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Buffer Annuities Draw Fire From Consumer Group

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Representatives from the Consumer Federation of America (CFA) have told the U.S. Securities and Exchange Commission that the SEC ought to keep an eye on buffer annuities.

Barbara Roper, the CFA’s director of investor protection, and Micah Hauptman, the financial services counsel, mention buffer annuities briefly in the CFA comment on the SEC’s new best interest sales standard proposal, and related proposals.

Issuers’ ads make buffer annuities sound perfect, and the products have been selling well, the reps write.

But the reps note that a FINRA executive said in 2017 that even FINRA variable annuity analysts have had a hard time understanding buffer annuity product filings.

(Related: Making the Annuity Fit: IVAs vs. Structured Annuities)

“To value these products and their potential payoffs, an investor would need to know how to value embedded derivatives,” the reps write.

Some buffer annuities “are virtually impossible for economists and quants, much less ordinary retail investors, to understand or value,” the reps write.

The CFA reps write that a varied population of investors needs access to a wide array of products, but they argue that the SEC may be using product diversity as an excuse for letting products that could hurt consumers stay on the market.

Buffer Annuities

A buffer annuity, which may also be called a structured annuity, or a variable index annuity, is an annuity that lets a consumer choose from a menu of investment options, lets the consumer share in investment gains, and provides protection against drops in investment option value.

A typical issuer uses options contracts, rather than investments in many individual mutual funds, to support part or all of the annuity obligations.

The CFA reps do not describe any specific examples of problems with buffer annuity performance.

A copy of the CFA comment letter is available here.

— Read NAIFA, AALU Clash with CFA at Fiduciary Standards Hearingon ThinkAdvisor.

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