Some financial advisors who sell variable annuities are concerned about recent developments.

These advisors fear that some companies might have bent their rules for big investors. They also worry about reports that some fund companies made cash payments to buy slots within VA contracts.

Terry Balding, a Sun Prairie, Wis., financial advisor, says the reports that some money managers might be cutting special deals tend to discredit the entire industry.

“Its very important that we know our clients are first in the eyes of these companies,” says Balding says. “We have to be able to trust them.”

So far, Balding is not getting many calls from clients about the VA investigations. But he would like to see the VA industry be more active in addressing possible problems with VA operations.

So far, “the VA industry has been very, very quiet,” he says.

Balding recalls hearing one VA issuer bragging about the care it took with selecting fund subadvisors. Now, he complains, he looks at the VA contract and sees it is full of fund companies involved with the marketing timing probes.

Phil Denney, an advisor in Austin, Texas, agrees that the kinds of abuses regulators describe in their complaints are a big problem. “What [the accused traders] did was wrong, because they got special deals.”

If the VA market timing investigation turns out to be more than a squall, what can insurers do to win back advisors trust?

Balding has no use for the idea of insurers investigating themselves or having industry organizations do so. He doesnt even trust the Securities and Exchange Commission to clean out the problems.

“I think Spitzers doing a great job,” Balding says.

If a VA company let Spitzers investigators in and those investigators gave the company a clean bill of health, then, Balding says, he might trust that company.

Denney objects to protecting the current orthodoxy that a good asset manager is one who buys and holds even as the stock market plummets.

Regulators “ought to be investigating these mutual fund managers about why they bought and held through a bear market,” Denney says. “They did not manage anything.”

The shareholders would have been much better off owning index funds, he says.

Market timing and related problems drive up fees for all investors, but, for the typical investor, “the fees are insignificant to people losing 30% or 40% of their money” as a result of the popping of the dot-com bubble, Denney says.

–Allison Bell


Reproduced from National Underwriter Life & Health/Financial Services Edition, February 6, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.