Nothing happens in a vacuum. If it weren’t for Dateline NBC’s 2008 “sting” operation featuring hidden cameras and shills posing as equity indexed annuity prospects, it is very likely that the Securities and Exchange Commission would not have voted to characterize IAs as securities.
You’ll recall that then SEC Chairman Christopher Cox made it quite clear that “senior investment fraud” motivated the SEC to act. He even kicked off the SEC open meeting on indexed annuities by playing excerpts from the Dateline program.
The SEC’s action came in direct response to the failure of IA firms to self-regulate incomplete, misleading and confusing sales practices involving their products.
For all practical purposes, however, it was this mass media, televised exposure of annuity sales practices that sealed the fate of indexed annuities.
What’s in store for the indexed annuity industry now?
Once again, present events are not taking place in a vacuum. If the industry wipes away the bad sales practices, overly complex contract designs, and too high fees, then insurers could better leverage the important value proposition that IAs offer to consumers: downside protection combined with upside growth potential.
What value proposition could be more attractive today to consumers, especially the millions now entering the “transition management” phase of retirement? The meltdown in the equity markets has driven these individuals to seek safe money alternatives to equities.
But the big question for the future of indexed annuities is how product providers choose to respond to this opportunity. Their future success will surely require more than a “tweak” to their existing business models.
Product providers that lead in the future will need to have embraced consumer-oriented contract designs and transparency in fee structure and performance.
They will also need to have adapted to a rapidly changing regulatory landscape that will, in my judgment, within 2 years deem advisors of all stripes to be fiduciaries. That is, all advisors will be held to the highest standard of care and trust in carrying out their duties for clients.
When the financial services industry arrives at the point that registered investment advisors, brokers and insurance agents are all at regulatory parity and operating as fiduciary advisors, the annuity distribution landscape will look very different than it does today.
Mandatory disclosure of compensation would surely alter annuity contract design, for instance. One can envision a shift away from up-front commissions in favor of trail-based compensation. Single premium immediate annuity compensation may also shift in a fundamental manner to an approach based upon periodic income payments rather than on premium paid in.
Just as important will be how the industry embraces and leverages technology, mass media and multimedia. This will be critical to success.
One need only to look at the election of Barack Obama to envision the technological communications model the IA industry should emulate to position itself for success.
This model entails succinct expression of the value proposition delivered to a mass audience via technology. The campaign leveraged web-based technologies such as online videos (YouTube) and multiple online events, and so can the industry.
Recall that the campaign successfully leveraged social networking sites and text messaging, too. It was no accident that the text messaging–not the traditional press conference–was chosen to announce the selection of Obama’s running mate. That made it a personal event, for millions.
In sum, once consumer-friendly products are in place, companies need to harness the power of video and Internet technologies to help communicate the value of these new products. Video educates and motivates. It is ideal to create a contextual understanding of how annuities “fit” in a larger retirement investing framework.
For the indexed annuity industry, use of these strategies will translate into growth.
Hingham, Mass. His email address is firstname.lastname@example.org