Reps cry foul over sales of index annuities

Nov 7, 2005 @ 12:01 am

By Dan Jamieson

IRVINE-A dispute is brewing between brokers and insurance agents over sales of equity index annuities.

Brokers are hot about losing annuity customers to insurance agents and are accusing agents of misrepresenting the products. Insurance industry supporters dismiss the broker complaints as "whining."

It's not hard to find brokers who report losing business to the indexed annuities. A registered representative in the Southeast who works for Merrill Lynch & Co. Inc. in New York said he recently lost two large accounts. His clients were enticed by equity index contracts offering a 13% bonus credit. But the product also came with a 15-year surrender charge, he said.

10% bonus

"We lost one yesterday," said a rep in Florida with Smith Barney, a unit of Citigroup Global Markets Inc. in New York. The client, with about $1 million in assets, was attracted with a 10% signing bonus. Had this broker wanted to counter, he could only have offered a 4% or 5% bonus contract.

The Merrill Lynch rep in the Southeast said one of the accounts he lost was worth more than $1 million. The bank-based insurance agent "probably got paid $150, 000," the broker said.

John Robinson, managing director of Hawaii Wealth Management LLC in Honolulu, said he has had a few clients put money into the products on their own.

The high cost and limited disclosure made about equity index annuities is "a sore spot with me," Mr. Robinson said.

Brokers complain that many of the insurance agents selling equity index products are not licensed to sell securities and don't understand the stock market.

They say no one seems to regulate agents.

"They're out of control," the Smith Barney rep said.

"I hear all those complaints, too, but I also hear from consumers about some nice stockbroker who dumped them out of a perfectly good fixed annuity and put them into a god-awful variable annuity or managed account, and lost them 30% in a year," said Jack Marrion, head of Advantage Compendium Ltd., an insurance research firm in St. Louis.


Brokers are just "whining" about losing business, he said.

About half of agents selling equity-indexed products are securities licensed, said Kim O'Brien, executive director of the National Association for Fixed Annuities in Milwaukee.

She does not believe that insurance agents aren't educated enough about the products. Complaint data "don't support that idea," Ms. O'Brien said.

Citing figures from the National Association of Insurance Commissioners in Kansas City, Mo., Mr. Marrion, who consults with insurance companies, said equity index annuities generated one complaint for every $700 million of premium, variable annuities one for every $600 million of premium, and regular fixed annuities one for every $280 million.

The NAIC was not able to confirm those numbers by press time. But within the brokerage and investment advisory industries, there is widespread concern about how equity index products are being sold.

"When I ask clients, 'Did they tell you about the deferred sales charge?' the answer is 'No,'" said the Southeast Merrill rep.

Brokers are also critical of the flood of marketing material offering high commissions on equity index products. "Here's one touting 11%," Mr. Robinson said. "It really is outrageous."

The Smith Barney rep said that in Southern Florida, investors are deluged with full-page ads for annuity seminars offering free meals. "I sure couldn't get any of that stuff approved" by compliance, he said.

"The biggest problem is where an agent has a client with a million bucks and puts $950,000 into these annuities," said Garth Terlizzi, owner of GET Financial Services Inc., in Lawrence, Kan., who sells equity index products. "There's been a lot of abuse."

"Index annuities give the impression that you're in the market, but that's not really the case, if you read the fine print," said Sandeep Varma, owner of Advanced Trustee Strategies Inc. in San Diego.

Ted Charles, president of Investors Capital Corp. in Lynnfield, Mass., reading from one product's brochure, said the interest rate is "linked to the market index growth."

Mr. Marrion said it's typical to describe the returns this way, and that the products for the most part are being offered as alternatives to certificates of deposit and fixed annuities.

Since equity index annuities are competing with those products, brokers wonder why they shouldn't be regulated as securities.

In August, NASD told brokerage firms to supervise the sale of equity index annuities.

The Washington regulator said that it did not have jurisdiction over the products, but highlighted a 1986 SEC rule that gave fixed annuities a "safe harbor" from securities regulation - but only if they were not marketed primarily as investments.

This year, the SEC began a review of how the products are being marketed.

Equity index annuities are pegged to the stock market. "One would think they'd all be considered securities," Mr. Robinson said.

Power grab

NASD's move is a "power grab, pure and simple," Mr. Marrion said. "We didn't hear a word of concern" about equity index annuities "until sales went up 50%," he said.

Sales have been doubling every two years, Mr. Marrion said, but still account for only about 15% of overall annuity business.

Ms. O'Brien said the Milwaukee-based National Association for Fixed Annuities' position is that equity index annuities are not securities.

"They are insurance products with a guarantee of principal," she said.

Mr. Charles, for one, doubts that the SEC would ever determine that equity index products should be regulated as securities.

"I really don't think they want to take on the insurance lobby," Mr. Charles said.

"That would be a big fight."


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