The Financial Industry Regulatory Authority continues to be “very focused” on variable annuities, as they remain one of the “top” products for customer complaints, Carlo di Florio, FINRA’s chief risk officer, said Monday.
Speaking at the Insured Retirement Institute’s Government Legal & Regulatory conference in Washington, di Florio said that while there’s been a “bit of de-risking” in the VA marketplace, other product providers are issuing VAs “with all the same risks” as complex structured products, such as VAs that include “buffers and caps.” Di Florio noted that it’s important for reps selling these types of VAs to be able to explain the “trade-off between the buffer and the cap.”
Annuities with buffers and caps differ from more traditional variable annuities in that they may add to the existing product complexity by varying exposure to market volatility, and require a more sophisticated analysis of product features such as the tradeoff between the upside caps and downside buffers.
FINRA is also watching other complex products such as interest-rate sensitive products like long duration bonds and exchange-traded funds, as well as corporate bonds, di Florio said.
Chief among customer complaints about VAs, di Florio said, are disclosure, sales practices, VA exchanges and surrender charges.
Structured VAs, also called “collared VAs,” include caps on the account value growth with some downside protection, according to IRI.
Structured VAs are generally filed as variable annuities, though the account value growth is similar to fixed indexed annuities, as the performance is tied to an index such as the S&P 500, IRI explained in a recent white paper.
IRI offered the following examples of the choices that structured products offer clients.
The buffers allow clients to elect what percentage of market loss that their account value is protected from, with commonly available amounts including 10%, 20%, 30% and 100%.
One example would be a client investing $100,000 and electing a three-year term with a 20% buffer. In this example, assume the cap is 10%.