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Annuities: Federal Regulators Concerned About Equity-Indexed Annuities

Aug 17, 2007
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.
About the Author
Nationally-syndicated financial columnist and Certified Financial Planner Jeffrey Voudrie provides personal, in-depth money management services and advice to select private clients throughout the USA. He will answer your financial question FREE at http://www.guardingyourwealth.net/
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