This past Sunday on Dateline NBC, Chris Hansen (host of To Catch a Predator) did an exposé on the deceptive sales tactics used by unethical insurance agents when selling equity-indexed annuities, most often to seniors.
I have mixed feelings about the affect that Dateline's exposé will have on consumers. On the positive side, it will expose the deceptive sales tactics used by unethical insurance agents and alert consumers of things to look out for when considering purchasing an equity-indexed annuity. I hope that it also served to expose many of the agents themselves so that their clients will know exactly the kind of people to whom they have entrusted their financial future-the kind of people who give the entire financial services industry a bad reputation. I know one insurance agent who promotes himself as an IRA expert and has told prospective clients that the only way they could receive the "Stretch IRA" (the ability to stretch the distributions from an inherited IRA over the beneficiary's lifetime) would be to use his company's "special" beneficiary forms which, not surprisingly, are only available with his company's equity-indexed annuities. That's just not true. Any IRA beneficiary form will enable the "Stretch IRA" as long as it is completed properly.
As most people know, the financial services industry has its fair share of snake oil salesmen. It's unfortunate and problematic that every insurance agent, stock broker or financial planner who uses deceptive, unethical sales practices (or simply gives bad advice) gives the entire industry a bad reputation and makes it much harder for those of us who genuinely care about our clients and our reputation for integrity and the quality of our financial advice to advise our clients. As a registered investment advisor, I have a fiduciary duty to act in my clients' best interest at all times, a responsibility that I take seriously. Unfortunately, not every financial advisor feels the same. Many care more about commissions than their clients. It would be wonderful if those advisors and their deceptive sales practices were exposed for their clients and all the world to see by last Sunday's Dateline NBC report. But the sad fact of the matter is that Dateline's exposé will likely have little or no affect on those advisors or their practices because they are just too good at spinning their lies and deception. Having been trained by the annuity marketing associations like the one exposed in Dateline's exposé, they are armed with most deceptive and effective sales techniques and have refined them to an art form.
It's more likely that last night's exposé will only make it harder for caring, ethical financial advisors who recommend annuities only when they genuinely believe that it's appropriate, beneficial and in their clients' best interest. I fear that individuals for whom a fixed, variable or indexed annuity might be appropriate and beneficial will now hear the word "annuity," recall Dateline's exposé and dismiss their advisor's recommendation without consideration. Even worse, they might lose trust in their advisor solely because he or she recommended an annuity.
I have never been a huge fan of equity indexed annuities, although I will admit that they can make sense for certain clients in certain situations. I prefer annuities that provide greater return potential, a wide selection of high-quality investments and greater control over how the investor's money is allocated. And until the creation of "living benefits," I was not big advocate of variable annuities. The annuity I most often recommend is a variable annuity with a guaranteed minimum withdrawal benefit (GMWB) which provides a specific guaranteed lifetime income, regardless of what happens in the financial markets. While this annuity, like an equity-indexed annuity carries steep surrender charges in the first four years, it can be extremely beneficial to individuals who are behind in their retirement savings, consistently nervous or conservative investors, individuals who want or need a guaranteed lifetime income or individuals who like the idea of having an insurance company guarantee that they will never outlive their retirement savings.
In a 2007 study by Ibbotson Associates (one of the world's most well-known and highly respected authorities on asset allocation), they concluded that for individuals in or near retirement, after all costs, there are numerous benefits to adding a variable annuity with a GMWB to a diversified investment portfolio. According to the study:
"Overall, we believe a variable annuity with a GMWB offers protection both in terms of market downturns and more importantly retirement income risk. For the typical investor in or near retirement, there is a good amount of value by investing a portion of his or her investment asset into a variable annuity with a guaranteed minimum withdrawal benefit, which provides a guaranteed income level through retirement. This can potentially increase the amount of income generated from the entire portfolio (especially during poor market performance periods), and reduce the amount of income risk. Similar to payout annuities, a variable annuity with a guaranteed minimum withdrawal benefit offers a secured lifetime income that is not available through traditional investment products." They also stated: "For the typical retiree, it is beneficial to look into investing a portion of their assets into a variable annuity with a guaranteed minimum withdrawal benefit."
Now, mind you, the annuity recommended in the Ibbotson study was a variable annuities with a GMWB and NOT the equity-indexed annuity discussed in Dateline's exposé. The potential benefits outlined in the Ibbotson study are the very reason why, after years of not being a fan of annuities, I decided in 2007 to begin recommending variable annuities with a GMWB to clients who fit the profiles I previously mentioned and for whom I believe the annuity to be both appropriate and beneficial. But before you begin to think that I've become an annuity zealot, I should emphasize that less than two percent of the money I manage for clients is currently in annuities and most were purchased by clients through previous advisors. However, I am in full agreement with the finding of the Ibbotson study and a firm believer in the benefits of adding the right annuity to a diversified retirement portfolio when appropriate, especially when a client is concerned about his or her ability to meet their retirement income needs or the possibility of outliving their retirement nest egg.
There are a few issues related to equity-indexed annuities that were not discussed in last night's exposé. The first is the fact that, although they include the word "equity," equity-indexed annuities are considered to be "fixed" insurance products and are primarily sold by insurance agents who do not hold a securities license. Most advisors who are securities licensed prefer variable annuities with guaranteed minimum withdrawal benefits to equity-indexed annuities for a variety of reasons including the potential to earn full market rates of return, have greater control over your investments and the ability to receive guaranteed income for life without having to annuitize, and regardless of what happens in the financial markets.
Non-securities licensed insurance agents like to sell equity-indexed annuities because it's the only product they can offer that could be considered to be a growth investment and because they pay commissions as high as 10%. Unfortunately, the barriers to entry are not as high in the insurance business as in the securities industry where registered reps must pass the Series 7 examination, a comprehensive seven-hour examination. So, most of the time, you'll find that the insurance agents who sell equity indexed annuities to be less knowledgeable about investments and economics than securities-licensed financial advisors. Here's a tip off: If the individual who's recommending any type of annuity (let alone an indexed-annuity) is willing to come to your home, you are most likely working with a salesman rather than a financial advisor. The best, most highly respected financial advisors don't make house calls.
Because of how lucrative selling indexed-annuities can be, many insurance agencies recruit armies of agents of questionable intelligence and integrity to prey upon the general public. I have met musicians and parking lot attendants who were recruited by an insurance agency to become licensed to sell insurance and annuity products part time. Often, they will recruit minorities to market products to their communities. And where English is neither the agent's nor his client's first language, both of their abilities to comprehend such complex financial products are limited. Sales abuses are commonly committed in such situations.
Another place where annuity sales abuses run rampant is in the public school systems where, each year, schools across the country open their doors and their teachers' pocket books to non-securities licensed agents and their companies. Based on the terrible, inappropriate products that I have seen sold to teachers, time and time again, I can only assume that most school systems provide no oversight of the individuals who are advising and selling financial products to their employees. The result of their negligence has been teachers who know little or nothing about investing or retirement planning being sold fixed and equity-indexed annuities as well as pre-tax life insurance policies as retirement plans. I've met teachers in their 20s who were sold fixed annuities when they would clearly have been better off investing primarily in equities. For the agents who are invited in the schools and given free reign to sell teachers whatever lousy annuity products they like, it's like shooting fish in a barrel, and utterly criminal. When I've asked a few of them how they could in good conscience sell a fixed or equity-indexed annuity to a young teacher, they almost always reply, "Teachers are conservative." Unfortunately, that's just a bad excuse for their not putting in any time or effort to educate their clients about how they should be investing for retirement. Most of the time, if they or their clients understood how they should be investing for retirement, the client (especially a teacher in her 20s or 30s) would never end up in an equity-indexed annuity.
As with any and every financial product, you need to know when and where an annuity might be appropriate. If you're not sure, you need to work with a knowledgeable, experienced and trustworthy advisor. And in spite of what many may now think, as a result of Dateline's exposé, annuities are not always bad and not all advisors are out to cheat and deceive the public.
If you have questions about annuities or anything else financial feel free to give me a call at (818) 673-1695. If you think you may have been sold an annuity product that's not appropriate for your needs and objectives, I would be happy to help you make that determination. If you're out of the surrender period, it may be possible to move to a better annuity product or, if it's a qualified annuity, to a non-annuity IRA. I would be happy to give you your options.
Rich Winer is the president and CEO of Winer Wealth Management, Inc. (www.winerwealth.com). He provides wealth management and financial planning services to individuals and families in Los Angeles and throughout the United States. Rich specializes in helping individuals nearing or in retirement to implement personalized strategies to protect and preserve their retirement savings, minimize taxes and increase the magnitude and longevity of their wealth. He is a charter member of Ed Slott's Master Elite IRA Advisor Group, an invitation-only group of IRA and retirement distribution planning specialists. He is often mentioned or quoted in financial publications like The Wall Street Journal and Financial Planning Magazine.
For more information, you may contact Rich at rich@winerwealth.com or call (818) 673-1695.
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