Variable annuities continue to get no respect

Jun 5, 2006 @ 12:01 am

By Gary S. Mogel

NEW YORK - If an investment is known by the company it keeps, then the variable annuity needs to hang out with a different crowd.

In an announcement last month by the Kentucky Office of Financial Institutions in Frankfort listing 13 common investment scams, variable annuities shared center stage with affinity fraud, churning, oil and gas investment fraud, and assorted other scams and schemes.

"We are especially concerned that as the first of the baby boomers turn 60 this year, they not become trapped in bad investments as their retirement nears," said Cordell Lawrence, executive director of the office.

Variable annuities are on the list because sellers often don't provide enough information to explain the investments fully and also because of the tendency of some sellers to make unrealistic claims regarding their returns, according to the office.

Some advisers take issue with that assessment.

"That's like saying, 'All Italians are in the mob'; it's offensive to me," said Mark Cortazzo, senior partner of Macro Consulting Group LLC in Parsippany, N.J.

"If the comments about VAs were similar to those made about race or religion, there would be an uproar," he said.

"The product itself is not a scam, but the way it's used sometimes amounts to a scam," said Craig McCann, president of the Securities Litigation and Consulting Group in Fairfax, Va. "VAs are often laden with costly riders and sold to people who don't understand, need or want the benefits provided by those riders."

Bad reputation

"VAs earned a bad rep because of the way certain advisers structured them," said Bradley Teets, president of KDT Investments in Punta Gorda, Fla. "One abuse I saw recently was a new client who came to me with all their money stacked in VAs with high surrender charges."

Private-placement oil and gas investments are similar to variable annuities in that there are many legitimate ones, but they are often overshadowed by the bad ones, added Mr. Teets, who handled such investments in a previous job as an accountant.

"I dislike when I read things that are meant to be educational but wind up being accusatory," said Thomas Henske, a partner with Lenox Advisors Inc. in New York. Of course, the same medicine won't work for all patients, but that doesn't mean it's bad medicine, he added.

"If a client happened to see that [Kentucky] list, I would have to waste time explaining away something that should never have been published," Mr. Henske said.

Much of the anti-VA hype is based on how the products were perceived before the living benefits came out, Mr. Teets said. The living benefits offer a spectrum of options that aren't available in other types of investments, he said.

"As with any product, VAs should be judged on their merits. No one - including regulators - should be making blanket anti-annuity statements," Mr. Cortazzo said.

Some advisers are also guilty of this type of blanket rejection, as they won't consider VAs, even if an annuity is the best solution for the client, he added.


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