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Do regulators want to end fixed annuities?

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FINRA and the North American Securities Administrators Association won the index annuity battle and persuaded the SEC to call index annuities securities by saying they would do a better job of determining when an index annuity sale is suitable.

However, instead of setting suitability guidelines for index annuity sales, in a recent press release, the NASAA said “Equity-indexed annuities … have taken an especially heavy toll on our senior citizens for whom they are clearly unsuitable.” According to NASAA, an index annuity sale is never suitable.

Sound bites from securities regulators on why deferred annuities are bad often settle on surrender charges. The whipping boy they used a few years ago was the mythical index annuity product with a 20-year surrender period (that never existed in the first place). It appears it isn’t the length of the surrender charge that truly is the talking point, but merely the fact that a deferred annuity is used.

In a recent Massachusetts securities case, the regulator jumped on the fact that one of the annuities replacing equities had a 10-year “lock-up” and another had a five-year “lock-up”—a pejorative synonym for “surrender period.” A Missouri case pointed out that two of the consumer’s new annuities were currently paying 3.25 percent interest and that the existing equity accounts had “gained over 23 percent in the two years prior to their liquidation.”

What I find disturbing is that the Massachusetts regulator failed to comment on the fact that 90 percent of the 82-year-old consumer’s assets were in the stock market before moving some of them to fixed annuities. Similarly, the Missouri regulator did not opine on whether the 2008 stock market would hold any risks for the 75-year-old consumer in that case.

The securities industry sells stocks and bonds; fixed annuities do not fit their model and are competition for investment money. This is coupled with the reality that the annuity industry has many toxic product designs built to maximize commissions and not consumer returns. There are also too many carriers that do not provide transparent performance results.

Part of the answer is education. I have sent letters to journalists who recently have had articles mentioning the safety of bonds, asking them to talk about multi-year-rate fixed annuities and showing the actual yields of index annuities. If I can get the media to report that at least some deferred annuities are good, it will become difficult for the securities regulator to end an entire industry.