Annuities – Good Sales, Bad Sales: Duties and Disclosure and What to Watch Out For

Camarda Wealth Advisory Group

Why annuities can be easy to sell and appear more attractive to consumers?

Why can annuities be easy to sell for those more interested in high commissions than in providing high value to investors?  

Spotting fees, risk levels, taxation, and the other factors that bear on a prudent, well-reasoned decision can be more difficult.

Complex disclosure can be confusing where there is Federal regulation

Complex disclosure in cryptic legalese can make the forest hard to spot for the trees. Variable annuities share with most investments are securities (and so regulated by the Securities Exchange Commission, or SEC) minimum and require disclosure, which is so obtuse and scattered as to be invisible in plain sight to most people.

The tale is the same for mutual funds, “managed money,” wrap accounts, and other “packaged” investments as well, and are only some of the many, many ways the financial industry dips its collective beak deeply into the pocket of the investing public with nary a trace or a thank you.

Consumer protection information can be scant for fixed and equity index annuities

But the required disclosure for fixed annuities—those regulated only by the individual states’ insurance commissions, since the life insurance industry lacks any Federal oversight—has been virtually non-existent, and still has a long way to go to be obvious to most consumers.

Matters in this regard have been so bad that the companies themselves, in order to guard themselves against future litigation for misleading product sales, often impose more in the way of disclosure than the states require!

Of course, it still has a marketing spin, and is usually in no way adequate to communicate the material facts to the person of average financial knowledge.

Be careful with equity index annuities

Please note that equity index annuities—those that offer stock market based returns but guarantee return of principal—are fixed products beyond the reach of SEC disclosure. This has been a major product growth area, and chances are strong you’ve been pitched one of these, which can appear to be especially attractive from a have the cake and eat it too perspective.

These are the kind that say something like “if the market goes up you make money, but if it goes down, your principal is guaranteed!”

In reality, index annuities are complicated derivatives products, but they are not invested in stocks or other securities, and, hence, beyond the reach of the SEC; they are regulated by the States as the life insurance policies they really are.

No commission reduction breakpoints on annuities

The fact that annuity commissions lack mutual fund-style breakpoints—where the percentage commission goes down as the dollar amount goes up, giving a volume discount, as it were—makes very large dollar commissions possible. Fifteen percent on a million dollar sale (and sales of this magnitude occur every day) means a $150,000 payday for one sale. Eight percent (a more typical payout, perhaps) still nets the salesperson $80,000. Fast. Breakpoints have been a staple of the mutual funds industry for decades. Even a “fair” commission of 7% nets $70K. Not bad for a few hours’ work!

Investment dollars can be converted to commissions quickly

Commissions are typically paid quickly, in many cases weekly, as soon as the investor’s check is cashed and any state-required rescission period (the ten to thirty day “free look” has passed).

So the money is quick, as well as big.

Finally, insurance agents, planners, and other salespeople who know the ropes can make tons more selling annuities than other investment products like mutual funds, since they generally get to keep the entire commission, instead of being forced to split it with their “broker/dealer” or sponsoring securities sales company. And many even seem to make a habit of finding “better” annuities every few years, and recycling investors’ money in what can look like a perpetual commission machine, but one that regularly shaves a layer off investors’ wealth.


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