Insurance Agent Forum

[JMO Fan]

Originally Posted by Charpress

I became securities licensed because I saw the handwriting on the wall (among other reasons).

But let's not forget, the real power behind this is not in any sense an attempt to protect seniors or anyone else. It is the brokerage industry that is suffering hard times and seeing a huge move away from their industry to the insurance industry. As always, the money is the motivation and the rest is just the excuse to get rid of some competition.

Which is why this will matter a lot. This powerful group will push them hard:

NASAA Commends SEC for Advancing Equity Indexed Annuities Proposal
Tyler: “Shielding investors from the predatory sale of EIAs is one of the most important steps the SEC can take to advance the cause of Main Street investor protection.”
WASHINGTON, D.C. June 25, 2008—The North American Securities Administrators (NASAA) today commended the U.S. Securities and Exchange Commission (SEC) for issuing a rule proposal related to the classification of equity indexed annuities.
This important proposal, as outlined at today’s SEC open meeting, would, if adopted, represent a significant step forward in the ongoing fight to protect investors, especially seniors, and we thank SEC Chairman Christopher Cox for his leadership on this issue,” said NASAA President and North Dakota Securities Commissioner Karen Tyler. “NASAA has long maintained that EIAs are securities and has urged the SEC to assert its jurisdiction over these products so that all investors who purchase EIAs can benefit from the strong protections afforded under the nation’s securities laws.”
... “We commend the SEC for moving forward with this proposal,” Tyler said, adding that NASAA looks forward to reviewing and commenting on the proposed rule. Tyler said the proposal, as described at the SEC’s open meeting today, “appears to remove the uncertainty that has surrounded the legal classification of equity indexed annuities for over a decade.” If adopted, Tyler said, “the proposal will subject these investment products to rigorous disclosure and suitability standards, and will deter abuse by exposing unscrupulous salespersons to strong sanctions under our securities laws.”
...
Millions of investors across the country, many of them senior citizens, need protection from the fraud and abuse that is taking place in the sale of EIAs. We applaud Chairman Cox for his commitment to strengthening protections for EIA investors.”
The sale of equity indexed annuities has risen dramatically since 1995, when they first appeared on the market. As sales of EIAs have risen, state securities regulators, as well as the SEC and the SROs, have received an increasing number of complaints about EIAs. According to a recent NASAA enforcement survey, 34 percent of all cases of senior exploitation reported to state securities regulators involved variable or equity indexed annuities.
...Tyler said the proposed rule would serve to close a regulatory gap, which has proven to be particularly harmful to senior investors. EIAs have generally been regarded as exempt from regulation under a provision of the Securities Act of 1933. As a result, many investors have been subject to fraud and other misconduct in the offer and sale of EIAs without the protections that the securities laws normally afford.

NASAA Commends SEC for Advancing Equity Indexed Annuities Proposal - 6/26/2008 - insurancenewsnet.com

[xrac]

Originally Posted by Charpress

I became securities licensed because I saw the handwriting on the wall (among other reasons).

But let's not forget, the real power behind this is not in any sense an attempt to protect seniors or anyone else. It is the brokerage industry that is suffering hard times and seeing a huge move away from their industry to the insurance industry. As always, the money is the motivation and the rest is just the excuse to get rid of some competition.

Well said!

[JMO Fan]

The proposed rule for those who want to comment. It's a big document. Cheaper than sleeping aids.
http://sec.gov/rules/proposed/2008/33-8933.pdf

[sman]

Originally Posted by healthagent

I do not see the ethical agents being harmed by this. In fact, the opposite would be true.

Sure they will. When a commission has to go through your broker dealer first, they take a cut. So the guy selling the index annuity and getting 5% now may only get 3%-4%. So it hurts their bottom line.

[healthagent]

How 'bout when that agent can't even get the appointment due to all the bad press.

[JMO Fan]

Quick read of the proposed rule is that all EIAs would be securities. It could also extend to all annuities, UL, and excess interest life. Separate accounts for all!?

[sman]

Originally Posted by healthagent

How 'bout when that agent can't even get the appointment due to all the bad press.

When I meet with a prospective client, my first meeting is just a fact finding session. I gather all the information and based on their goals, make a recommendation. Sometimes that includes annuities. All the "bad" press hasn't limited my appointments. I guess if I told every prospective client up front that an annuity was the answer to their problem, they would likely turn me away (and rightfully so). But I really don't believe the "bad" press has done anything to hinder getting an appointment.

[TonyBahu]

Originally Posted by sman

Index Annuities are a good product for the right situation and for the right percentage of a portfolio. There is no one size fits all. And I wouldn;t want to see someone put their entire nest egg into an IA. When running historic numbers, I think it's safe to say that an IA should average somewhere in the 4%-6% return range. Generally better than a traditional fixed annuity or CD, but will likely underperform the equity markets over any 10-year period.

As far as how the companies make money on these products, it's fairly simple. There are 3 basic "buckets" where these dollars go. First and foremost, the carrier will take the cost of paying administrative expenses (including commissions and the companies profit) out of the money. Next they have a required amount they must set aside to meet the guarantees of the contract. And lastly, they use what's left to purchase options on whichever index the IA uses for it's crediting method.

So, if $1 is invested, the company may take out $0.05 to cover the admin charges, commissions, etc. They may need to set aside $0.90 to cover the guarantees. Then they'll take the last $0.05 and purchase options on the index. Regardless of what the market does, the company already has it's profit. If the market goes up, they exercise the options and apply the interest to the contract. If the market goes down, the option expires worthless. Keep in mind, this is a simplistic explanation.

When you see a company offering a big bonus or a higher than usual participation rate, it's usually made up for somewhere else. Like in the guarantee or a longer surrender period. Some plans have a guarantee of 2% interest on 87.5% of the amount invested, but may have a higher participation rate or cap. While others, like ING, have a plan that has a guarantee of 3% interest on 100% of the money, but has a lower participation rate. One isn't necessarily better than the other. I'm of the opinion that the guarantees will likely never come into play. But people like guarantees.

As for the NASD involvment, I believe there are a couple of reasons. Number one, I think the NASD member firms (i.e. - broker dealers) have been seeing large amounts of money leaving to go to IA's. So they've put pressure on the NASD to try and get these products regulated just as equity products are. Secondly, many agents have abused IA's and taken advantage of people while offering poor advice. I have mixed emotions about the NASD getting involved. I don't really mind there being a requirement to have a securities license to offer an IA (although an IA is a fixed annuity and has a guarantee return - you can't say the same about equities). But I really don;t like the idea of having to run it through the broker dealer and taking a cut on commissions. Not all BD's require this (not yet anyway).

There's a great website where you can plug in the parameters of an IA (such as crediting method, bonus, aprticipation rates, caps, etc) and get historic results. This assumes, of course, that the IA would have had the same parameters for the entire length of the contract. But it gives you a general idea of which IA's might be better than others over the long haul. The website is Welcome to Annuity Marketing Services. You will have to register to be able to use the calculator. But you can use any alias and email address you like to do so. If you are an analytical person, you'll have fun running the different hypotheticals for many different contracts from many carriers.

In a nutshell, I believe this is an excellent description of the EIA. The bottom line is, everything is a tradeoff. Insurance companies are notorious for trying to make their product better than their competitors. However, there are only so many facets you can compete on. And if you decide to be the best in one facet, it is likely you won't be the best in another.

As in the example above, ING has a 3% on 100% guarantee but the maximum you can earn is lower than other EIA's with lower minimum guarantees. ALWAYS a tradeoff and never an exception. Beware the one thing that entrances most agents and that is commission. Often the products with the highest commissions are the ones that nail the clients to the cross. Don't believe me? Take a look at the super high comission products and let me know which one isn't sticking your client in for 15 years or mitigating their returns DRAMATICALLY. Always a tradeoff.

They can be great when used properly to augment a portfolio. But as mentioned above, they are NOT the cure-all. And they won't beat most markets in a 10 year period or for any extended period of time for that matter. They are designed to beat fixed rates (at the time of issue) by about 1% and not much more.

Hope that helps!

Tony Bahu
CEO
Annuity Report Reveals Shocking Secrets About Your Annuity

[Mr. Bill]

All I can say is that

"And they won't beat most markets in a 10 year period or for any extended period of time for that matter"

Indicates a poor understanding of the equities markets. Just ask John Bogle.

[bobson]

Originally Posted by TonyBahu

Take a look at the super high comission products and let me know which one isn't sticking your client in for 15 years or mitigating their returns DRAMATICALLY. Always a tradeoff.

They won't beat most markets in a 10 year period or for any extended period of time for that matter. They are designed to beat fixed rates (at the time of issue) by about 1% and not much more.

So let me get this straight... You are "sticking your client for 15 years" in a bad annuity with a long surrender charge but in order for equities to be good they have to be held for at least 10 years?

Am I the only one that sees the irony???

[xrac]

Originally Posted by JMO Fan

Quick read of the proposed rule is that all EIAs would be securities. It could also extend to all annuities, UL, and excess interest life. Separate accounts for all!?

FINRA is constantly reaching for more power. They will regulate all insurance and all financial transactions if they have their way.

Brokers, advisers blast Finra proposal - InvestmentNews

[JMO Fan]

Originally Posted by xrac

FINRA is constantly reaching for more power. They will regulate all insurance and all financial transactions if they have their way.

Brokers, advisers blast Finra proposal - InvestmentNews

That might be true, but the SEC, not FINRA, is proposing to classify all EIAs as securities. The SEC has long avoided regulating insurance -- even their newly proposed rule would leave company reporting to the states. Consumer complaints and court cases as well as brokers have pushed the SEC to act.

Federal courts have defined the requirements, including the requirements for securities licensure, suitability, and separate accounts, based upon federal securities laws. Many annuities, but especially EIAs, have stepped too far over the line from longevity-protection to investment-selling. Securities-type disclosure, including prospectuses and suitability rules, is appropriate for insurance sold mainly as investments, to protect sellers as well as consumers.

[URDRWHO]

Have you ever been securities licensed?

Increased fees to you (last time I paid my Series 7 it cost me $500 a year)

Increased E&O exposure ...hence increased E&O premium.

Commission sharing with BD (often 50%)

To be in securities compliance you need a separate filing cabinet for securities clients (you can NOT commingle insurance and securities files)

Each letter you get from a client must be sent to your BD.

If for some reason you are called to the FINRA arbitration board you have no rights.

Can I stop now....I can go on.

Originally Posted by healthagent

I don't know what the big stink is all about. Register them as securities and agents just have to pass another test. If they can't pass the securities test they shouldn't be talking about financial vehicles in the first place.

[xrac]

Originally Posted by URDRWHO

Have you ever been securities licensed?

Increased fees to you (last time I paid my Series 7 it cost me $500 a year)

Increased E&O exposure ...hence increased E&O premium.

Commission sharing with BD (often 50%)

To be in securities compliance you need a separate filing cabinet for securities clients (you can NOT commingle insurance and securities files)

Each letter you get from a client must be sent to your BD.

If for some reason you are called to the FINRA arbitration board you have no rights.

Can I stop now....I can go on.

URDRWHO, you love FINRA as much as the other reps I know!