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June 28, 2002 at 08:00 PM
The Securities and Exchange Commission is keeping an eye on a number of troublesome practices affecting variable insurance products–specifically “unbundled” variable annuity contracts, the sharp rise in fund substitutions, and market timers’ use of funds within annuities as short-term trading vehicles.
Paul Roye, director of the Division of Investment Management at the SEC, told attendees at the National Association for Variable Annuities (NAVA) regulatory affairs conference in Washington this week that the fast changing variable insurance products industry is keeping the commission on its toes. One of the emerging trends the SEC is trying to keep pace with, he said, is the unbundling of variable products, which allows investors to pick and choose additional death benefits and other features that fit their specific needs–but usually at an extra cost. While this practice offers investors the benefit of customizing their annuity, Roye says it raises disclosure issues and further complicates an already complex product.
Mike DeGeorge, NAVA’s VP and acting general counsel, says selecting benefits makes the process “more complicated for the investor in working with the broker/dealer or financial planner in determining which features really are best suited for that investor’s needs.” And it becomes imperative that the advisors selling the product understand the benefits, he says.
But a recent survey that queried the top 20 broker/dealers on the conditions and environment surrounding distribution of unbundled variable annuities revealed B/Ds are having trouble keeping up with an annuity contract’s moving parts. “The sheer volume of information that a producer is asked to assimilate to sell these products is getting to be quite a challenge,” says Jim Doyle, VP of professional services at Pivot/Info-One, the Easton, Connecticut-based financial services consulting firm that conducted the survey. “[Broker/dealers] generally responded that product design has run ahead of product support.”
Despite the steep learning curve involved in selling unbundled products, “there is tremendous value to be derived from them,” Doyle says, because they often result in “a better match to consumer need” and “the ability in an unbundled format to add new benefits to existing contracts enhances the retention of those contracts long-term.”
