Equity Index Annuities, the best answer?

smithgroup82 · 09-06-2008, 11:49 AM

Hello everyone. I am working with a marketing company that is pushing for the associates to REALLY offer the EIA as a soulution to clients who has investments with mutual funds. They have devloped the philosophy that Mutual Funds have VERY negative features during this season of the market, and the client would be better off with moving their investments into an EIA. However there is numerous financial experts and gurus who go against this exclusive philosophy. I know there is no way it can be a "One size fits all" product or vehicle. Can anyone help by giving the pros and cons about this, by offering some simulated circumstances?

Thease are the features that they tell us to really zero in on when trying to help the client:

A. No loss of princpal
B. postive probate aspects
C. Heirs to don't have to liquidate as in a mutual fund
D. No expensive manger fees etc etc.

What is your thoughts? Is this a good philosophy to endorse during this economy???? Thanks

Mac1958 · 09-06-2008, 12:42 PM

Talk about a loaded question.

Yes, Equity Indexed Annuities are always the best answer for everyone. Except when they aren't. And it depends on the individual's situation. Today. And tomorrow.

Yes, your clients won't have to worry (as much) about loss of prinicipal. And yes, annuities help the survivors avoid probate. And yes, they can offer "safe growth".

On the other hand, operational costs are high. Money can be tied up for 12, 15 years. Many EIA's maintain strict control over annuitization, limiting how a client can annuitize their money.

Worse, far too many people offering EIA's have one goal in mind: To get as much money into that sucker as possible. They don't care about how much they leave liquid for the client, nor do they care how much access a client has to their money. It's all about the commission. I have several examples of an insurance guy completely screwing over a client. I'm not saying that all do. But enough to cause serious problems and wreck the reputations of the rest.

This is why EIA's will end up requiring a securities license to sell, and why commissions will drop to make them less tempting to push. A real financial professional needs the knowledge and training required to practice responsible asset allocation.

If you're going to be talking people into putting a significant percentage of their liquid assets into annuties, I hope that you're qualified to objectively and effectively assess their overall financial picture, and that your marketing company is going to protect both you and your clients with compliance issues.

I don't mean to sound so cynical, but I've seen some really nasty crap done to seniors who made the mistake of trusting someone with their money.

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smithgroup82 · 09-06-2008, 12:48 PM

So looking at this exclusive philosophy is not realistic? Kind of like buy term and invest the difference issue? That may not be good for every client etc????????????

patch36 · 09-06-2008, 05:59 PM

...and I have seen some really positive results from the proper sale of an FIA, Fixed Index Annuity. The insurance companies would rather never call them Equity Index Annuities because of the potential confusion with them being thought of as securities products.

As mentioned, you never put all of a Senior Citizens money in any annuity. You always leave a substantial rainy day/emergency fund in something liquid like money market or laddered CD's. Not in the stock market unless they have a high risk tolerance.

Some companies have very restrictive death benefit and annuitization requirements, but most do not.

Fixed Index Annuities are an ideal place for money that is not being used to fund any immediate necessities. If the client is comfortable with only being able to access 10pct of their money per year without a penalty then in many cases the annuity is a good choice.

It eliminates market risk and offers many strategies to link to a financial market or a fixed interest account. You cannot lose money in a FIA unless you withdraw more than 10pct per year prior to the end of the contract period.

It is VERY unlikely that annuities will be regulated by the securities folks in the near future. They cannot even regulate their own products and have far more complaints than annuities no matter how you measure. The push to take control of the Annuities market is ONLY about money and power, not better regulation of the product. I have talked to NAFA and other experts and they are confident that 151 will fail as written. It is likely that annuities will someday in the future require an additional license or certification to sell.

Do not fear the product, but do take the time to learn the difference in the offerings from different companies.

I personally would avoid Allianz because of restrictive death benefits and annuitization rules. You can purchase riders to solve the issues, but they are built in to other companies products.

I really like Midland and their sister company North American, as well as Aviva, and a few others.

When you have a client who is sick of the shell game of the stock and bond markets, FIA's are something to consider.

Winter · 09-06-2008, 07:12 PM

Originally Posted by patch36

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It is VERY unlikely that annuities will be regulated by the securities folks in the near future.

We don't know. It is possible. It has been proposed and it is being considered and it is moving forward. The annuity carriers are plenty nervous. Got a mailer from American Equity last week giving information about the proposed rule or legislation change and the package included letters for you to send to the SEC/FINRA or you congressmen (can't remember, I set the package aside).

No need for everyone to go down the rathole of arguing whether they are or are not securities. My only point is that the issue is active and is a loose cannon rolling around and is within the range of possibility. Others disagree and I see that.

Charpress · 09-06-2008, 07:58 PM

"It is VERY unlikely that annuities will be regulated by the securities folks in the near future."

Unfortunately, that should probably be VERY LIKELY instead of VERY UNLIKELY.

One reason this is happening is because many FIA products are crap. To be able to remotely judge a particular product, you have to analyze caps, spreads, and all the various indexing schemes available. Yearly point to point? Monthly average? Annual reset? Five year reset? Bonus balanced against amount of penalty and years in the product? Etc, etc. etc.

I shouldn't say this is why the rules may be changing. It is really a money play by the brokerage industry and a power play by the SEC. Pure and simple.

patch36 · 09-06-2008, 08:42 PM

I agree there will be changes, but I still believe, based on discussions with people involved directly in the fight, that it is unlikely they will become a securities regulated product in the near future. I do agree there will be changes in the the regulation of the products and the education and licensing of the agents.

If you are putting clients into an FIA as an investment and sell the Index side of the product you are going to have issues for sure. There is no uniformity and therefore it is very difficult to compare product allocation strategies. I generally put people in the fixed side to begin with and generally that is where they stay. Even the promise of not losing money on the index side does not sway my average client away from the fixed side of the product. Looking at the market and the volatility of the market, I have not regreted the conservative philosophy of the fixed interest rate.

My clients are not boomers and do not trust the markets. Many of them lost enough that it is not the Index features they are looking for. They are looking for safety, deferred taxes, and peace of mind. Find that at Ed Jones? Not.

BiggitySwat · 09-06-2008, 08:50 PM

Originally Posted by Mac1958

This is why EIA's will end up requiring a securities license to sell, and why commissions will drop to make them less tempting to push.
...

Agree with you that people need to stop being greedy and load all of someone's money into a surrender period FIA. However, could you provide the link to the source where carriers will drop annuity commissions across the board? I really don't see how that will discourage greedy/unethical agent, rather I see it just punishing the legit agents too by giving them less compensation for their services.....

Winter · 09-06-2008, 09:06 PM

Originally Posted by BiggitySwat

Agree with you that people need to stop being greedy and load all of someone's money into a surrender period FIA. However, could you provide the link to the source where carriers will drop annuity commissions across the board? I really don't see how that will discourage greedy/unethical agent, rather I see it just punishing the legit agents too by giving them less compensation for their services.....

Yes there is the problem of putting seniors into long surrender periods with high commissions being an incentive but there are considerable watch-outs related to having seniors exposed to secuties sales reps who have incentives to put seniors into risky securities and then on top of that churn them frequently in order to compensate for the lower commissions such that the seniors assets are squandered on sales charges.

There is a certain tendency in these discussions and elsewhere to suggest that insurance folks are shleppes and when you get securities licensed that everything is suddenly brought up on a higher plane. It isnt. Yet it is true that the securities regs and compliance are much, much tougher but that is only because the abuses are much more widespread.

BiggitySwat · 09-06-2008, 09:27 PM

Originally Posted by Winter

Yes there is the problem of putting seniors into long surrender periods with high commissions being an incentive but there are considerable watch-outs related to having seniors exposed to secuties sales reps who have incentives to put seniors into risky securities and then on top of that churn them frequently in order to compensate for the lower commissions such that the seniors assets are squandered on sales charges.

There is a certain tendency in these discussions and elsewhere to suggest that insurance folks are shleppes and when you get securities licensed that everything is suddenly brought up on a higher plane. It isnt. Yet it is true that the securities regs and compliance are much, much tougher but that is only because the abuses are much more widespread.

Good point, and relevant - I actually am studying for my Series 7/66 right now actually.

But again, where is the source that says carriers will drop annuity commissions - I don't think that's fair if it's true, because it just punishes everyone rather than specifically targeting the greedy bunch. Especially in light of today's rising expenses all around....

patch36 · 09-07-2008, 08:02 AM

The average commission is not as high as has been publicized. I know of no incentive to drop commissions.

There are far more official complaints against securities related sales than there are about annuities.

In 2007 there were 348 total complaints about annuities. There were over 77,000 complaints in 2007 about securites related products. Perhaps the state insurance regulators should take over the federally regulated securities industry?