The question of whether equity-indexed annuities should be classified as a fixed or variable product was headed for resolution last summer. The NASD in August announced it would issue guidance on the controversial issue, and members anxiously awaited an answer. But in what is all too characteristic of the self-regulatory organization, advisors were left scratching their heads, and compliance departments were scrambling to make sense of “Notice to Members 05-50.” In it, the organization issued “guidance” on the subject by refusing to take a stand one way or another.
Despite regulatory confusion, equity-indexed annuities have proven themselves an effective tool in addressing the investment needs of the elderly. According to the American College’s Fundamentals of Insurance for Financial Planning, equity-indexed annuities are a variation of fixed-interest deferred annuity products. They offer guaranteed minimum interest rates, and at the same time pay higher returns if a specified stock index increases. They are designed to appeal to investors who want to participate in high-equity investment yields without bearing the full downside investment risk of a variable annuity.
Like all investment products, they’re subject to abuse from a small number of unscrupulous individuals bent on making inappropriate recommendations. So what are some of the more appropriate situations to recommend EIAs for senior clients?
Ken Bradford, LUTCF, manager of Carlton Group Insurance Services in Springfield, Tenn., recently had a client situation where a husband died and his younger wife received a large insurance payout.
“She came to us for help and didn’t need the money right away,” Bradford relates. “We purchased an EIA that returned 18 percent the first year. Obviously, this type of return cannot be sustained and we told her it could easily go flat the following year, which she understood.”
While Bradford admits annuities are not for everyone, he notes that a high number of investors are still scarred from the recent economic downturn, resulting in millions of dollars that remain on the market sidelines. For seniors who need equity exposure due to increasing life spans but are wary of an increase in the associated risk, EIAs are a good fit. And most companies allow the contract holder to withdraw up to 10 percent annually after the first year, allowing for limited liquidity.
“EIAs work well as an investment strategy, but we think a better description is an aggressive saving strategy,” says Dan Crane, an advisor with Senior Financial Services Group in Springfield, Ohio. “For the appropriate client, we’ve had great success in limiting market risk while providing a better than average return.”