“Well, if that doesn’t beat all,” was the first thing that came to mind when I saw an August 2, 2007 Los Angeles Times report about how some hedge funds are temporarily barring withdrawals.
Apparently the funds are suffering losses so they are taking this step to ward off having to sell securities when prices are plunging, as has occurred in recent weeks.
The writer, Tom Peruno, says the practice is legal. But, can you imagine how the investors feel?
If you are in insurance, you already know the answer. Before the era of modern insurance contracts, insurance professionals encountered strong consumer resistance to immediate annuities that consumers believed would lock up their money forever. They also faced consumer resistance to putting money into long term care and term life insurance policies that may never “give back” during the consumer’s lifetime.
Pure and simple, people don’t like jailing their own hard-earned money. They want to be able to take it out. For many, the mantra is: “No access, no deal.”
The recent episode with the hedge funds should give insurance professionals some leverage, however.
That’s because many modern insurance and annuity contracts not only offer liquidity features; they guarantee the features.
This liquidity is now available in several different forms. Examples include the guaranteed minimum withdrawal benefit and guaranteed lifetime withdrawal benefit in variable annuities; the accelerated benefits features now common to many life policies, triggered by long term care and/or terminal illness; the commutation features in newer lifetime income policies; and the bailout provisions in some fixed annuities. (Even “return of premium” features can be thought of as a type of liquidity in that money paid in is not gone forever; you can get it back under prescribed circumstances.)
These are in addition to the 10% penalty-free withdrawal provisions found in most traditional annuities; the systematic withdrawals in fixed and variable annuities; the policy loan features in most cash value life policies; and the right to surrender annuity, life and LTC contracts in return for a value as determined by the contract.
Of course, fees, interest or penalties may be applied for taking money out before the end of a stated period. This is no different than bank penalties for taking money out early from certificates of deposit. But consumers who are willing to pay the fees at least know they can get to the money.
Barring insolvency, an insurer can’t say, “Oh, we’re not doing that right now.” In variable insurance contracts, there may be limits on money moves (due to guarantees, other features, or market timing limits), but insurers can’t say, “Sorry, no withdrawals this month, because the market is crazy.”
That is a powerful story to convey to consumers who want liquidity.
Agreed, the hedge fund investors who have encountered a temporary moratorium on withdrawals aren’t likely to suffer much. After all, most of them have big bucks, so they can roll with the punches. And many are financially sophisticated enough to grasp, or even condone, their fund’s decision.
Still, the idea of suddenly not being able to make withdrawals, at a time when the market is swooning, will likely leave many with a bad taste in their mouth.
Further, those who earmarked their hedge fund investment for retirement income could be up a tree, if the moratorium cramps their income plan. (Such investors might include mass affluent seniors and those who entered hedge funds with minimums as low as $100,000.)
Their ensuing problems could lead to bad publicity, various investigations and so on. That can shake public confidence in other financial products and services–not unlike a cancer spreading throughout the system.
Don’t think so? Keep in mind that regulators are already probing various forms of misconduct in sales to seniors.
In fact, the Financial Industry Regulatory Authority (the new name for the National Association of Securities Dealers) has been probing broker-dealers to see if they are “targeting” retirees and seniors for Section 72(t) qualified plan withdrawal programs, says Sutherland Asbill & Brennan LLP, Washington, D.C., in its August 3, 2007 Legal Alert.
What’s more, says Sutherland, FINRA inquiries into sales made to retirees and seniors mirror those of other regulators, such as the Securities and Exchange Commission, state regulators and Congress.
In the area of liquidity, the insurance industry has delivered. Liquidity features are now fairly common–and guaranteed. This is a story the public needs to hear. Playing footsie with it–by barely mentioning the feature or its value–is nothing but a colossal waste.