Investment Advice, Advisors & Attacks On Agents  1/07
I’ve reviewed the security statutes of several states and many specifically state that a "Security" does not include any annuity contract under which an insurance company promises to pay a fixed or variable sum of money, or both, either in a lump sum or periodically for life or some other specified period. This should make it quite clear that fixed annuity sales do not fall under securities jurisdiction. The issue being forced recently is in how the sale was obtained. I am hearing a few state security departments are going after index annuity producers by using the “unregistered investment advisor” backdoor approach.

The general understanding for years has been that an investment advisor was a person that received fees for advice. Indeed, the usual regulatory rule states an investment advisor receives compensation for advising others of the "advisability of investing in, purchasing or selling securities". But today it appears that some security minions are going after fixed annuity agents by saying if they mention securities during their fixed annuity presentation that the agents are talking about "advisability" and since the fixed annuity pays a commission that the agent is being compensated.

Unfortunately, most state regulations are very vague in defining investment advice and what is an investment advisor, probably because the SEC has not well defined it. A strong argument could be made that telling a consumer that you can handle their investment needs, analyze their portfolio, and then select the appropriate mutual funds, bonds and stocks, all for a 2% asset-based fee, is acting as an investment advisor. However, if a consumer buys an insurance agent a cup of coffee and says "The stock market sure looks uncertain today" and the agent nods yes or no, an aggressive security department could say the insurance agent was providing investment advice for compensation.

I am talking to insurance regulators because this issue is not going away, but the problem is the security departments are not saying index annuities are securities and they should regulate them instead of the insurance departments, they are saying the agents are not acting like agents but like investment advisors, which falls upon security turf. The only permanent solution is for the SEC to redefine what investment advice is, or for a federal court to uphold the right of free speech for agents. In the meantime producers need to watch what they say and provide balance in their fixed annuity presentations.

Matchbox Cars & Retirement   1/07
It seems like many of the ads talking to baby boomers about retirement show clips of Vietnam, hippies and supposed home movies of a picnic beside a ’66 Chevy. They are trying to show they understand baby-boomers, but it is obvious these marketing folks were all born in the ‘70s and are clueless about what shaped the generation.

I  was a teenager during this

The moms of baby-boomers told stories of sleeping three to a bed, the dads said their childhood goal was to be the first kid to use the bathwater, and both parents accepted a world where hardship was just the way things were. They struggled, they tolerated, they became independent, and they produced baby-boomers. By contrast, babyboomers complained when they had to share a bathroom with their sister, or as adults about the thread-count in their sheets. We’ve had primarily consequence free lives so that we think we are smarter than we actually are, and we’ve gotten away with so much stuff that we think if we throw a tantrum the world will bend to us.

We’re spoiled. Marketers need to treat babyboomers as the spoiled children we are and that means responding in one of two ways. One way is to trick us into thinking we’re still getting everything our way. For example, the marketer’s message could be “index annuities are for special smart people and may not be for you”, which will cause us to whine because we don’t like being told we can’t have something, and then the marketers can go ahead and say “okay, you can have an index annuity this time, but just this once”. I call this the Barbie Dream House/Matchbox Car Garage sales approach.

The other way is to use guilt. As baby-boomers we know we’ve had it good, so the marketer’s message could be “a fixed annuity is the grown-up way to handle retirement income needs because you don’t want your children to be stuck taking care of you” or more simply “be an adult and buy the annuity”. This is known as the Tough Financial Love marketing approach.

So, the new retirement ads will either show a group of seemingly wise baby-boomers playing with financial toys with the tag line “retirement product may not be available because quantities are limited”, which will encourage us to act now before the annuities are all gone, or show a nanny with a stern countenance saying “You’ve been caught. It is time to grow up, take care of your retirement, and buy the annuity”. Either approach will be dramatically more effective than pictures of tie-dyed shirts and black light posters. Peace & Right On.  

A Quasi-Hypothetical Look At Returns & Index Participation 2/07
Let’s say in 2005 you purchased a currently marketed index annuity on the last day of each month – 12 annuities in all – with each annuity using an annual reset crediting method. What would your 12 annual returns in 2006 look like? The chart shows the range of interest that “woulda” been credited based on participation rates, caps and spreads in effect at time of purchase. For example, if you had selected the best performing index annuity on 31 January 2005 you would have earned 8.36% interest on 31 January 2006. However, if you had purchased the lousiest index annuity on that date you would have earned a miserly 0.94% for the same annual period. 

As a disclaimer, most index annuity carriers group the applications received; applications received during a given week might all be issued each Friday, and some carriers only issue policies once a month. For the most part, the chart and my return numbers show what interest “woulda” been if all of the annuities had issued policies at the end of each month. And these are first-year returns only. The chart shows both how even a month’s difference in annual periods can greatly affect returns and what a difference the crediting method can make.

What percentage of the annual S&P 500 index gain did the index annuity methods participate in? The top interest-earning annuities credited interest that was equal to 90% or more of the index gain for the same period and twice credited greater than 100% of S&P 500’s actual return – thanks to averaging or triggers, the worst annuities skunked for two months and averaged 22% of the index gain overall. Depending on the annuity purchased your average return for all 12 annual periods ranged from 2% to 9% in 2006.

Does this mean a good index annuity should give me 50% to 60% of actual index movement?

Does this mean a good index annuity should give me 50% to 60% of actual index movement over my future holding period and a great one might give me 90%. Maybe, maybe not, because past performance does not do a good job of predicting the short-term future.  

I’ve collected actual return data for five year periods, once each year, for five years, so I can put up some real numbers about actual index participation. With the exception of the 1997 – 2002 returns, which use first of the year returns, all of the other five year periods use annual periods that begin and end on or about 30 September each year. We’ll begin with the most recent results.

9/01 – 9/06  
The S&P 500 was up 28.3% for the 5 year period. The effective participation rate for annual reset annuities, when compared with the actual index gain, ranged from 63% to 122% for the entire period.

9/00 – 9/05  
The S&P 500 closed down 14.5% for the 5 year period, therefore an effective participation rate cannot be determined. However, the average annual reset index annuity returned 24.8% for the period

9/99 – 9/04
The S&P 500 closed down 13.1% for the 5 year period, therefore an effective participation rate cannot be determined. However, the total returns of annual reset index annuities ranged from 21% to 40%.

9/98 – 9/03
The S&P 500 closed down 2.1% for the 5 year period, therefore an effective participation rate cannot be determined. However, the average annual reset index annuity returned 36.7%

1/97 – 1/02
The S&P 500 was up 56.67% for the 5 year period. The effective participation rate for annual reset annuities, when compared with the actual index gain, ranged from 80% to 91%.  

A more appropriate benchmark for index annuities is 1 Year CD rates 

Index annuities are targeted as savings vehicles and their goal is to be competitive with other savings vehicles. Thus, it would make sense to benchmark index annuity returns not against S&P 500 returns but against other savings vehicles. It would be more of an apples-to-apples comparison for an annuityowner to know their annuity earned 40% more interest last year than that paid in the bank from whence the money came from, rather than how their annuity earned 40% less than an investment metric that the annuityowner never considered in the first place. An appropriate benchmark for fixed annuity returns is the average one-year rate on certificates of deposit, and using this metric index annuities have participated very well.

Standard & Poors does not sponsor or endorse any index product. Information is for illustrative purposes, does not included reinvested dividends, ignores taxes or sales charges, and could never be construed as investment advice.

The top ten carriers for the quarter were:

Total Sales for 2006 were $25.3 billion.

The main reason for the dip in sales were very competitive bank interest rates. A guaranteed 5.5% 1 year walk-away CD rate looks pretty good against the uncertainty of an index-annuity rate that might be zero, and would at best be 2% to 3% higher. I’ve tracked CD rates and fixed annuity sales for two decades and every time CDs have gone up, fixed annuity sales have either flattened or fallen. 

However, the NASD’s 05-50 anti-annuity notice did harm sales for a few carriers that failed to get on broker/dealer approved product lists. Most noticeable was the decline in Allianz sales from $8.8 billion in 2005 to $6.7 billion in 2006. 2005 ended with 46 carriers selling index annuities and 2007 begins with 58 index companies active in the market. Although 2006 was troubled, we estimate there are $109 billion of in-force index annuity policies on the books.

Top Carriers By Channel

Agency	Bank	Broker/Dealer
Allianz	Jackson National	Jackson National
Aviva	Jefferson-Pilot	ING
Old Mutual	ING	Allstate

 

Average Fixed vs. Average Index Premium 
The average index annuity sales premium reported was $50,372; average premium ranged from $11,257 to $82,150.

In 2006 the index annuity carriers averaged one customer complaint for every $119 million of premium sold, this compares with a rate of one complaint for every $310 million in 2005 and one complaint for every $614 million in 2004. Because the average premium has remained pretty much the same over the last three years what this means is there were five times as many complaints in 2006 as there were in 2004. By contrast, variable annuity complaints have steadily declined. 

In 2004 variable and index annuity complaints were on a par, but by 2006 for every one variable annuity complaint there were eight index annuity complaints based on premium sold.

Index Annuity complaints have increased fivefold in 2 years while VA complaints have fallen

While all index carriers averaged one complaint per $121 million of premium sold the top 25 carriers averaged one complaint per $119 million. In 2005 there were 87 complaints for the top 25 carriers and in 2004 there were 35 complaints. The worst ratio for one of the top 25 index annuity carriers was one complaint for each $4.5 million of sales; I found no complaints for eight carriers.

In 2005 there were 176 closed customer complaints reported on the top 25 variable annuity carriers, which is one complaint for every $729 million of premium. This was better than the 181 complaints reported in 2004 and the one complaint for every $676 million of premium.

Sun Life was the top seller of index annuities with zero complaints and others in the top 25 with zero complaints were LSW, CUNA Mutual, Protective/West Coast Life, Standard Life of Oregon, RBC, Lafayette Life and Union Central. There are seven carriers that have never received a complaint in the five years I have been compiling statistics.

Suitability Complaints
It is difficult to single out complaints for misrepresentation or unsuitable selling because this data is not broken out by product type, but only by carrier. However, it appears claims in these two areas when index annuity carriers are involved are up sharply.

Caveats
These closed customer complaints cover the gamut from fraud to delays in policyholder services, and although the complaints are closed I am unable to determine how many were resolved in the carrier or agents’ favor. The data base relies on voluntary reporting from the state insurance departments and may not be thorough. The NAIC database does not include complaints filed with state security offices, NASD or SEC; however, it has been difficult for me to find hard data from these other sources that would radically change the implications of the data collected.

 It should also be noted that annuity complaints in the NAIC files represent but a small piece of all insurance complaints. Last year annuity complaints were only a fraction of life insurance complaints, and there were 8 times as many complaints against auto insurance and health insurance as there were against life insurance and annuities.

Bottom Line
Although they are still lower than for some other insurance products, by any measurement index annuity consumer complaints have soared.

However, the average inflation rate may not be your inflation rate, and your cost of living might have gone up more, gone up less, or even gone down, when compared to the average CPI.

A large part of the cost of living is where you do the living. Although citizens in the South and West pretty much matched the national average, last year the average Midwesterner saw prices go up by only 2.4% if you factor in the Social Security benefit increase these folks might even have more purchasing power than they did a year ago, even after inflation. But folks in New England saw prices go up 3.6%, so, even after receiving the 3.3% benefit increase they still lost ground. 

A large part of the cost of living is how you do the living. For example, if you stay home and cook you didn’t lose as much because your grocery bill only went up 2.4%, but if you eat out your tab increased 4%. Gasoline was especially pricy increasing 13% last year and was a big factor in pushing the overall inflation rate up; however, if you use public transportation your average fare was up 4%. 

And another part of your cost of living is how much you spend on different things. The average cost of prescription drugs rose 4% in 2006 and the cost of dishes fell 7%. Although both drugs and dishes are included in making up the CPI, I’m guessing most folks on Social Security spend a lot more money on the first one, so they’re really not benefiting from cheaper dishes, clocks and infant apparel three areas where prices went down. 

All this really means that the rate of inflation is personal and your inflation rate is probably different from what the government says, and this means it makes sense to keep an eye out for bargains and keep your personal price index as low as possible. It also means you need to keep a careful eye on the yields you earn. 

As an example, say you’re getting $400 a month in extra interest income from some savings you’ve put aside. If your personal inflation rate is 3% a year that means that savings would need to produce $412 a month next year to keep everything copasetic. If you’re still earning $400 and need $412 you can probably tighten your belt a little and get by. But if the same 3% inflation rate continues you’d need $425 in two years to equal what costs $400 today, and in ten years $537 would be needed. You basically have two choices – keep buying smaller belts, or try to make sure what you’re earning covers both the $400 and allows you to keep some of the return and let it compound so it will help future earnings offset inflation.

You have several safe money choices. If you’re looking at bank options be sure to shop around and see if the bank down the street is paying more than the bank on the corner. Fixed annuities offer a special advantage because interest that remains inside the annuity and is not taken out compounds without current taxes being owed. You might even want to consider putting some money into I Bonds, which are savings bonds that earn interest indexed to the Consumer Price Index. But I Bonds are for compounding only; they don’t work if you need to take the interest out each year. Even though inflation is lower than it was 20 years ago it still nibbles away at your money. However, savvy spending and saving can whip inflation. By the way, if you’re interested there is a mind-numbing amount of inflation information available at http://www.bls.gov/cpi.

Index Annuity Sales Drop in 1st Quarter 06/07
The Advantage Index Sales Market Report shows first quarter 2007 index annuity sales were $5734 million compared with sales of $5985 million for the previous quarter. First quarter sales were down 4% when compared with fourth quarter sales; down 9% compared with the same period one year ago. The top ten carriers for the first quarter:

Average Fixed vs. Average Index Premium
The average index annuity sales premium reported was $49,211; average premium ranged from $13,814 to $85,579. 

Average Commission
Average weighted commission paid by carriers ranged from 3.00% to 11.00% of premium.  

The Myth Of A Retirement Crisis? 06/07
If you talk with financial advisors, read the financial press, or listen to speeches from Social Security personnel you walk away with the impression that we are in the middle of a retirement crisis with everyone either running out of money long before they die or living in poverty during retirement. You’ve heard the sound bites:

Social Security? Going Bankrupt
Retirement Assets? Insufficient
How much should you withdraw? One wag says 2%  a year might be okay.

Why is all the talk so gloomy? One reason is that saying things aren’t so bad doesn’t generate revenues.

The public has the same problems in getting opposing views on retirement realities that they do when asking a surgeon if they need surgery or a mechanic if their car needs brakes. No one gets paid unless they cure a problem. A story that Social Security will be around and that most boomers have enough money to retire on (and for the few that don’t, they never will) is not something the industry and financial press wish to highlight, especially if it turns out to be true.

This article talks about new research that indicates there may not be a crisis. The research does not say that everything is hunky-dory, but says that most retirement related concerns – including Social Security – do not need radical surgery but if anything merely may need to be tweaked. Something to keep in mind is this is presented to give readers different views on retirement planning; I’m not championing a no-retirement-crisis cult.

Why Does Everyone Say There Is A Crisis?
There are three reasons often given as to why society has a retirement crisis. The first reason is insufficient retirement wealth. However, most of these pundits tend to look only at cash assets – what’s in the bank, the retirement plans, and the company pension. Even Social Security income is sometimes marginalized  with the writer assuming it won’t be available. This new research takes a broader view, it includes the cash categories – and Social Security – and it also includes other assets such as life insurance, home, and other hard assets.

The second related reason given for the crisis is inadequate retirement income. The typical measurement of adequate income is replacement rate – how much of the pre-retirement income is being replaced. The problem is the replacement rate isn’t comparable across income levels. Although one couple may say they can’t live on less than a quarter million a year, they may be able to squeeze by on 60% of that amount, but a couple making $40,000 a year working fulltime may need 100% of that income in retirement because savings in commuter expenses would be offset by uncovered medical bills. One researcher uses an income approach with the federal poverty line income as the “absolute” adequacy minimum because it is by definition the minimum needed and this is relayed in the next section. The other study looks at “’optimal” net worth. (The final reason stated is that Social Security won’t be around, but to learn more you'll need to read my August column in Senior Market Advisor).

 “Most households can expect to have sufficient total resources to finance adequate consumption in retirement”

 Retirement  Income
A paper to be published by Dr.s Love, Smith & McNair titled Do Households Have Enough Wealth for Retirement [2 March 2007, http://ssrn.com/abstract=968412] found that half of the singles over age 50 have, or will have in today’s dollars, an income of at least $32,000 and at least half the couples have or are on target to have an income of $40,000 or more. Another 38% have an income of between $9,669 and $32,000 (singles), and $12,186 and $40,000 (couples) (the minimum numbers being the 2006 poverty threshold income for people over age 65), and 12% of age 50 plus folks have an income under the poverty limits [http://www.census.gov/hhes/www/poverty/threshld/thresh06.html].

What they found was half of retiree and pre-retiree (going down to age 50) couples have or will have an income of at least $40,000, and some couples have very substantial incomes – this can be seen in that even though the median income for a couple is $40,000 the average income is $73,000 (the very top retirees have a lot of income and that is pulling up the average).

Where is this income coming from? Half of the folks have current IRA/401(k) balances of more than $60,000; 38% own annuities or life insurance, and another 38% get or will get a defined benefit plan pension. These folks will rely on financial assets and a bit of Social Security.

On the other side, half of the folks have current IRA/401(k) balances of less than $60,000; 62% don’t own annuities or life insurance, and another 62% don’t have a pension. For these people Social Security income is crucial. Non-financial assets, almost entirely housing, represents about $9,000 of that $32,000-single $40,000-couple Mean annual income. What this translates into is the wealthy will leave the house(s) to the kids, but most folks will “consume” the house to produce income at some point in time.

Based on the research 88% of retires will have an “adequate” income in retirement, adequate being defined as above the poverty line, and 50% of couples have or will have an annual income in today’s dollars of more than $40,000. It is also their conclusion that those near or under the poverty line either currently or projected cannot be helped because their situation is usually due to some life crisis such as early disability.

 Are People Saving Too Much For Retirement?

Does $12,186 represent an adequate retirement income? At that income level there are government programs designed to help people get “enough”. But for that matter is the Mean couple income level of $40,000 adequate, or even $150,000 for the first couple I mentioned? Only the retiree can answer what is adequate for them.

 “Fewer than 20% of households have less wealth than their optimal retirement targets”  

Saving Optimally
Last year Scholz, Seshadri and Khitatrakun published Are Americans Saving “Optimally” for Retirement? [Journal of Political Economy; 114, 4]. Their conclusion? More than 80% of Americans have more than enough optimal wealth to meet their retirement targets. In fact, many are saving too much.

What returns are assumed? A real rate of return of 4% What about uncovered medical costs or nursing home charges? They built in the probability of having four consecutive years (prior to death) of incurring $60,000 of out-of-pocket medical expenses. Why does their study conclude that 4 out of 5 people either have, or are on target to have sufficient retirement assets, while many others don’t? It is the treatment of the house.

There are those that refuse to consider the home as a financial asset and thus exclude it as a possible income source, and Scholz etal also find when you remove the house the percentage of folks saving optimally for retirement drops to 61%. However, he argues that the house is simply another financial asset and it is illogical not to use the asset to produce retirement income if needed. The conversion of the home is the main reason both research teams show why a crisis is avoided. 

Summary
Is there a retirement crisis? It appears if you’re 50 or older Social Security should be able to pay you 100% of your benefits for your lifetime, and simply a little tweaking would keep it going towards the 22^nd century. And if you’re 50 or older our two research teams indicate at least half of you should enjoy a comfortable retirement, another 30% should squeak by, but the bottom 20% will have a rough time and probably can’t be saved regardless of what they do today. If 80% of the retirees will have enough to cover their basic needs is there still a retirement crisis?

Crisis or not, there are many steps that might be taken. 

For folks near the lower end of “adequate income” they should probably make every effort to stay in the workforce and delay receiving Social Security benefits as long as possible –  retiring at age 62 cuts lifetime benefits 25% instead of waiting to age 66, and if cash flow is getting tight converting low or no yielding assets to an immediate annuity might be worth considering. 

For risk averse folks a variable or index annuity with a guaranteed lifetime withdrawal benefit offers the peace of mind of a guaranteed and potentially increasing payout, so money may be allocated more aggressively than one’s timidity might permit. 

For over-savers it’s a matter of priorities. Might an annuity GLWB somehow be connected with a remainder trust to better benefit both sides? Could longevity insurance be used with a term certain immediate annuity or to justify taking a more aggressive portfolio payout? Whether or not there is a crisis the insurance industry will play an increasingly important role in improving an individual’s retirement quality.

Does A VA With A GLWB Make Fixed Annuities Obsolete? 7/07
No, because one is trying to compare apples and oranges.

Many variable annuity proponents have been telling me that a VA with a GLWB makes index annuities and fixed annuities obsolete because of the guarantees. What I often hear is that since a GLWB provides guaranteed payouts and often guarantees simple interest growth of 5% to 6%, that it is essentially better than a fixed annuity because it offers a higher minimum guaranteed growth rate and the potential for higher returns. But these folks are confused as to why people buy fixed annuities and variable annuities.

 With a fixed annuity your principal is protected from loss, and if you do decide to take your money and leave, you know pretty much what leaving early will cost. A variable annuity, even with a GLWB, protects only the income and not the principal; the principal is still fully exposed to market risk.

 If you own a stated rate or index annuity and cash it in you will get back your original principal plus minimum guaranteed interest and any additional interest credited to the policy, less any surrender charges. If you own a variable annuity with a GLWB and cash it in you will get back the market value of the annuity less surrender charges – there is no GLWB cash value. The cash value of the variable annuity will be higher or lower than the fixed annuity, reflecting the market risk and potential gain inherent in investments. If a consumer’s primary goal is to protect their principal from market risk they should not buy a variable annuity, with or without a GLWB, because it will not give the protection. If a consumer wants the freedom to maintain access to principal without market risk they should not buy a variable annuity, with or without a GLWB.

The GLWB guarantees an income level and the possibility of having money available in future years if needed or at death.

A VA GLWB should only be compared with fixed annuities on the basis of producing an income and offering this lump sum possibility.

A valid comparison could be made on the respective payout levels of VA and fixed annuity GLWBs and what scenarios would result in the VA or fixed annuity having more money, or any money, available upon policy surrender or at death.

A fixed annuity is regulated as a savings vehicle, a variable annuity is regulated as an investment security. Guaranteed living benefits reduce the risk of owning a variable annuity, but they do not turn it into a fixed annuity because principal is still subject to market risk.  

lllusion of Validity 8/07
I was speaking at a function for planners and advisors awhile back and one of the planners afterwards told me that he didn’t need to use fixed annuities because he was doing strategic asset allocation, and that based on his knowledge and his models that his clients were protected against market risk of loss.

When I heard this I had a flashback to the fall of 1999 when another young stockbroker/planner told me his clients didn’t need index annuities because he was using tactical asset allocation and thus they were protected against market risk of loss – and based upon what he described his typical client would have lost roughly half of the value of their “tactical” portfolio in the millennium bear market that followed.

The market has risen for four years. At the end of May the S&P 500 finally passed the old high set seven years before. The market exuberance is more tempered than the last time around. However, just as markets have never dropped to zero neither do they keep going constantly up. If you look back over the last 60 years the market has failed to increase a fifth year in a row 90% of the time.

The problem for a lot of investors and advisors is if they’ve invested in the stock market for the last four years they’ve been right, and all of this “proof” results in something called an illusion of validity wherein we think we will be right in the future because we were right in the past. But, this all overlooks something my first manager told me years ago, which is never confuse brains with a bull market. Unfortunately, there are many people that believe the “new” stock market has two phases – up a little and up a lot.

If the market does what it has always has done in the past it will fall, and then rise again. If you are in for the long term and can emotionally handle the risk, it’s usually smart just to ride it out. However, every time a bull market extends its time in the arena it attracts folks and money that probably shouldn’t be there because risk of loss is not fully appreciated, and neither these folks nor dollars can truly handle a potential loss.

For these people and this money fixed annuities with a stated or indexed interest rate can often make sense.  

Introducing The Green Annuity*   Policies printed on recycled paper   Insurer portfolio holds only “G” rated bonds (debentures of windmill  companies, bio-fuel conglomerates and perpetual motion corporations)   Our wholesalers only use public transportation to visit you (remember if they are late for your appointment it is because they are saving the earth)   Please forgive our   Building a tax-deferred umbrella to protect the earth from global warning *not invented by Al Gore

 2^nd Quarter Index Annuity Sales Rebound 09/07
The Advantage Index Product Sales Report produced by AnnuitySpecs.com shows second quarter 2007 index annuity sales were $6604 million compared with sales of $5734 million for the previous quarter. Second quarter sales were up 15% when compared with first quarter sales; up 3% compared with the same period one year ago.

The top ten carriers for the second quarter:  

Average Fixed vs. Average Index Premium
The average index annuity sales premium reported was $45,808; average premium ranged from $10,907 to $75,015. 

 Average Commission
The index annuity commission received by the agent averaged 8.07% of premium. Average weighted commission paid by carriers ranged from 3.45% to 10.76% of premium.  

Retirement Assets Are 40% Of Total U.S. Household Assets 09/07
At the end of 2006 total retirement assets were $16,350 billion with IRAs, defined contribution [457, 401(k), 403(b)] plans and government [Federal, State, Local] plans each representing a quarter of the total, and defined benefit plans and non-qualified annuities composing the final quarter.

Of the $1,578 billion in non-qualified annuities the composition is $924 billion variable annuity, and I estimate $600 billion fixed rate and $54 billion fixed index annuity.

The securities industry managed 85% of IRA assets, while insurance carriers controlled 8% and banks managed 7%.

Over the last dozen years the share of the 403(b) assets controlled by insurance carriers declined from 66% to 47%.

The dollars invested in Lifestyle mutual funds (whereby bond fund allocations are automatically increased as age increases) more than doubled from 2004 to 2006 and represent $189 billion.  

Data Source:  Research Fundamentals. Investment Company Institute. July 2007 Vol.16, No.3, 3A

Crossing The Line 10/07
Many years ago when I first entered the financial business there were a group of stockbrokers that wanted to do more than simply sell stocks, bonds, and mutual funds to their customers, and instead wanted to help them plan their financial future. The financial planning concept began to take root because many people wanted someone to advise them on putting the financial pieces together. To handle the additional responsibility of acting as an advisor, and not merely a salesperson, these planners took additional training and testing, and their client base grew.

My fellow stockbrokers noticed that planners were making money and would discuss the merits of acting like financial advisors instead of brokers. I would bring up the point that the advisor angle had a downside and that was one would be held to a higher standard.

Security Salespeople
As stockbrokers we were primarily considered salespeople by regulators, meaning a suitable investment was defined as one where the customer’s check cleared. Now, you couldn’t outright lie, and you’d get in trouble if you starting selling gold mine stocks to widows, but the attitude was that consumers should accept a bit of “lily gilding” by stockbrokers because, after all, they are salespeople.

The attraction of greater commissions caused a bunch of stockbrokers to hold themselves out as financial planners, but they were still acting, trained and selling as stockbrokers. Unfortunately, consumers couldn’t always tell the difference between legitimate and illegitimate advisors and many suffered for it. The result was security regulators did two things: they raised the standards for stockbrokers requiring greater disclosure, more training, and put the onus on the broker/dealer to ensure all investments were suitable. Second, the regulators said if you were going to hold yourself out as a general financial expert you needed the training and regulatory credentials to act as one. These two steps didn’t eliminate the problem, but it did result in more bad apples being punished for pretending to be investment advisors.

Annuity Salespeople
It seems that many consumers have a misperception about what a fixed annuity does; many appear to assume that an annuity can only be used to produce an income for life with the consumer losing all access to their principal. Although a fixed annuity may be used in a number of ways this narrow perception of what an annuity is limits the number of consumers that think they may benefit from one. So, when the agent is perceived as being an annuity salesperson the consumer often tunes out.

There were a couple of ways to deal with this misperception. The first would have been for the industry to educate consumers on what a fixed annuity could do for them, the benefits it would provide, and therefore change the perception of the consumer so that when they heard the phrase “annuity agent” they would think “flexible safe money instrument offered by an annuity professional” instead of the old narrow misperception. The second way to get thru to the consumer would be to disguise the fact that annuities were being sold.

The industry chose the second way.

Euphemisms are an accepted part of our world. We don’t say that Uncle Fred dropped dead; we say he passed away or crossed over. In real estate a “sunny homestead” is a nicer way of saying there are no shade trees on the lawn. And I talk about fixed annuities as being a safe money place. Regulators I have talked with did not seem to have a problem with agents saying they offered tax-advantaged interest earning financial vehicles that are protected from market loss, and even permitted some puffery, because, after all, annuity producers are agents for the insurance company that pays them a commission on the sale of the annuity, and are not expected to act as impartial fiduciaries. But then a line was crossed.

To enhance their understanding of seniors some agents took courses that gave them a better understanding of the needs of seniors, and usually the course provided some designation showing completion. However, some agents represented the designation as proof that they were qualified to solve all of a retiree’s financial problems, even tho the agents were still licensed and acting as annuity salespeople.

Some agents honestly dislike the risk of stock market investments and some agents honestly believe that fixed annuities are a better place than banks for a retiree’s money. However, instead of presenting these opinions as opinions to consumers the agents instead represented themselves as impartial trained financial advisors, even tho the agents were still licensed and acting as annuity salespeople.

Once again regulators are faced with a situation wherein consumers can not tell which one is the legitimate trained advisor and which is the salesperson, and so the regulators are attempting to punish those that pretend to be investment advisors. There is a problem and it is currently causing a great deal of finger-pointing and yelling on all sides that really is not accomplishing anything. But I believe some things can be done to help consumers, regulators and annuity producers address the issues.

Define & Defend Fixed Annuities – The industry needs to broaden the consumer perception of what a fixed annuity is and what it can do. This means courting the various financial writers that are getting all of their annuity education from stockbrokers and telling the annuity industry side. This means creating consumer educational resources on fixed annuities (look at the Investor Education Resources section of the Investment Company Institute web site for inspiration). It also means insurance regulators need to speak up when a security regulator says something inaccurate and to correct their counterpart’s views.

Create A Safe Harbor For Annuity Advice – The agent can hold seminars on the good points of annuities, buy seniors lunch and thrill them with the magic of tax deferral, and all of this falls under the auspices of the insurance license. Security regulators are prosecuting annuity producers for stepping over the line and acting as investment advisors, but the regulators will not tell the producers where the line is. The security and insurance regulators need to define when the line is crossed. When does fixed annuity advice and free speech become investment advice?

Get Rid Of Bad Apples – I have read far too many regulatory complaints and lawsuits where the agent involved was convicted of other bad behavior in the past, and yet the agent still has an insurance license, still found a marketing company to work with, and still found an insurance carrier to secure an appointment. Whenever I bring this up the parties involved point their fingers at the others for not acting; however, there is nothing to stop a marketing company or carrier from refusing to work with an agent. Bad agents are not a protected class.

The lines between financial professionals will continue to be redrawn and the bar in the insurance industry for getting and keeping an insurance license will be raised, just as both stockbrokers and advisors are held to higher standards than they were in the past. The bottom line is the consumer will be aided by more experienced and better trained professionals and all will benefit.  

Positive Annuity Article in New York Times 10/07
The 23 October Special Section on Retirement has a half page article saying annuities make sense for retirement (even has a kind word for Lincoln National)
http://www.nytimes.com/2007/10/23/business/retirement/23annuity.html

5 Year Index Annuity Returns  11/07 
There were 25 carriers active in the index annuity market in September 2002. Farmers, IDS, SunAmerica and Transamerica marketed term end point designs that have not yet reached the end of their index period and they cannot be included in the study. I asked the remaining 21 carriers for copies of customer statements with customer information whited-out for contracts issued closest to 30 September 2002 for a five year period ending 30 September 2007. Nineteen companies responded with details about 23 different products. This is the sixth year I have collected 5-year return data and I deeply appreciate the cooperation and support of the carriers, representing almost 90% of the industry, that were open in sharing what some of their policyowners earned in their index annuities. This carriers are:

What Is Important
Index annuities are designed to be competitive with stated-rate annuities and to the best of my knowledge they are demonstrating that competitiveness. Half a dozen products credited annualized interest of 7% to 8% and almost all the rest credited interest in the 5% to 6% range.

 FIAs credited from 27% to 254% more interest than the average CD over the last 5 years 

The S&P 500 was running at an annualized return rate of 13.4% for the period and the average U.S. stock mutual fund hit 16.1% a year, a strong statement demonstrating that index annuities are not designed to compete against equity investments. However, the average annualized index annuity yield of 6.12% compares very favorably to the 5.0% attained yearly by the average taxable bond fund return, blew the socks off the 3.5% that was earned by a U.S. Savings Bond issued in September 2002, and pole-vaulted over the 2.5% achieved by the average CD over the same 5 years.  

Once again, index annuities did what they were supposed to do – be a safe money place with the potential for more interest.

3rd Quarter Index Annuity Sales Slip 12/07
The Advantage Index Product Sales Report produced by AnnuitySpecs.com shows index annuity sales were $6449 million compared with sales of $6566 million for the previous quarter. Third quarter sales were down 2% when compared with second quarter sales and with the same period one year ago. The top ten carriers for the third quarter: 

Average Fixed vs. Average Index Premium
The average index annuity sales premium reported was $55,629; average premium ranged from $15,464 to $110,000. 

Average Commission
The index annuity commission received by the agent averaged 8.05% of premium. Average weighted commission paid by carriers ranged from 3.00% to 10.45% of premium.   

Although 30 states now participate in the Compact the momentum for joining seems to have abated. One reason for the remaining states’ apparent reluctance to join may be a fear that the state legislature’s ability to have local oversight of insurance issues will be compromised, according to Danette Kennedy, cofounder of Annuity Regulatory Compendium and president of Gorilla Compliance LLC. The Compact established a multi-state public entity, the Interstate Insurance Product Regulation Commission, which serves as a central point of electronic filing for certain insurance products, including life insurance, annuities, disability income and long-term care insurance.

Subscriptions to Annuity Regulatory Compendium and access to www.annuityreg.com are free to regulators and available for $800 a year for everyone else. For more information contact annuityreg@mail.com

Copyright 1998-2012 Jack Marrion, Advantage Compendium Ltd., St. Louis, MO (314) 255-6531. webmaster at indexannuity.org. All information is for illustrative purposes only, does not provide investment or tax advice. No index sponsors, promotes, or makes any representation regarding any index product. Information is from sources believed accurate but is not warranted. Advantage Compendium neither markets nor endorses any financial product.