Where's the outrage?
By Kim O'Brien
The National Association for Fixed Annuities
If you have recently channel surfed through the cable or local news or read any of your morning papers, you are no doubt aware of the news reports of 789 Chrysler dealerships closings throughout the nation. The stories all highlighted the fact that these were mostly family-owned and operated businesses that employed anywhere from four to 15 employees. According to the Wall Street Journal, an estimated 89,000 workers have been impacted, and many more will lose their jobs.
The headlines are passionate,: "Chrysler Ax Falls," "Thousands of Jobs Lost," "Americans Out of Jobs." And yet, if you simply insert the words "insurance agencies" for "Chrysler," the jobs outlook will be just as dire if the SEC manages to pull a win out of its court battle and/or defeat the legislation to repeal Rule 151A. To borrow a phrase -- where's the outrage?
NAFA estimates that, collectively, more than 200,000 agents and employees will lose in excess of $2 billion of personal income if Rule 151A is upheld. More than 90,000 agents currently sell indexed annuities, and many are life-long insurance agents who employ family members who, in turn, are responsible for families of their own. Additionally, NAFA estimates an additional 600-800 marketing organizations will be negatively impacted by the rule -- either having to spend an additional $92 million to comply with the dual regulation, or going out of business. The SEC was cavalier in its reporting of the economic impact, having stated in the National Underwriter, "... although revenue from indexed annuities at a marketing organization may drop, it would have opportunities to sell other types of securities, and may be able to compensate for any declines in sales of indexed annuities that may occur."
But here's the reality check: Throughout the decades, agents have developed their customer base; serviced individuals who are risk-averse and who demand safety and protection for their retirement dollars. This is akin to trying to tell the Chrysler dealership that they can save their business if they just sell Harley Davidson motorcycles instead. Seriously, not every town in America needs a Harley dealership.
How far will customers have to go to buy their fixed indexed annuities? Even if they could find a new "dealership," would they be allowed to purchase an indexed annuity? Of the 265 billion variable and fixed annuities sold in 2008, broker/dealers sold 84.5 billion in annuities. Meanwhile 85 percent of those sales were variable annuities and only 2 percent were indexed annuities.1 Given the lopsided variable annuity sales by the registered community, it's doubtful they will reverse course and offer fixed annuities to their clients.
One of the biggest falsehoods supporting Rule 151A is that consumers will benefit from indexed annuities being declared a security because only licensed security advisors will be able to sell them, and a "proven" regulatory authority will police fraudulent and misleading sales activities. One has only to remember the mutual fund scandals of the 90s, the recent Ponzi schemes discovered after the customer's money was gone, and the newest insider trading scandal to know that there is no guarantee that federal oversight will benefit consumers in any way.
On the other hand, the comprehensive regulatory scheme under state insurance law has a proven record of protecting consumers. The state insurance laws focus on licensing insurers, approving products for sale, regulating the form and content of policies and forms, and enforcing insurers' and producers' market practices, with particular detail to unfair trade practices (including false advertising, churning, twisting, etc.), disclosure, suitability and supervision, illustrations, producer licensing and training, and consumer complaints. It's more likely that a citizen in, say, Iowa would choose to talk to their own insurance department representative in Des Moines rather than submitting to the process of arbitration, which even its creator, FINRA, acknowledges is flawed.
Furthermore, the notion that a securities license puts the seller in a better or more informed position is patently false. Only passing reference is made to fixed annuities in all of the securities testing material. And, based on their sales records, security advisors cannot boast of "more experience." In reality, the comprehensive licensing and continuing education required of insurance agents to sell fixed annuities -- including indexed annuities -- provides much more training and requires much more expertise in the laws governing marketing and sales, the insurance elements of the fixed annuity product and the required disclosure and suitability processes.
The independent insurance agent fills a valuable and necessary role by protecting Americans' savings and providing products that allow owners to sleep without worries of what tomorrow's market reports will be. But, if agents aren't allowed to sell them and broker/dealers continue their long-standing preference to sell securities and variable annuities for their "accumulation" potential, consumers, not producers, will be the biggest loser under Rule 151A. Today's retirees have less money in savings, longer life expectancies and greater exposure to market risk than any retirees since World War II. Fixed annuities, including indexed annuities, protect their savings from market risk and can guarantee a stream of income that cannot be outlived. Whether your client makes the decision to take that income or not, the promise is there.
1 LIMRA International *For further information, or to contact this author, please leave a comment and your e-mail address in the forum below.