It doesn’t take much to get “Stan the Annuity Man” enraged. Mention fixed indexed annuities, and he’s livid. Bring up advertising pitches for them, and he fumes, as evidenced in an interview with ThinkAdvisor.
There’s no shortage of outrage directed at Stan, either — that is, Stan Haithcock, ardent consumer advocate and self-proclaimed No.1 independent annuity agent for consumers and fee-only investment advisors in the U.S. One chief reason for the industry’s disdain: He helped Sen. Elizabeth Warren with her investigation two years ago calling out annuity companies for incentive trips paid to agents and deeming them a conflict of interest. In her report, Haithcock was referenced as a source at least three times.
Consequently, he received “more hate mail from the industry than I ever got in my life,” he says in the interview.
Industrywide, annuity sales are down; but the business of Haithcock, 53, a former financial advisor with Dean Witter, Morgan Stanley, UBS and PaineWebber, is flourishing. Why? Because the industry, promoting variable and indexed annuities, focuses on potential growth, while he ignores those and zeroes in on guarantees and lifetime income, “the one benefit that annuities offer,” as he puts it.
Another bone of contention: regulation. Haithcock says the annuity industry needs it big time, especially to stop the “fraudulent” way indexed annuities are advertised.
Since such contracts are marketed as securities, they should be sold as securities — and therefore regulated by the Securities and Exchange Commission and the Financial Industry Regulatory Authority, Haitcock maintains.
Annuity sales’ focus should be on simple premium immediate annuities (SPIAs) and qualified longevity annuity contracts (QLACs), instead of variable and indexed annuities, he says.
ThinkAdvisor recently interviewed Haithcock on the phone from his Ponte Vedra Beach, Florida, office. Looking to the future, Stan the Annuity Man — named after baseball record-setter Stan “The Man” Musial — thinks that in five years, annuities will be a direct-to-consumer business. He has been testing that model for nearly a year now (www.Annuities.direct). He views annuities as commodities. Incidentally, Haithcock stresses that the educational annuity books and manuals that he’s written, including a new one on fixed indexed annuities, are available to readers free. Here are excerpts from our conversation:
THINKADVISOR: A recent survey by Jackson National Life Insurance and the Insured Retirement Institute found that only 46% of consumers are aware that annuities can provide guaranteed lifetime income.
STAN HAITHCOCK: Bingo! Who’s to blame for that? The annuity industry. There should be just one ad: “Annuities. Lifetime Income.” The word annuity should mean lifetime income. But it doesn’t. It’s a cuss word.
Do you think annuity sales are declining because the industry focuses on the wrong message?
Yes. It shouldn’t be about market growth, which is going to go down in the history of marketing as one of the biggest blunders an industry ever made. The industry is addicted to the drug of market growth, and they keep going there, focusing on potential returns of indexed annuities or variable annuities.
Why shouldn’t they emphasize potential growth?
Because the 10,000 baby boomers retiring every day don’t care about that. All they care about is guarantees and lifetime income. The one benefit proposition that annuities have — lifetime income guarantees — the annuity industry says nothing about.
How will expected rising interest rates affect annuity sales? This can make fixed indexed annuities a plus for consumers.
It will help pricing. But with lifetime income guarantees, the primary pricing mechanism is life expectancy from the day you take the income, not interest rates, which play a secondary role. The younger you are, the lower the payment.
Many people are against any and all annuities.
That always blows the top of my head off! Because [the way to look at annuities is] what are you trying to solve for? It depends on what you’re trying to achieve. If it’s for income and lifetime income guarantees that start immediately, there’s an immediate annuity. If you want income to start at a later date, that’s s a QLAC [qualified longevity annuity contract] or deferred income annuity. If you just want to protect the principal, that’s a multi-year guarantee annuity.
What’s your opinion of indexed annuities?
The industry is defending indexed annuities [aka fixed indexed annuities or FIAs] to the death, and now they’re introducing fee-based indexed annuities, which could be the biggest joke of all time. They’re doing this to transfer risk of lawsuits to the brokerage firms under the BICE [best-interest contract exemption] part of the DOL [fiduciary standard] rule. The annuity companies are saying, “Hey, this is fantastic! You guys get to sell our product, and we don’t get sued!” This is the real reason fee-based indexed annuities will try to be jammed down consumers’ throats.
Why could they be “the biggest joke of all time”? Because an indexed annuity is a CD [-like] product. You only get to change the allocations — the index options — on the contract’s anniversary date. The other 364 days you can’t make any changes.
What do you think of fee-based indexed annuities that are marketed to RIAs?
It’s the most asinine product on the planet, but they’re selling them like crazy in brokerage firms and putting annual wrap fees on them. They’re ridiculous. They allow you to have a little bit more potential upside, but you share the downside.
If they’re “ridiculous,” why were they introduced?
This is what happens when there are low interest rates: Products are made up out of thin air. Brokerage firms love them because you can wrap them, and they can project future revenue [of fee-based accounts]. But what does that have to do with the client?
So you wouldn’t sell them, I venture to guess.
Not if you put a gun in my mouth. No way possible.
What’s your take on the way fixed indexed annuities are advertised?
It’s fraudulent — misleading and abusing the consumer. But the industry turns its head because it’s profitable. If indexed annuities were regulated by the SEC and FINRA there would be no more ads for them like we see on TV and no more internet ads talking about 13% returns with full principal protection. There would be no more bad chicken dinner seminars.
If they’re misleading, why hasn’t anyone done something to stop the ads?
This is one reason that the Department of Labor stepped in. They were tired of the unregulated nature of this type of sales pitch. Variable annuities are regulated by the SEC and FINRA, so you can’t make crazy claims. But fixed indexed annuities are regulated at the state level, and each state has a regulation.
What about national ads?
No one has been able to figure out who regulates them. So promoters have been able to push the envelope on the sales message and sell indexed annuities with scenarios that would never be allowed if the SEC and FINRA were involved.
Do you think the indexed annuity should be sold as a security?
Yes — if they’re going to be marketed as a stock market return product. But if marketed as a CD alternative, as it was when introduced in 1995, no. It’s a fixed product.
Can they outperform CDs?
They have potential to. Since their inception, they’ve returned about 4%, so just a shade better. That’s outperforming CDs, but that’s certainly not market returns.
How much commission do advisors stand to make on fixed indexed annuities?
There’s a direct correlation between the length of the surrender-charge time period and the commission. The longer that period, the higher the commission. You can buy these annuities with as short a term as four years; in most states it’s around 10. Some states allow you to hold them 14 or 17 years.
Does this correlation go for variable annuities too?
Correct. It’s true for any deferred annuity. If we wanted to solve this whole [issue], we’d have a flat commission rate built in for all product types regardless of surrender-charge time periods. Then the right product would be sold [to meet the client’s needs].
Why do you write that the “variable annuity is rightly maligned”?
The average annual fee for the life of the policy is around 3%. I have no problem whatsoever with fee-based 100% liquid variable annuities where someone is managing the assets and charging a management fee. That makes sense. But loaded variable annuities are very, very expensive. You’re seeing those kinds go away, and sales are declining.
Negative press has hurt them. It’s just not a great product, and word gets out. People have gotten smart. You can’t fraudulently pitch consumers forever. If you want market growth, go get it: You might as well buy mutual funds because with a variable annuity, you’re limited to choices based on what the carrier chooses to give you.
But why do VAs continue to be the largest part of the annuity market?
Because brokerage firms dominate the sales and [have] big distribution.
Why doesn’t anyone in the annuity industry come forward and talk about the abuse you mention?
Nobody wants to step out of line because they don’t want to mess up their little compensation packages. It’s a massive cover-up. They don’t want to upset the apple cart or kill the golden goose. But if they were truthful with the public about these products, the golden goose would be huge.
What’s your position on the Labor Department’s fiduciary standard rule?
I’ve been for it from the start. The industry should be much more regulated from the standpoint of sales messages, especially [that of] the indexed annuity salesmen. The annuity world turns their head to the misleading and fraudulent pitch of market upside and no downside, which is the typical indexed annuity sales pitch. But in the same breath, it will fight to the death that indexed annuities are not securities. Well, you can’t have it both ways.
What do you think about the DOL rule’s likely full-implementation delay till 2019?
I predicted very early that the insurance lobby on the Hill would eventually kill the DOL rule. Now you’re seeing the guts of the rule delayed. The insurance lobby is fighting to protect the indexed annuity distribution model and product. Because [under the rule], there would be less product being fed into the distribution channel to sell. There’s too much money, too much in profits, involved from a distribution standpoint.
So what’s the future of the DOL rule?
I don’t think it will pass. But if it does, it will be watered down. The annuity companies are using the DOL rule as an excuse to introduce fee-based annuities. It’s the ultimate case of putting a square peg in a round hole. You need active management for a variable annuity to justify an annual fee. But with an indexed annuity, you only get to change it one day a year.
Are you progressing with your planned direct-to-consumer annuity business?
We’ve been testing it for almost a year. You can get live quotes on the site.
How do you make money selling direct?
All annuities still have to have an agent of record, just like with life insurance that’s sold on the internet. The agents are getting paid. Same thing with annuities.
Is direct-to-consumer sales the future of annuities?
In five years, they’ll be dominating the industry just like Priceline and Orbitz dominate the travel industry because eventually, the consumer will demand simplicity. Purchasing an annuity will be as easy as buying a plane ticket. And the people with the money, the older ones, are going to demand lifetime income. My business is thriving because I just talk about guarantees.
Most people think annuities are complicated and hard to differentiate.
The annuity thing is the simplest thing you could ever do in your life. It comes down to: What do you want the money to contractually do, and when do you want those contractual guarantees to happen? From there, you go to product type and shop all the carriers. They’re commodities.
You’ve merchandised t-shirts on your website for some time. Now you have “Annuity Man Barf Bags.” Who would go for that gag?
We don’t sell a ton of them, but we sell more than I could ever have imagined. Mostly agents giving seminars are buying them. They find them funny. We came up with the word “vomitility”: You know when the markets are going bad when you see your neighbor step out on his front porch and start throwing up.
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