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I’ve been predicting for
some time now that Equity-Indexed Annuities and the sales practices
associated with them will be the Next Big Scandal of the financial
services industry. And now my predictions are coming true.
After a chorus of complaints, the National Association of Securities
Dealers (NASD) and the Securities and Exchange Commission (SEC) are
finally taking notice. In a recent securities conference in Chicago,
NASD officials pointedly warned brokerage firms that they are
opening themselves up to civil liability where equity-indexed
annuities are concerned.
The NASD also clearly asserted its authority to oversee the
suitability of transactions involving equity-indexed annuities.
“Whenever unsuitable recommendations are made, we have
jurisdiction”, said Jim Shorris of the NASD.
This is good news for investors and bad news for the charlatans that
have been using this product to milk seniors out of thousands and
thousands of dollars. Now, those investors can turn to the NASD for
help. The actions of the NASD also increase the potential success of
civil lawsuits brought by investors.
It’s not just the NASD that is taking notice. Recently, I was
invited by the Financial Planning Association to participate in a
conference call with several SEC officials. The SEC had looked into
equity-indexed annuities several years ago but failed to take
action. Let’s hope that this time it will be different.
You might not think that NASD or SEC involvement is all that
revolutionary, but it is. Let me explain. Brokers who are licensed
to sell investments are regulated at the Federal level. The NASD and
SEC police their actions.
Equity Indexed Annuities, though, are not regulated at the federal
level, but by each state’s Insurance Commissioner. Even though
Equity Indexed Annuities are technically an insurance product, they
are being marketed as an investment. But all an agent has to do to
be able to sell them is sit through a five-day course and pass a
simple test on health and life insurance.
It used to be that Equity-Indexed Annuities were mainly sold by
independent insurance agents. Now, they are being sold by brokers
who work for the larger brokerage firms. The high commissions these
products pay are simply too enticing. Worse, these brokers aren’t
selling them under the umbrella of their firm. They are selling them
as what is termed an ‘outside business activity’.
That means that even though you are talking to a person that works
for a big brokerage house and that person is recommending you sell
your variable annuity, pay a penalty and move the money into an
equity-indexed annuity, the firm is not policing that transaction.
Every other trade done by the broker must meet strict compliance and
regulatory standards. The sales of equity-indexed annuities do not.
If an advisor were to place 100% of a client’s investable assets
into a variable annuity or a single stock or mutual fund, they would
likely face fines and possible revocation of their license. At the
very least, they would be opening up themselves and their firm to
potential lawsuits. Yet, I often hear of advisors telling a client
that they should put 100% of their money into Equity Indexed
Annuities.
Under federal regulation, an advisor can’t recommend a client pay a
7% penalty to get out of one annuity and move then move that money
into another high commission product. That’s just like a stockbroker
getting you to constantly buy and sell stocks so they can earn a
commission–it’s called churning. Yet, I see advisors using the
‘bonus’ offered by some Equity Indexed Annuities to do just that.
Now that the NASD has clearly stated that these advisors can no
longer sell equity indexed annuities outside of their firm’s
regulatory umbrella, hopefully some of these unethical sales
practices will be put to a stop. But investors need to beware! The
high commissions these products offer, sometimes as high as 13%, are
just too tempting for many advisors to ignore. Don’t expect them to
change their ways overnight.
The increased scrutiny of equity-indexed annuities can only be good
for the investor. Carefully research this and any other investment
before you buy. Otherwise, it might be an investment you quickly
regret.
Additional articles on equity-indexed annuities available at
www.guardingyourwealth.com.
Have a financial question? I’ll personally answer it--FREE. Go to
www.guardingyourwealth.com and click on ‘Ask Jeff’.
In addition to being a nationally syndicated columnist and Certified
Financial Planning Practitioner, Mr. Voudrie provides personal,
private money management services to clients nationwide. |
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