The sale of Equity-Indexed Annuities has increased 45% the first 6 months of this year. I'm concerned that the vast majority of those sales are unsuitable for the investors buying them. Oversight by the Securities and Exchange Commission (SEC) and the National Association of Securities Dealers (NASD) is desperately needed to protect retirees from being taken to the cleaners by agents hungry for the large commission. Read on to find out how this oversight will benefit you.
For almost 2 years now, I've been warning people against buying Equity-Indexed Annuities. Hopefully, my articles have caused agents all across the country to lose sales. That's why I am regularly attacked and berated by agents. When I started, I was a 'lone voice in the wilderness'. Now, the SEC and the NASD are interested in the situation. The national media are covering the story more regularly. The chorus of voices calling for change is growing. For example, The Wall Street Journal had an article on October 15th that echoed my complaints.
Greater regulation and oversight of these products is needed because, even though they are technically an insurance product, they are being sold as an investment. Anyone looking at their sales literature can plainly see that. With promises of market gains and the 'guarantee' that you won't suffer any losses, this investment is promoted as the answer to all your concerns. Investors are buying it as an investment, not insurance. Therefore, they should be regulated as investments and not as insurance.
Investors will benefit if Equity-Indexed Annuities are classified as an investment. It will reduce, but not eliminate, the potential for abuse. Here's why.
First, being classified as an investment will result in better disclosure of the risks involved with this product. Equity-Indexed Annuities are complex products. Many of the agents selling them don't even understand their intricacies. Consumers are not adequately warned of the dangers they face in these products. Most think they can't lose money in this investment and that's simply not true.
For instance, many of those purchasing one of the most popular Equity-Indexed Annuities fail to realize that if they pull their money out of the contract when the contract matures that they won't receive the index-related returns they thought they would. In fact, those wanting a lump sum from this specific product after 10 years would be GUARANTEED of making a total return of about 1.5% for the entire 10 year period. Few would ever buy this investment if they clearly understood that.
Second, those selling investments are required to make sure that the investment they sell is suitable for the person they're selling it to. When a commission-based investment is sold, it is reviewed by compliance officers to verify suitability. Compliance officers closely scrutinize investment sales because it's their job to protect their firm from lawsuits and regulatory fines. And they know that their firms may be audited by the SEC.
No compliance officer would approve the sale of an Equity-Indexed Annuity for 100% of a person's investable assets--but I see those recommendations all the time. No compliance officer would approve of a transaction where the investor pays a large penalty on one annuity contract to transfer the money into an Equity-Indexed Annuity. This has become such a problem, though, that the NASD has issued warnings about it.
Third, the high commissions equity-indexed annuities offer create a huge conflict of interest for the advisor. If you were an advisor and had the choice of making 2% or 15% on an account, which would you choose? Is it any wonder equity-indexed annuities have become so popular?
The Wall Street Journal article arrives at the same conclusion that I have--older investors should avoid equity-indexed annuities. And yet, who are these agents going after the most? Older investors, of course, because they're the ones with the most assets.
Don't be surprised if in the not-too-distant future, new regulations emerge to reign in the wild-west world of equity-indexed annuities. Until that day arrives, don't fall for the equity-indexed annuity sales-pitch. There are much better ways to earn a decent market return with low risk, and you don't have to give up control of your money to do it.
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