The designation debate and annuity misinformation

Without full knowledge of the situations described in the article, we express no opinion about the actions of the individuals mentioned. However, we do emphasize that each person’s financial situation is unique and must be evaluated, addressed and resolved in the context of what is best for that client.

- David Woods
CEO, NAIFA

FSP GENERAL STATEMENT ON FINANCIAL
AND INSURANCE DESIGNATIONS
In light of the July 8 New York Times cover story “For Elderly Investors, Instant Experts Abound,” on some of the designations used by financial and insurance professionals, the Society of Financial Service Professionals is restating the criteria it uses to evaluate the credentials that make an individual eligible for membership. They are:

1. The designation or degree must be awarded by a credible institution or examining body as a designation or degree.
2. The credential is awarded after successful completion of an examination or series of examinations designed to measure mastery of a body of knowledge.
3. Attainment of the credential should be subject to a minimum experience requirement appropriate to the field of expertise.
4. The individual earning the credential should have a continuing commitment to advanced education.
5. Holding the credential should entail adherence to a professional Code of Ethics.

FSP’s core values are relationships, education and ethics. We believe that these planks create a platform that enables advisors to serve their clients’ best interests and operate in the public trust. As an organization, we firmly believe that true continuing education – and designations earned as a result of such education – is highly worthwhile. We support the endeavors of all parties in the insurance and financial service profession to provide credible expertise to their clients.

For more information about FSP, call (888) 243-2258 or visit www.financialpro.org.

- Lisa Wetherby
Director, Public Relations
Society of Financial
Service Professionals

NAFA RESPONSE TO N.Y. TIMES ARTICLE
The National Association for Fixed Annuities applauds the advocacy efforts of The New York Times and its intention to keep its readers informed about potential misleading sales practices and salespersons. NAFA strongly opposes unscrupulous or misleading sales methods including any representation of expertise or authority when there is none. However, NAFA also strongly disagrees with any implication that these activities or representations are widespread or endemic. NAFA is aware, from industry reviews of the documented consumer complaints and resolutions with insurance departments, that the vast majority of sales are not only appropriate for and desired by the customer, but are satisfactory as well.

NAFA was disappointed that the information and education your paper sought from us and from our member companies was apparently not utilized in this article. Instead of helping to educate the public on what should be known and what ought to be asked when learning about fixed annuities, [your reporter] Mr. Duhigg seemed to be more interested in vilifying the agents, the designation and the insurance companies. NAFA understands that headline journalism sells newspapers, but no one seriously believes that all insurance professionals, insurance designations or insurance companies are bad. Furthermore, the article did nothing to help readers understand fixed annuities nor to know what to look for when considering purchasing one.

You are right in differentiating the two types of fixed annuities, immediate and deferred. However, NAFA would like to offer a bit more insight into these differences to benefit your readers. Immediate annuities, like their name, are suitable for individuals who want the guaranteed lifetime payouts immediately. Deferred annuities are for individuals wanting that same guarantee but do not want to begin tapping into this savings immediately; they will receive their guaranteed payouts, but only after the deferral period. In addition, these individuals are seeking guaranteed principal protection, guaranteed prior earnings protection, guaranteed minimum interest, tax-deferred savings, longer-term savings plans, and gifting without delays and costs of probate.

Your section regarding commissions began with some information on sales numbers and offered the opinion that immediate annuities are “often sound investments” for retirees but that “the vast majority of annuity sales do not offer immediate payouts.” If you would have asked the insurance companies that you interviewed or inquired of NAFA, you would have been informed that almost all deferred fixed annuities offer payout options which are similar to and often exactly the same as their immediate annuity partner. In addition, the majority of all fixed deferred annuities allow purchasers to receive payouts of their annuities if they select a payout option between five years and lifetime payout. The deferral is just for those who want to delay their payout because they are still working or using other savings or retirement funds for their present income.

To further reinforce your alarm, you concluded that out of the total $182.8 billion sales in 2006 (NAFA informed you that LIMRA reports sales of $236 billion), “97 percent of all annuity sales were deferred annuities.” Since this article was about the sale of fixed annuities, and you interviewed companies about their fixed annuities and requested information from NAFA, the National Association for Fixed Annuities, we question why you included almost $161 billion dollars of variable annuity sales in your tally. Since variable annuities are by their very nature deferred, it would seem your intent was to sway opinion to your next point that deferred annuities offer “sales agents the richest commissions that is one reason so many of them are sold every year.” We informed you that the average fixed annuity commission is about 5 percent, not the 9 percent you used as an example. Misstatements such as those in Mr. Duhigg’s article regarding “high commissions” imply that they are used as an inducement to sell “elderly” people annuities that are inappropriate for them. You did not inform your readers that commissions are commonly reduced, generally by as much as 50 percent, for annuities sold to older individuals.

A no-surrender charge product with a typical 1 percent annual asset fee, as opposed to a 7-year surrender charge product with a 7 percent street level commission, will actually have a higher cost to the client and will thus reduce the potential return to the client, not increase it. This is as true of mutual funds and other vehicles as it is true of fixed and variable annuities. An asset-based trail must recover an increasing cost over time from the spreads, and since the spreads cannot be increased (in most cases), they start out higher at the outset than spreads on products with traditional stacked, front-end commissions and contingent deferred sales charges.

Just as a typical “A” share mutual fund will actually cost a client less if the asset is held for a longer duration than a “B” share mutual fund will, so will a stacked front-end commission on the annuity cost less than the asset-based trail over the same duration. NAFA is unaware of any other financial instrument that reduces surrender charges (or contingent deferred sales charges) because of age.

The article also claims that annuities “require buyers to wait as long as 10 years before receiving benefits.” Ignoring the fact that the average surrender period is more typically around seven years, you did not mention the 10 percent free withdrawal each and every year. You also failed to point out that, unlike mutual funds or other market risk products, surrender charges can be waived at death, for nursing home confinement, terminal illness, IRS required distributions, or, in some cases, loss of a job.

Omitted, too, was the fact that, unlike mutual funds or other market risk products, surrender charges are waived if the client chooses to receive guarantee payouts over as little as five years and up to lifetime.

Finally, no reference was ever hinted at that, again, unlike mutual funds or other market risk products, even before beginning the surrender period, fixed annuities offer the policyholder a 30-day free look when first receiving the annuity policy and full disclosure information to reverse the decision if that is what is preferred. NAFA believes that in the end the two most important maxims for insurance professionals selling fixed annuities are:

1. Target safe money needs, not age or demographic.
2. Diversify products as well as risk by putting savings or investments into more than one financial product.

Suitability is always a matter for individual determination. Only a well-informed client can make an appropriate decision. Therefore, it is important that all the features and benefits of the fixed annuity be fairly and accurately communicated to a prospective buyer.

Kim O’Brien
Executive Director, NAFA