Regulator sees danger in annuity specialization

May 15, 2006 @ 12:01 am

By Sara Hansard

WASHINGTON - Some brokerage representatives are concentrating on selling one type of annuity and are making unsuitable sales as a result, according to the Alabama securities commissioner.

Industry officials acknowledge that product specialization exists, but they argue that it is a healthy trend that is occurring as a result of the increased number of annuity products being offered and the fact that the 76 million baby boomers are closing in on retirement.

As the number of annuity products has proliferated, many agents are concentrating on one product, usually the one that pays the highest commission, said Joseph Borg, director of the Alabama Securities Commission.

National trend?

"I don't think it's just Alabama," Mr. Borg said. "I think you're going to find it really as a national trend."

But that fact is being driven by the needs of people who are nearing retirement, said Richard Silver, executive vice president and general counsel of AXA Financial Inc. in New York.

"With retirement planning becoming a significant need, we're seeing specialization develop around it, as well," said Mr. Silver, who also is general counsel of AXA Equitable Life Insurance Co. and MONY Life Insurance Co. AXA Financial owns both New York-based companies.

"Specialization in and of itself is not a bad thing," said Clifford Kirsch, vice president and senior corporate counsel for insurance and annuities at The Prudential Insurance Co. of America in Newark, N.J. "To the extent that specialization means expertise in the product, that's a good thing."

Mr. Borg is concerned that overspecialization among salespeople for particular annuity products could lead to unsuitable sales to consumers.

"Rather than … doing an analysis between a mutual fund and a stock portfolio, versus the same thing inside a variable annuity or an indexed annuity, they're saying, 'Here's this product, and here are the choices' - the choices being all variations of the same theme," he said.

Many consumers, Mr. Borg said, may not understand that there could be better options for them to purchase. Agents, especially those in small offices who aren't well supervised by their brokerage firms, may concentrate on one or a few products, because it is too difficult to understand the large number of complicated annuity plans, he said.

"Unfortunately, in some cases, the one they pick is the one that's going to pay the highest commission, not necessarily what's best for the client," Mr. Borg said.

Alabama securities regulators have brought about "half a dozen" cases involving such sales since the beginning of the year, he estimated. The trend has been occurring for the past three to five years.

However, "five years in an investment portfolio is a rather short time," and the trend is only recently coming to light, Mr. Borg said.

No guarantees

He said he is seeing cases of people who are retiring and buying annuity products with the proceeds from their 401(k) plans without realizing that the returns aren't guaranteed. Now that markets are rising again, "folks are being encouraged to go ahead and retire early. We are detecting that people [are] being sold these products based on an income stream represented as guaranteed, without being told there is market risk," Mr. Borg said.

Salesmen are telling them that "they can get $3,000 a month if they turn it all over," he said. The investors "don't understand that if [their investment] doesn't make the return, they're eating up the principal," Mr. Borg said.

Regulations exist to deal with unsuitable sales in any event, said Mark Mackey, president and chief executive of the National Association for Variable Annuities in Reston, Va. All brokerage representatives are required to evaluate customers' needs, objectives, tax status, risk tolerance, age, income and liquid assets to determine whether a particular annuity is suitable, he said.

"The law is clear, whether selling one or many products," Mr. Mackey said. "They cannot make a sale unless it's suitable."

Most brokerage firms are moving away from transaction-based business toward a process-oriented focus, Mr. Mackey said.

"Specialization in markets is a fact of life in the financial services industry," Mr. Silver said.

By necessity, agents need to focus on products for that market that guarantee lifetime incomes, he said.

"There are not many ways to produce that for a client other than annuities," Mr. Silver said.

But specialization shouldn't lead to unsuitable sales, he said.

"That's not what we see in our business," Mr. Silver said. AXA agents sell a variety of financial products, and "even with individual specialization, we have the facility to refer people to specialists in other disciplines."

The lack of agent training for annuity products is "a huge problem," said Wisconsin securities administrator Patricia Struck, whose office is in Madison. "Anybody who employs agents that market variable annuities or other hybrid products really needs to do a good job of training agents so that they understand what they're selling to investors."

She also is president of the North American Securities Administrators Association Inc. in Washington.

Agent training should focus on understanding what features the product offers rather than how the product works, which is better left to actuaries, Mr. Kirsch said.

Training should focus on how annuity features work, including accumulation, income and death benefits.

"The training efforts need to allow people selling the products to effectively explain [them] to a customer, making sure the customer understands what an annuity offers, what they're buying and the costs associated with the different features they may be selecting," Mr. Kirsch said.

If state regulators set uniform suitability and supervision standards for annuity salespeople, commissions probably would come down, said Mark Casady, chairman, president and chief executive of LPL Financial Services Inc. He works at the Boston headquarters of the company, which also is based in San Diego.

"When you standardize a process of supervision, products tend to look very much alike in terms of compensation and contingent deferred sales charges," Mr. Casady said.

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