SEC would, in declaring the FIA a security, lay the groundwork for the securities industry to steal an entire market, a market with limitless potential.
Consider the predictions of earlier prophets, that boomers will leave the share markets for moderation, and for safety. The beneficiary of this exodus would be safer, more conservative instruments. The fixed-indexed annuity is the modern worlds version of that safer, more conservative instrument. The odds of such an exit of the market has increased today, as boomers just went through what the Wall Street Journal has coined the Lost Decade for investments, and the market is down 16% since October 2007 as of this writing, July 1st, 2008.
FINRA, (with the aid of Christopher Cox, the SEC Chairman, abetted by a number of others, and with special accolades given to the Attorney General of Alabama, Joseph Borg), is attempting to drill into what would be a new revenue stream. Through means of distraction via market conduct issues, the securities industry is attempting to take over the FIA marketplace by way of a Trojan Horse. The SEC Chairman, is considered a beacon of prominence, knowledge, justice, fairness, and consumer advocacy. That may not be the view today, not by those in the insurance industry, or possibly consumer/senior advocacy groups, who may see him as a member, and a friend, of the Wall Street elite, who is simply trying to highjack a revenue stream.
If this rewriting of the rules actually makes it through the courts, (which would be absurd), Christopher Cox may be credited with undermining the insurance industry, one of the most conservative places with which to place your savings, alongside U.S Treasuries, and banks (which are having solvency problems again).
The world has watched various debacles, where oversight is the responsibility of the SEC. The securities industry has a litany of acts/laws, and consumer fraud memos, put in place to promote full disclosure and to protect the investing public against malpractice in the securities markets. What grade, A through F, would you give the SEC? Compare the handling of Martha Stewart, and the jail time given to her, with the mismanagement, the failure to oversee, of the mortgage industry and the rating agencies. Consider that the SEC has genuinely played a significant role in the present economic crisis. The Securities and Exchange Commission played a significant role in what can be deemed financial fraud. The SEC, as told to me from the perspective of an esteemed mortgage company, to put it lightly, the SEC is lacking professionalism, and that the bond rating agencies should never have been allowed to place investment grade ratings on blind, mortgage backed securities. This occurred under the watch of the SEC, over many years. Once again, the SEC has enough problems, and quite frankly, has shown itself to be inept in regulating its present responsibilities. These are the opinions of experienced, knowledgeable financiers of the share markets.
If this transfer of power occurs, the securities industry will become the gatekeeper, where consumers will not be able to either gamble with their money in the stock market, or save their money with an insurance company, utilizing FIAs, without first paying the securities industry for the right to do so.
Its the consumers money, not FINRAs. This whole thing is very transparent, this is all about power and money. Think about it, if they get this final piece, they will now cover the entire spectrum of risk and return conservative, low risk bonds on the left, conservative/moderate, with zero market risk via FIAs in the middle, and riskier products, stocks, mutual funds, and variable annuities on the right.
The SEC states there will be increased competition by adopting this new rule. This new rule will in fact reduce competition and harm consumers if adopted, as only consumers who open brokerage accounts, would then be able to access an FIA.
The SEC is preparing to battle against case precedents, which clearly define fixed-indexed annuities as insurance products, not securities. The SEC wants to make their case to the financial world, that supervision is now required by the securities industry, as the insurance industry is not responsible enough to regulate its own products, nor supervise its agents. Commissioner Voss, again disagrees, as does the insurance industry as a whole.
As crazy as it seems, the securities industry, (even though they exist in a completely different marketplace, where investing, which is, by definition, speculation and/or gambling), believes they will simply learn what they need to know, and supervise everyone and every product. The revenue stream of the SECs constituents, would then be enhanced. Index universal life is surely next on the hit list. The result is, all business would now go through one gatekeeper, where you will now pay the securities industry for the privilege of being able to gamble, where they promise to send you statements about your winnings, and losses, (like that makes it better), and if you so desire, you may place your nest egg in a safe, boring, protected investment (read FIAs), but you must again pay us for that privilege.
Why is this happening? The answer is because a lot of money is at stake. It cant be the consumer protection issues, because the insurance industry has taken the time to employ suitability standards and other consumer safeguards.
The Statement made by the Chairman at the Open Meeting on Equity-Indexed Annuities, could literally be viewed as part of pop culture, whatever is, or can be sensationalized, and garner ratings we will put out there Literally, the statement by the SEC Chairman appears to be an editorial lacking substance, the kind of stuff Dateline is putting out there. Its a smear campaign. His comments, show bias, misinformation, purposeful, intentional, destructive, omission of the facts, and twisting of the facts. Below you will read the Statement at the Open Meeting on Equity-Indexed Annuities by the Chairman, and my comments.
The Chairman: Our next item of business is a subject of great interest to senior investors.
AmericanAnnuityAdvocates.com: Yes, and NO, it is of business interest to the SRO, FINRA, who has courted you into your present position, and who is interested in the business of fixed-indexed annuities, because seniors and boomers are buying more and more of them everyday.
The Chairman: For three years, we have been closely partnering with the North American Securities Administrators Association (NASAA) on senior issues, and the recommendation before us this morning from the Division of Investment Management is very much a product of that collaboration.
AmericanAnnuityAdvocates.com: OK, but it appears to me that you are partnering in the take over, for profit, of the fixed-indexed annuity business, because if you cant beat them, take them over, and in the process, the office receives power, and your constituents profit, the securities marketing firms/FINRA you didnt even have to pay for the acquisition of this new profit center, imperialism.
The Chairman: NASAA has led the way in exposing the abusive sales practices often used to promote equity indexed annuities to older investors for whom they are unsuitable.
AmericanAnnuityAdvocates.com: Again, they are suitable for 99.9% of the people who purchase them, and they have true advantages over many market sensitive investments, as seen below. In fact, In 2007, there was one complaint for every $109 million of premium.
Advantages over mutual funds: Fixed-Indexed Annuities offer advantages over mutual funds in terms of both safety and costs. Consumers need to know the truth, that fixed-indexed annuities have no loads, fees, or charges, eating away at your nest egg. FIAs keep your money safe, preventing you from experiencing losses in your retirement savings. Fixed-Indexed annuities are insurance products, considered savings vehicles, with guarantees of principal and interest, they are not securities. Fixed-Indexed Annuities allow savers to participate in the positive movement of the SP 500 stock market index, via credited interest, and lock-in annual market gains, but never market losses Mutual funds cannot make this claim. If you are willing to accept moderation, meaning a cap on upside earnings, then such moderation comes complete with safety of principal, plus all of your annual gains are locked-in and yours to keep Fixed-Indexed Annuities may offer the moderation particular seniors and boomers need.
The advantage of safety with annuities: The safety tax-deferred annuities provide consumers, is traditionally cited as the #1 reason consumers place their savings in tax-deferred annuities. Your tax-deferred annuity is safe because qualified legal reserve life insurance companies are required to meet their contractual obligations to you. Tax-deferred annuities protect your principal, your interest, and your ability to make withdrawals, when you need income.
By investing in a tax-deferred annuity, the risk is absorbed by the financial strength and the cash reserve of the insurance company. Plus, there is a state guaranty association to help pay claims, should an insurance company become impaired. The Guaranty Association provides a safety net, and is similar, in a sense, to the way banks are able to insure deposits up to $100,000 through FDIC insurance. Hence, the "safety" of tax-deferred annuities.
Savings Advantages: Many people today are choosing tax-deferred annuities as the foundation of their overall financial plan. Along with the safety, the traditional savings dollar may be taxed every year, but tax deferred annuities offer consumers triple compounding. By postponing annual income tax with a tax-deferred annuity, your money compounds faster because you earn interest on your initial deposit, interest on your interest, and interest on dollars that would have otherwise been paid to the IRS. Similar to many CDs, annuities have a penalty for early surrender.
Tax Advantages: You pay NO taxes on funds in your annuity while your money is compounding. You may also pay a lower tax on random withdrawals because you control the tax year in which the withdrawals are made, and only pay taxes on the interest withdrawn. If you decide to annuitize, that is, to take a monthly income from your annuity, your taxes may be less because they will be spread out over a period of years. Tax deferral gives you potential control over an important expense - your taxes.
Liquidity advantages: Annuities provide consumers with the liquidity they need in retirement. Most annuities allow funds to be withdrawn by way of a free 10% withdrawal feature annually or via annuitization.
Keep more of your Social Security benefit when you utilize annuities for savings.
Annuities can help you reduce the taxes you pay on Social Security benefits. This is made possible by the repositioning of bonds, CDs, and mutual funds, into tax-deferred annuities. Depending on your retirement income, you may be paying tax on up to 85% of your Social Security benefit.
Annuities Avoid Probate: If a premature death should occur, the accumulating funds within your annuity may be transferred to your named beneficiaries, avoiding the probate process. Like most assets, however, the annuity is part of your taxable estate. Your heirs can choose to receive a lump sum payment, or a guaranteed monthly income.
Annuities will help ensure that you will not outlive your money: According to a survey conducted in 2001, the American Council of Life Insurers found that 88% of Americans agree that, for their retirement, receiving at least some of their savings as regular income payments that they cannot outlive is important. Today, I imagine this number has increased.
Annuities enable clients to avoid the risk of the stock market. This should not require any explanation, as a large percentage of the population, wish to avoid stock market risk.
Go to www.americanannuityadvocates.com , look under the Learning Library and click on Annuity Advantages, and there you will see this information everyday.
The Chairman: So too has the Financial Industry Regulatory Authority (FINRA) and the National Association of Securities Dealers (NASD) before it.
AmericanAnnuityAdvocates.com: OK, since when did the NASD become the ruler of the universe, the god to all things Financial? How did the SEC hand this group of securities marketing firms, this Ruler of the Universe Title, and why did the Insurance industry let this happen? This would not have happened under the watch of a cohesive body.
The Chairman: Two years ago at the national Seniors Summit here at the SEC, NASAA made public its survey results showing the scope of senior investment fraud. As then-NASAA President Patty Struck put it, the survey revealed a landscape littered with slick schemes and broken dreams that has been devastating to the victims and their families.
AmericanAnnuityAdvocates.com: Is the stock market and the frictional costs eating away at the consumers nest egg, not "littered with slick schemes and broken dreams"? This is an ironic statement, given the turbulence in the share markets, sensationalizing a bit, dont you think? We all know the statistics, and that emotions drive everything, that mutual funds are kept for 2.6 years on average, and consumers get in and get out of the market at precisely the wrong times. Consider, that if the consumer needs his or her money, they dont know what they will get, because its nothing more than gambling, speculation, and it costs a lot, assorted fees, bid/ask spreads, 12-b1 fees, management expenses.
What about the scandals with after hour trading, insider trading, dilution of shareholder value by use of stock option grants, ill gotten acquisitions with superficial/over inflated share prices that again dilute share holder value? This happens when a company with nothing more than speculative value, experiences a speculative rise in share price, allowing it to takeover a brick and mortar company with real profits, real value, real employees, and then later, when the weight of real expenses, yet no real revenue, drives the new version of these merged companies down, share holders are left owning a less valuable stake. Guess who profits the least and takes on the biggest risk, falling prey to scandalous CEOs and boards, and they dont even know it? The nave, the ignorant consumer. Guess who profits the most and takes the least amount of risk in all of this? You know the answer Mr. Cox, the reward goes to the BDs, the investment banks, and the criminal boards and CEOs. Are people forgetting all of this, or simply choosing not to talk about it?)
Mr. Cox, Mr. Borg, Patty Struck, answer one question:
Did FIAs cause any senior to lose money? Now tell the truth, now that you know how FIAs really work, Did FIAs cause any senior to lose money? No, if they did we would call it a security, not a fixed-indexed annuity
The Dateline people left a lot out, so in case anyone doesnt know, below you will find some advantages that the folks at Dateline, again, left out. This is what I call purposeful omission of material facts, which is fraudulent, at least when you examine the study material for your series, 6,7, 65, securities license.
If clients, seniors, etc, needed their money, most fixed and fixed-indexed annuities offer a free annual withdrawal of up to 10% of account value, which is a featured advantage of most annuities. Although the 10% free annual withdrawal provides excellent liquidity, the owner of the annuity contract has the additional ability to remove all of his or her annuity savings without any penalty, when confined to a nursing home for approximately 90 consecutive days, if the annuity contract comes with a Long-Term Care Waiver. Another Liquidity Feature offered with many fixed and fixed-indexed annuities is a Terminal Illness Rider. After the first contract year, if you are diagnosed by a physician as having a terminal illness, you may have the option with the terminal illness rider to withdrawal up to 25% or more of the annuitys account value, without incurring an early withdrawal charge. There is no additional charge for this rider, but the withdrawal provision may be used only once over the duration of the contract.
In comparison to fixed, and fixed-indexed annuities:
CDs do not permit the consumer to have access to his or her money until the stated CD period is up.
For example 3 months, 6 months, 1 year or more. In other words, the bank does not allow you to take a free 10% withdrawal of your CD value. If you need access to your CD you are subject to penalties, a loss of interest, and possibly a loss of principal.
Bonds do not have a method to exercise a free 10% withdrawal feature either.
Because the market value of a bond falls in a rising interest rate environment, bonds can be riskier than other investment alternatives. If you were to buy a $50,000 bond with a 30 year maturity and an 8% yield, only to have interest rates then rise to 9%, your bond is instantly worth less, $45,000, were you to try and sell it in the open marketplace. When the public can buy a new bond yielding 9%, why would they pay you full price for a bond paying 8%? The point we are trying to make here is that bonds do carry risk. Hence, if you purchase a bond with your savings, and you are forced to sell that bond because you need to access some of your savings, there simply is no 10% free withdrawal feature, no long-term care or nursing home waiver, and no ability to annuitize your bonds at market value.
Mutual Funds and stocks have no free 10% withdrawal feature.
If one needs access to savings, and those savings are placed in stocks or mutual funds, you must sell the stocks or mutual funds to raise the cash you are looking for, perhaps at an inopportune time, meaning the market may be down significantly, as it is today. If an annuity has a free 10% withdrawal feature, and a contractually guaranteed decreasing surrender charge schedule, you will always know exactly how much you can withdrawal for free, and anything above 10% of your account value will be assessed a decreasing withdrawal charge. With market sensitive investments, you may be assessed service fees when you need to liquidate accounts and your money may be worth substantially less, due to market fluctuation.
Did the SEC Chairman not know all of this? I cant imagine he didnt, so I am puzzled by the tact he is taking.
The Chairman: The survey of state securities regulators showed that 45% of all investor complaints received by state securities regulators are made by seniors. The survey also found that equity-indexed annuities are among a handful of products most often involved in senior investment fraud. For example, cases involving annuities represented 65% of the caseload in Massachusetts, and 60% of the caseload in Hawaii and Mississippi.
AmericanAnnuityAdvocates.com: OK, I am curious. What are the other products in regard to a handful of products most often involved in senior investment fraud. Im guessing, the other four are securities related. Also, I am pretty sure that: a) the seniors are unaware, or were momentarily confused, in regard to all of the advantages, in terms of safety and liquidity, that are real, that exist, contractually, with fixed-indexed annuities, or b) someone is confusing the seniors, other advisors, or even the state securities regulators, in terms of the questions, or the line of questioning, that they inflict upon these seniors. Remember, when these folks reviewed the brochure, the disclosure, the suitability forms, that annuities must have seemed logical at that time. Again, in 2007 there was one complaint for every $109 million of premium.
And in terms of cases involving annuities represented 65% of the caseload in Massachusetts, and 60% of the caseload in Hawaii and Mississippi. I dont know the details, but is it possible, that when the word annuities, particularly indexed-annuities come into play, that there is a heightened state of sensitivity in the state securities regulators offices? And this is where they chose to spend their time. Maybe arbitration in regards to security related issues takes care of itself. I am just throwing it out there. Anyone who is familiar with the workings of arbitration, understands that the consumer is at a disadvantage, and recovers only a small portion of what they represent their losses to be. They have no choice, as they are contractually bound to arbitration when they open a brokerage account and sign all of the broker dealer paperwork. Please read an excerpt from a third party resource (who is more oriented in the stock market, than am I). This is what he has to say regarding the fairness of arbitration.
Below are excerpts from an article written by Jeffry Voudrie Arbitration Won't Fix It.
Some of my best article ideas come from my readers, and this week is no exception. This is a story of misplaced trust, dishonesty, inaction and great financial loss. The lessons learned through their experience will hopefully save you from a similar fate. Read on to find out more.
Bill and his wife, Jane, (not their real names), were a well-educated couple looking to boost their returns. After attending one broker's seminar, Bill was impressed by, his expertise in company analysis and stop-loss protection.
They decided to put Jane's retirement money into this broker's hands. But after signing the paperwork to open the account, the broker never contacted Jane to find out how she wanted her money managed. Both sides made assumptions about what the other wanted and/or would do.
Jane and Bill were busy, and so was Jane's IRA. We don't know how long it took or how the account did early on, but eventually, over 90% of Jane's retirement money went down the tubes.
The broker promised stop-loss protection but never actually put that strategy in place. The broker determined Jane's risk tolerance without any input from her. When that section of the application was left blank, the broker filled it in it himself so that it, according to Bill, would justify his stock picking and mutual fund selection.
Bill and Jane had to go through arbitration in an attempt to recover their losses, as are almost all brokerage firm clients. After a process that typically takes several years, the panel agreed that the broker had violated 26 NASD regulations. These included lying, the use of erroneous information, total mismanagement of client's accounts and the use of unsuitable investments.
When it was all over, guess who the panel found at fault for Jane's losses?
Jane, of course They reasoned that since she was a well-educated woman, with a Master's degree no less, that she should have known better than to let it happen. Her husband Bill was even chastised for finding the broker in the first place, and for putting her in a position to lose her money. "We were supposed to know better, not the broker, or his broker-dealer. I am not making this up. My wife got a check for less than 1% of the account value before the losses occurred."
Bill's experience with arbitration is fairly typical. Roughly 50% of arbitration cases are won by the investor, but the award is often a fraction of the damages. Moreover, many times the complaint doesn't even show on the broker's record.
This story has many lessons. Perhaps the most important one is that you bear the primary responsibility for managing your investments. The financial system isn't out to protect the individual investor. Even if you suffer great financial loss, don't expect the system to bail you out.
I agree.
The Chairman: Working with our state regulatory counterparts, the SEC has made cracking down on fraud in this area a top priority, and today's proposed rulemaking is a big part of that effort. But let me be clear: the Commission would not be here today working on this topic were it not for the pioneering efforts of Karen Tyler, NASAA's current president, and her predecessors Patty Struck and Joe Borg, who together with our colleagues at FINRA have been highlighting the problems associated with equity indexed annuities for years. This is truly a joint federal-state partnership, and the SEC is proud to be working shoulder-to-shoulder with state securities regulators on this vital investor protection issue.
AmericanAnnuityAdvocates.com: In regard to Working with our state regulatory counterparts, Susan Voss says she never got the call, meaning there has been zero communication with state insurance regulators. The SEC has made cracking down on fraud in this area a top priority, why this particular area and not the entire handful of products most often involved in SENIOR INVESTMENT FRAUD?
OK, anybody besides me see that all of the guys on one team are proposing rule changes that benefit them, and undermine the guys on the other team, the insurance industry? The insurance industry does not gamble with seniors money, thats what the share markets force all of us to do, as investing is legalized gambling. And thats ok, if you like to gamble, but its sometimes not legal, its criminal, as we have all read the array of headlines involving Wall Street monkey business.
Seniors that are taken advantage of, are taken advantage of period. They may be dealing with advisors selling securities, or those with an insurance license, or one who has both licenses. Consider that many seniors are told stay invested, over the long run stocks outperform everything else, hang in there, the market always comes back. No it doesnt, not for people who need their money, not for people who emotionally cant take the roller coaster ride, who become physically ill, watching the market news, who die with low account values. Not true, the market does not always come back
In regards to consumers being taken advantage of, or not understanding the choices they have on the spectrum of risk and return, and /or not being able to recall, why they choose investments, or annuities, or CDs, the americanannuityadvocates.com Consumer Interest Questionnaire, (or something like it), should be adopted if you are selling investments, or insurance products (email me if you would like a copy). The questionnaire makes everyone involved more aware, and goes a long way towards making all parties involved, feel safer.
No one believes seniors should not be protected from fraudulent used car salesman, securities peddlers, widget salesman, and hot dog vendors with germ infested wheel carts. Protect seniors, but thats it, protect seniors, dont take over an industry just because of a few bad apples. This is piracy, imperialism, and it is plain for all to see. Perhaps Mr. Cox, when looking back on his career, will wish that he never embarked on this crusade against the insurance industry.
The Chairman: Equity indexed annuities are investments that insurance companies sell to the public. They were first introduced about 13 years ago, around 1995. They gained ground and grew significantly over the years — in 2004 alone, for example, sales of equity indexed annuities increased over 50 percent, from $14 billion in 2003 to about $22 billion in 2004. In 2007, indexed annuity sales were nearly $25 billion. Today, over $123 billion is invested in indexed annuities.
AmericanAnnuityAdvocates.com: Yes, they are popular financial products, insurance products, protected investments, because people like moderation, especially when you get safety of principal, and all of your credited interest can be locked-in annually, never to be lost in the ups and downs of the share markets.
The Chairman: These products are both simple and complicated. They are simple in that, like other investments, they involve a pay-in and a pay-out. After money is paid in, the value of the investment can grow based on changes in a securities index. At some point, the investor takes the money out, and, depending on when that happens, the terms of the contract and the performance of the index determine whether the pay-out might be more or less than the money the investor contributed in the first place.
AmericanAnnuityAdvocates.com: Ok, they are simple, but certain crediting methods take more time to explain than others. It is worth the investment of ones time, if one is interested in protecting their savings. In regard to: At some point, the investor takes the money out, and, depending on when that happens, the terms of the contract and the performance of the index determine whether the pay-out might be more or less than the money the investor contributed in the first place, is disingenuous, twisting or ignorant. I do not know of one fixed-indexed annuity, since the beginning, that allows the client to receive less than the money he or she put in, should the client stay in the contract for the agreed period of time, which is clearly stated on the product disclosures, approved by the state insurance department. If someone has knowledge of such a product, please send me an email.
The Chairman: That's the simple part. The complicated part is that a variety of fees and charges, limitations on accumulation, calculations of index values, and other detailed features are baked into equity indexed annuities. And although the contract guarantees a minimum value, that's typically less than what the investor gives the insurance company in the first place. As FINRA noted in an Investor Alert, indexed annuities are "anything but easy to understand." FINRA added that, because there are so many features among various products, investors have a difficult time comparing one equity indexed annuity to another.
AmericanAnnuityAdvocates.com: Ignorance or misinformation, I think, as Mr. Cox may be confusing fixed-indexed annuities with market sensitive variable annuities, which are investments. Ok, products have features, a crediting method which allows the consumer to be credited interest, based on the numerical change in the value of a benchmark index. You dont get something for nothing, there is no free lunch, and like anything else in life, some things can be a little complicated, but not very complicated. An example of very complicated would be a variable annuity, not a fixed-indexed annuity. And as far as And although the contract guarantees a minimum value, that's typically less than what the investor gives the insurance company in the first place. Wrong, as typically, you get your principal and then some. Although I must admit there are some companies that guarantee your return of principal only, which is not less than what the investor gave the insurance company, but there may be only one or two contracts like that.
If you are interested in information pertaining to the generic differences between VAs and FIAs, from an educational perspective, email me at stevend@americanannuityadvocates.com, and I will email you the article, comparing VAs to FIAs.
Here are a few excerpts: Fixed Indexed annuities (FIAs), and variable annuities (VAs), share the word annuity, provide tax-deferred growth, and each provide the opportunity for annuitization, but thats where the similarities end. Fixed indexed annuities are truly an evolutionary financial vehicle, at the midpoint of our spectrum of risk and return. Variable annuities are found at the far right end of our spectrum, include stock market risk, plus high costs: fees, and expenses that may chip away at the opportunity for growth.
Have you stopped to really compare the two products? Really, have you looked at hypothetical projections, back testing, with and without fees, the FIA versus the VA? Have you considered the value of the number Zero. Zero is a phenomenal number when faced with the alternative, perhaps a negative 33% plus fees that one could experience in a market downturn like we had in 2000. The fixed indexed annuity is an orange, and the variable annuity is a pear. Some people like oranges and some people like pears. The FIA seems perfect for moderate savers or past investors looking for upside potential along with safety and the locking-in of annual gains. The VA appears to be more appropriate for the investor who has already placed sufficient savings in a safe place, with other discretionary assets which they can allocate to the potential upward and downward swings of the market. VA investors may feel comfortable knowing that there are modified guarantees, requiring annuitization, or the systematic withdrawal of their original principal returned over time.
The fixed indexed annuity is a simple product. If the SP 500 index moves in a positive direction by 10%, on an annual, point-to-point basis comparing day-1 with day-365, and you had 100% participation with an 8% cap, you would be credited with an 8% interest rate on your account value. If the SP 500 index moves in a positive direction by 18%, you would again receive 8% on your account, simple If the SP 500, to which the majority of FIAs are linked, were to fall 10%, the FIA credits a wonderful number, Zero. If the S P 500, were to fall by 33%, your annuity contract would not only credit the fabulous number Zero, but you would have a new plateau for growth, meaning if the SP 500 fell from 1500 to 1000, your new plateau for growth would be 1000. Now, if the SP 500 were to begin a recovery and grow to 1100 the very next year, you would be credited with 8% interest again. Say you had $120,000 in a market sensitive investment such as a VA, and you had 2.5% in cost, fees, and expenses, you would need a market return of 57%, just to get back to $120,000 the next year, and 69.94% to keep pace with the fixed-indexed annuity. Hence a Zero percent return is absolutely wonderful when it comes to negative market performance.
It is no wonder, that when advisors and consumers discuss retirement savings, and consumers express safety and liquidity, yet at the same time they would like to have some upside potential, that advisors recommend the FIA.
Variable annuities are mutual funds wrapped in an insurance contract, with many options. There are costs to be considered with the VA a) you have mortality and expense charges to cover guaranteed death benefits and annuity payout options, b )you also have administrative fees for record keeping and general administrative charges, c) since the guts of these products are mutual funds, making VAs a security, one must pay for the professional money management that insurance companies call sub-accounts, even if the fund loses money, and d) various special options or riders providing living benefit guarantees. So why are consumers buying variable annuities? Its a complicated answer for a complicated product.
If consumers could buy mutual funds on their own, without all the fees of the hypothetical VA which range anywhere from 2.25% to approximately 3.5%, why would they buy a VA from an advisor?
Although the VA products may appear to have costly benefits, I dont judge anyone for selling them. There are excellent benefits with these products that could come into play. In addition to the benefits of VAs, think about the choices confronting todays advisors. They do not want their clients to lose money as they did in 2000 they want to protect their clients nest egg. A guaranteed living benefit or a guaranteed withdrawal benefit provides the safety net that allows the advisor and the client to sleep a little better than they would without such modified guarantees. However, it is imperative that the advisor understand everything about the product, and have a more cumulative perspective on the product.
Overzealous broker dealers may prohibit their representatives from using fixed-indexed annuities. Some broker dealers may be unduly influencing the retirement choices of both the client and the advisor, scrutinizing the sale of fixed-indexed annuities to the point where they have actually stopped transactions. Compliance folks from afar have decided that they know more about the wants and needs of the client, than the advisor who met with the client many times. Compliance officers have stopped what advisors argue are perfectly suitable sales, only to offer ill advised alternatives to the outraged advisor, who must later approach his or her client with an embarrassing dilemma. There are paper trails providing evidence of such incidents, where compliance people have actually stopped perfectly legitimate transactions.
The reason advisors are sometimes turning to variable annuities is not always because they are enchanted with the product. It may be that they have simply thrown in the towel. They have stopped selling fixed-indexed annuities, possibly to the detriment of their client, and perhaps their career.
Advisors need to do their homework. Those that do not may be disillusioned by the potential benefit of these special options. They may come to realize only after the sale has been made, and assets have been transferred, that the overall makeup of the VA, and the total costs to the consumer, may have escaped their initial understanding. This realization may leave the advisor unsure of his or her professional advice.
The variable annuity special option acronyms look like this GWA, GWB, GMIB, GAV,GPA, HAV, GMDB, PPFL, LIA. Nomenclature such as Roll Up Base, Step Quarterly Ratchet, Protected Withdrawal Value may have Traditional, Enhanced, Plus, before or after these terms or the prior acronyms. Now, pretend youre a consumer Do you understand this contract as I have explained it to you?
Heres the point, advisors never see projections from the VA company, where retirement savings can be chipped away by the products cost structure. If advisors were to genuinely have a more innate understanding of the forces at work within these products, they may feel better about recommending VAs to the ideal prospects. These products are worthwhile for the investor/saver with discretionary savings, that is, savings where one can afford to a) take a loss, b) be guaranteed only a return of original premium after X number of years, c) accept the guarantee of a 5, 6,or 7% return on your original premium, after a surrender charge period of 7 to 10 years, which is not available in a lump sum but must be annuitized and taken over a minimum of 10 years or the lifetime of the consumer, and lastly d) the systematic return of your original premium via a withdrawal benefit over a period of 20 years, 5% of your premium per year. Such modified guarantees have a true cost when you factor in the time value of money. Come to think of it, why is the variable annuity, and all of the companys who market it, not receiving the same scrutiny and attention, as two tiered fixed annuity products received? Because 91% of all VAs are sold with these riders, and its only way they can be sold, apparently.
However, VAs may also provide more upside potential to the client who is willing to accept both the cost and modified guarantees. Its a judgment call that only the educated advisor and consumer, can make
Products react differently to the movements in the market, the economy. Savings products are different from investment products and the fixed-indexed annuity is a savings product, an insurance product. The VA is an investment product. It is not the answer to safety concerns unless the client and the advisor understand the product inside out, which I would bet, they almost never do, and I am serious when I say that.
The Chairman: Surrender charges are another way that investors can find that they get back less money than they put in. The charges can be as high as 15 to 20 percent of the amounts invested. Although the surrender charges decline to zero over time, that process can take more than 15 years. In the meantime, if an investor who buys an equity indexed annuity needs his or her money sooner — for medical expenses or rent, for example — he or she can be forced to forfeit a substantial amount of the investment.
AmericanAnnuityAdvocates.com: Two issues here, really. I hate to say it, but again on the part of the chairmans message, more misinformation. In regard to the typical bear market, the market as a whole averages a 32% movement to the downside, using a $100,000 deposit as an example, your account would then be worth, $68,000, and that is without fees. Just to get back to your original $100,000, you would need a 47% increase in the market, and again, that is without fees. How many years, will it take for the market to return the client his or her original $100,000 deposit, and what if they need their money for, medical expenses or for rent? By the way, with fees of 3%, you are now down 35%, and you would need an increase in the underlying securities of over 56%, just to get back to your $100,000.
What if someone asked the Chairman the same question, in relation to a security, what would be the ramifications then? Again, misinformation, or ignorance in regard to the liquidity, as usually, a full waiver for all surrender charges would apply, when it comes to nursing home admittance, or terminal illness, and a free 10% withdrawal of ones account is available annually, so this would cover the rent issue.
As noted earlier: Bonds do not have a method to exercise a free 10% withdrawal feature either. Mutual funds and stocks have no free 10% withdrawal feature. If one needs access to savings, and those savings are placed in stocks or mutual funds, you may need to sell the stocks or mutual funds to raise the cash you are looking for, perhaps at an inopportune time, meaning the market may be down significantly. If an annuity has a free 10% withdrawal feature, and a contractually guaranteed decreasing surrender charge schedule, you will always know exactly how much you can withdrawal for free, and anything above 10% of your account value will be assessed a decreasing withdrawal charge. With market sensitive investments, you may be assessed service fees when you need to liquidate accounts and your money may be worth substantially less, due to market fluctuation. Did the SEC Chairman not know all of this? Again, I cant imagine he didnt, so I am puzzled by the Chairmans tact in regard to FIAs.
The Chairman: Unfortunately, many equity indexed annuities appear to have been marketed to investors who are least able to scrutinize the details. It's common for these products to be sold as investments to older Americans who are simply in many cases not suitable purchasers. Three years ago, the NASD, now FINRA, raised concerns about the manner in which broker-dealer personnel were marketing and selling unregistered equity indexed annuities. They also sounded the alarm about the absence of adequate supervision of these sales practices.
AmericanAnnuityAdvocates.com: Why, with the safety, and the liquidity features already discussed, would FIAs not be suitable? Are securities more suitable MR. Chairman? We all know the statistics, investors in general earn far less than the market, after what Warren Buffet refers to as frictional costs, and after poor market timing, as Jack Bogle of Vanguard Fame often discusses. How have seniors done in the market over the last ten years, the last eight years, and the last year?
To address the biased, misinformation, of Dateline NBCs Tricks of the Trade consider these excerpts taken from americanannuityadvocates.com.
The television newsmagazine Dateline NBC did run a story about the sale of annuities to seniors on Sunday, April 13. The show was an undercover investigation and its title, Tricks of the Trade, certainly gave everyone an indication that it would be focusing on negative and unsavory sales tactics. The American Council of Life Insurers (ACLI) and other organizations have prepared responses, but its unlikely those viewpoints will ever receive airtime. Again, unfortunately, sometimes a few bad apples can give others a bad name, but that can happen in any industry, even the securities industry.
If you are preparing for retirement, I highly encourage you to educate yourself on your various savings and investment options, by learning more on the website Americanannuityadvocates.com, and from other sources that you feel provide sound information. Do not count on others to make your decisions for you. Unless you understand the workings of the various products found along the spectrum of risk and return, you will not be in a position to make an informed decision, to follow, or not to follow an advisors advice. Although this sounds simple, and logical, there is a constant flow of misinformation in the marketplace, as you can see in the speech from Chairman Cox.
The most prominent points of contention made by Mr. Cox and others, usually center around the following issues. As you can easily tell, those who make such points are uninformed and usually oriented towards market sensitive investments. This may be appropriate for some, and or a portion of ones nest egg, but for many boomers or retirees, perhaps moderation is more in order.
Below are the points of contention most often sited with annuities:
Maturity Date
- Uninformed opponents of annuities competing for the savings and investment dollars of seniors and boomers, try to convince consumers that the inclusion of a maturity date in a contract means they cannot access funds until the policy matures. That simply is not true. (And honestly, its fraudulent to lie about the meaning of the maturity date. If one doesnt know the meaning of something, say so, dont, lie or make things up. And to include Dateline NBCs Tricks of the Trade, was to promulgate more misinformation, is beneath the Chairmans position.)
The maturity date is not how long you must keep the annuity, but how long the insurer will let you keep the annuity interest deferred before annuitization. (And most carriers will allow extensions)
Surrender Charges
Almost all annuity contracts will include waivers of surrender charges for critical situations like confinement to a nursing home or diagnosis of a terminal illness, which cannot be said of other financial products that are sold, such as bonds, and mutual funds. Now you know, (Dateline producers) .
Additionally, surrender charges are actually a good thing for at least three reasons:
- They allow 100% of a consumers deposit to go to work earning interest immediately. A product with a front-end sales charge (which fixed, fixed-indexed, and income annuities do not utilize) reduces the amount of the deposit up front to cover the sales commission, and therefore, less money is working for the consumer from day one.
- They encourage the consumers money to stay with the company longer, which allows a carrier to invest longer (at higher rates) and provide higher returns.
- They discourage the consumer from tapping an account early for non-critical needs, so the money is actually there when they need it the most.
Always remember that fixed annuities, and fixed-indexed annuities, (not to be confused with market sensitive variable annuities) completely protect your principal, interest, lock-in your credited interest gains, and afford the consumer tax-efficient, tax-deferred growth.)
The Chairman: Today, in 2008, the cause for concern seems greater than ever. Recently, Dateline NBC produced a segment on the abusive sales tactics that are often used to sell equity indexed annuities to seniors. A hidden camera captured the evidence at free lunch and dinner seminars that were followed by sales pitches that downplayed the surrender charges. They also highlighted a number of other abusive and misleading sales methods, such as salespeople with fake credentials and over-the-top presentations designed to instill fear in would-be investors. The SEC was not involved in producing this segment, but I'd like for all of us to watch just a few minutes of it right nowshort video presentation
AmericanAnnuityAdvocates.com: Dateline, as well as other pop-culture magazine like television shows, has run programs aimed at the securities industry, so people living in glass houses should be careful when throwing stones. To be perfectly honest, the Chairman is editorializing here, which is beneath such a position that is supposed to be one of unbiased competence, charged with protecting the consumer. The manner, or the respect he gives to Datelines Tricks of the Trade, is surprising, and unwarranted. The Chairman reveals an obvious biased orientation to the share markets, where seniors would be gambling with their nest egg, governed by the Rulers of The Universe/FINRA, where Wall Street would continue to profit at the seniors/consumers expense. This is shameful.
The Chairman: One big reason that these abusive sales practices have gone unchecked is that the question of whether they are securities at all has been left unanswered. In 1997, shortly after equity indexed annuities were first introduced, the Commission issued a concept release that asked a range of questions about equity indexed annuities. We received a number of letters, which were followed by further debate among industry participants, government regulators, and consumer advocates.
Today we are considering a new rule that would establish — on a prospective basis — the standards for determining when equity indexed annuities are not considered annuity contracts under the Securities Act of 1933 and therefore are securities and thus are subject to the investor protections afforded by the securities laws. These investor protections include the requirement of registration under the Securities Act, and our requirements related to truthful and complete disclosure of the investment to potential purchasers. In addition, investors would enjoy the benefits of protections against fraud and misrepresentation, and additional safeguards against abusive sales practices by unscrupulous marketers. In the future, these protections may significantly reduce the problem of investors being harmed by inappropriate sales of equity indexed annuities.
I would like to thank the staff of the Division of Investment Management for their hard work in bringing this release before the Commission today. I include, of course, Buddy Donohue, the Director of the Division, and especially Susan Nash, Keith Carpenter, and Michael Kosoff, as well as the Office of the General Counsel, including Lori Price and Cathy Ahn, and the Office of Economic Analysis, including Jim Overdahl and Joshua White.
I would also like to thank the leadership of both the North American Securities Administrators Association, especially current president Karen Tyler, and past presidents Joe Borg and Patty Struck and FINRA. Their efforts have been instrumental in bringing to light the investor protection concerns related to equity indexed annuities that we are addressing today.
End of SEC Statement.
The #1 mistake those saving for retirement, and those already in retirement make, is not understanding how the products on the Spectrum of Risk and Return work, and quite simply, that is how they lose their money. Consumers are making uninformed decisions. Advisors can fail to help consumers make good decisions because it isnt their money. Hence they dont really have the same sense of urgency or the same sense of reality. They face having constraints placed upon them by their broker dealers, and often fail to help consumers make good decisions, because of those constraints.
I think we are all advocates for a Consumer Protection Model, but then why is it we do not have one. I sent a model to NAFA, one that we recommend agents use when talking with clients about retirement savings, hoping they would promote it The Educational Disclosure for Consumers, Regarding Investing and Saving for Retirement. And what was the outcome?, I have been asked.
I believe it was viewed, but NAFA must have believed either a) there was not enough merit, or b) it would stir the pot, and complicate things, but I really dont know. In the model, we ask the consumer Are you aware of the effects of 1) market risk, 2) time horizons, 3) costs, fees, expenses, 4) simple, compound, and triple compound interest, 5) the practical math associated with investing versus savings , 6) the effect of taxation on Social Security Benefits, 7) and how all of these issues affect retirement income. At that point, the advisor is expected to review all of this with the consumer.
A consumer protection model is more important than ever. However, what this model draws out, essentially, is that clients and perhaps advisors dont really understand risk, or the fact that what they advise consumers to do with their life savings is gamble. Those who participate in the ups and downs of the share markets and think of themselves as investment advisors, fail to share with the consumer (share holders) not only the practical math involved with investing, but they never compare the risk and return as it applies to the consumer, versus the advisor, the broker dealer, the investment bank, the CEO or other high level employees (who receive stock options and dilute share holder value). Once someone understands how these various institutions work, and how they make money, you must admit, that the consumer does not understand all of the risks to which they are exposed.
Through all of the accounting issues, all of the reporting, GAP vs. EBTIDA, Wall Street is the ultimate cheerleader, always smiling, always optimistic, always willing and able to put lipstick on the pig. They are always mindful of their underwriting fees, their commissions, their profit engines, and the fact they receive these windfalls while the consumer bears the greatest risk. It is a fabulous business model. Advisors cannot possibly explain, and cannot possibly justify, those risk variables, so they dont talk about it. There are variables that advisors may discuss with consumers, and there are those that are not disclosed. If they did disclose the risk beneath the obvious, as our adult education class illustrates, they would not be expecting a 10% return in the market unless PEs were in line with Jeremy Grahams charts, and the profit engines of Wall Street were fully operational.
As you think about securities, and consumer protections, get real. Although most advisors will now say it is a great time to buy, (and it may be), as stock prices are depressed, consider the average bear market hits bottom at 32%. Its down 16% since October 2007, hence, we may only be halfway there as of this writing, July 7th, 2008.