While many financial advisers continue to criticize and shun equity index annuities, insurance companies that sell the product are trying to improve its tarnished image by focusing on education.
"A few firms walked away from it, but this product will continue to grow," said Bruce Parker Jr., chief executive of Baltimore-based Old Mutual Financial Network and Old Mutual Capital. "This is a solid product for the middle market that's accumulated assets."
According to the Financial Industry Regulatory Authority Inc. of New York and Washington, EIAs have characteristics of both fixed and variable annuities. Their returns, which are linked to the performance of stock market indexes, vary more than those of other fixed annuities but not as much as those of variable annuities.
"The underlying value proposition is extremely important to boomer investors who need to place principal protection on assets, while maintaining some degree of upward interest," said David Macchia, president and chief executive of Wealth2k Inc. of Hingham, Mass. The company last week launched an educational program — available to producers — to walk customers through the good and bad of EIAs.
But a skeptical planning community has its doubts about the product.
"They are some of the worst products out there," said Robert M. Burkarth III, a regional vice president of the Householder Group in Stamford, Conn. "There's no way a 75-year-old client would understand the way they work, so it's an area ripe for abuse."
Last month, Minnesota's attorney general, Lori Swanson, won a settlement against Allianz Life Insurance Company of North America in Golden Valley, Minn. The suit alleged that the firm marketed and sold deferred annuities to senior citizens without first determining whether the products were suitable for them.
In the end, the firm agreed to repay the premiums of unsuitable sales and step up suitability standards.
Another strike against the EIA: Regulatory oversight for the product has been foggy. Although EIAs are pegged to the performance of an equity index, they aren't securities, but insurance products.
Those who wish to report EIA-related problems must turn to their state insurance commissioner, not FINRA or the Securities and Exchange Commission.
That means it is up to insurance companies to track suitability for the products and train their registered representatives.
Advisers are quick to tell tales of unsuitable EIA sales to investors.
Mr. Burkarth had a client who held an EIA during a time when the Standard & Poor's 500 stock index was up about 17%, but since the annuity had a 7% cap on gains, the investor missed out on a sizable return.
Lengthy mandatory holding periods, some as long as 10 years, and high surrender charges also have made the investment a nightmare for senior citizens, who may have been unaware of EIA restrictions.
"A typical indexed contract is about 100 pages long," said Stuart Speer, a certified financial planner and securities principal at Heritage Advisors LLC of Overland Park, Kan. "Unfortunately, I've never encountered a salesperson who had more than a vague understanding of these labyrinthine contracts."
Jackson National Life Insurance Co. of Denver has created a certification program for its independent insurance agents. As part of the company's fixed-index-annuity certification program, the agents participate in an independent-study course and take an exam.
"We also have dedicated wholesalers who are working with reps on when it makes sense to sell annuities," said Doug Mantelli, vice president of annuity marketing strategy for Jackson National Life Distributors LLC. "It won't make sense if you want equitylike returns: This is a portion of your money that you want to protect."
Jackson, like other firms, also adjusted its product: Clients can now purchase contracts that are as short as five years. Fewer "moving parts," such as renewal and participation rates — which can drastically affect the returns — make the product easier to understand, Mr. Mantelli added.
Allianz also has put together a web-based education program for its agents and will provide a statement of best practices. Both will be distributed by the first quarter of next year.
"We'll also call clients who are 75 and older to make sure that they understand the product and that it's suitable for them," said Pat Nelson, whom Allianz recently named to a new position, chief suitability officer.
Advisers agree that a properly modified EIA has its place as a safeguard for a portion of assets of clients who are educated about the product.
"Not all of my clients own them," said Douglas Black, a CFP and president of Larson Financial Services Inc. of Leawood, Kan. "But when a client says, 'I can't afford to lose this money, but I want more than what I'm getting on my [certificates of deposit],' then I think I need to show it to them."
Darla Mercado can be reached at [email protected].
