Regulators are cracking down on abusive sales tactics by broker/dealers selling annuities. But sales of variable annuities–and, particularly, immediate annuities–continue to grow at a healthy clip. In the first quarter of 2004, total VA assets hit $1 trillion, a level not seen since 2000. Sales of VAs reached $34.4 billion in the first quarter of this year, a healthy jump from $31.7 billion in the first quarter of 2003. “People have not been deterred from investing in annuities as a result of the heightened regulatory scrutiny,” says Michael DeGeorge, general counsel for the National Association for Variable Annuities (NAVA) in Reston, Virginia.
In June, the Securities and Exchange Commission and the National Association of Securities Dealers issued a joint report on broker/dealer sales of variable insurance (it’s at www.sec.gov/news/studies/secnasdvip.pdf). The report cites “a large number” of investor complaints about being sold a variable annuity without fully understanding the product, or being sold an annuity that was not appropriate for their investment objectives. The SEC and NASD also found instances of brokers recommending annuities to senior citizens and other investors who couldn’t afford to buy the products without mortgaging their homes. Other abuses included failures to disclose the fees, risks, and tax consequences of variable insurance products.
NAVA says the report failed to show “that improper sales practices are widespread throughout the variable annuity industry” and maintains that “the vast majority of variable annuity sales are in compliance with SEC and NASD requirements.” But SEC Chairman William Donaldson insists that the report’s findings “show that many firms should take steps to improve their practices,” and that “given the complexity of variable annuities, extra care is required” when selling and buying these products.
The SEC has issued an alert (sec.gov/investor/pubs/varaquestions.htm) reminding investors that annuities aren’t for everyone, especially those who need money in the short term or who borrow against their homes in order to afford one. “People don’t understand there is a long-term holding period, usually seven years,” when they purchase an annuity, says Daniel Reagan, a registered rep at Fleischer Jacobs Group in South Burlington, Vermont.
Recently, the NASD slapped three firms–Nationwide Investment Services Corp. of Columbus, Ohio; its affiliate, Nationwide Securities Inc. of Dublin, Ohio; and American Express Financial Advisors Inc.–with fines for variable annuity sales abuses. In settling with the NASD, none of the firms admitted wrongdoing. But Nationwide Investment Services and Nationwide Securities were fined $175,000 for inadequate procedures and systems governing variable annuity sales, and for distributing advertising and sales material with inadequate disclosures about annuities. American Express was fined $300,000 for inadequate record-keeping. The fines came on the heels of NASD complaints against Waddell & Reed and its president and national sales manager for recommending 6,700 variable annuity exchanges to customers without assessing the suitability of the transactions. Waddell & Reed has denied wrongdoing. The NASD, meanwhile, vows it will rein in “problematic sales practices” in deferred variable annuities–the top-selling contract–through a proposed rule requiring “suitability, disclosure, principal review, supervisory and training requirements that are tailored specifically to transactions in deferred variable annuities.”
DeGeorge of NAVA notes that at the end of 2002, deferred variable annuity sales totaled $113 billion, while sales of immediate variable annuities reached only $500 million. But immediate annuities are becoming more popular with retiring baby boomers in need of cash. “Immediate annuities will be more important and play a much bigger role as the baby boomers retire in the next several years, because Social Security is not going to provide enough cash flow to people in retirement,” DeGeorge says.
An immediate annuity is purchased with a single premium, and payouts begin a month or so after purchase, DeGeorge says. With immediate annuities, investors take a lump sum and convert it into a lifetime income stream. Deferred annuities are longer-term investments that have an accumulation phase. They can be purchased with a lump sum or through monthly premiums. The money in a deferred annuity builds up over time on a tax-deferred basis. At retirement, the contract owner can begin to take money out of the annuity by annuitizing.