NAFA NEWS
RE: August 16th Article by Tom Lauricella, Wall Street Journal. On August 18th, the Wall Street Journal columnist, Tom Lauricella interviewed NAFA Government Relations Chair, Danette Kennedy. Unfortunately, most of the information did not make it into the article, but NAFA wanted its members to have excerpts from the interview.
WSJ: Why is NAFA opposed to the proposed Rule 151A? What’s the big deal?
NAFA: The big deal is that NAFA believes the state insurance departments and insurance companies do a better job of ensuring suitable and appropriate sales than any federal entity. The states provide consumers with local access to department employees who can help them with their complaint, more timely and efficient processing of their complaints, and they avoid the often lengthy and costly arbitration process through the SEC.
WSJ: How are the states better at investigating complaints?
NAFA: The SEC has acknowledged that the current arbitration process isn’t working. They even put out a release saying so and that they needed to review the current process as there were many complaints that the process was time consuming, convoluted, and expensive. Also, the state insurance departments are also the final determination of insurance company licensing, product approval and marketing and they hold quite a big stick over the carriers when it comes to market conduct and complaints.
WSJ: One of the things that we see as beneficial to federal regulation is that there is one source for product comparisons and information.
NAFA: What source is that?
WSJ: Edgar
NAFA: We are not familiar with the source, but would be happy to look into it and send you follow up information. However, the securities industry has never argued that the taking over control of insurance products was predicated on a need for a central place of information. Also, while we are unfamiliar with EDGAR, we are very familiar with a variety of sources where you can find company and product information. For example www.annuityspecs.com; www.annuityratewatch.com; www.ipipeline.com to name a few.
WSJ: Can you tell us how earning excess interest is NOT a security.
NAFA: Excess interest has never been the test for defining a security or an insurance product. An annuity that provides a guaranteed interest rate that is promised the first year is a declared-rate annuity, one that is promised for a select number of years is multi-year guarantee annuity or a MYGA, one that is promised to provide a specified income stream is an immediate and one that is promised based in part on the positive changes of an outside index is an index annuities. Also, excess interest is the cash value basis for all universal life and whole life insurance products.
WSJ: But doesn’t the fact that the index product’s interest isn’t certain or known in advance makes it a risk to the customer and a security, right?
NAFA: Wrong. You can’t re-define risk. The law has already defined risk. Risk is assumed by the individual if, because of market fluctuations, some or all of their money could be lost. The fixed insurance product, including the indexed annuity, promises that if the market goes down, you will never lose your principal or your previous interest. That promise means the assumption of risk (risk of the consequences of negative market returns) is born by the insurance company.
WSJ: You’re talking about the minimum interest guarantee right? How often is the minimum guarantee paid out versus the excess interest?
NAFA: We do not have those figures but in reality they are really irrelevant. The minimum guarantee is simply the promise that even if the market performance IS negative, the customer is assured that they will at least earn a minimum interest and if you keep saving with the tax-deferred annuity you will always have the floor protection and the potential for positive interest, but at the very least – minimum interest.
WSJ: A variable annuity has a fixed interest bucket. Why doesn’t that make it an insurance product and not a security?
NAFA: Because it doesn’t have the minimum interest guarantee on the variable account or the protection from negative market activity. The investment element of the potential for gain during positive markets and the potential for loss during negative markets is what makes it a security.
Follow up question regarding EDGAR: A review of the EDGAR website and fixed annuity websites (including index product information) shows that the information is available for annuities and searching by product features, company or any other criteria is available. NAFA would be more than willing to take Mr. Lauricella through a tour to demonstrate.
EDGAR*
Annuity Rate Sites
Detailed Company Information
X
X
Analytical models and tools including in-depth searching
X
X
Product Database
X (SEC Filings)
X( State Product Approvals)
*EDGAR® is a federally registered trademark of the U.S. Securities and Exchange Commission (SEC). EDGAR Online is not affiliated with or approved by the U.S. Securities and Exchange Commission.
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Follow up Question regarding Commissions
A common misperception is that fixed index annuities pay higher-than-usual commissions. Commissions payable on IAs today are as low as 1% and the average on all IA products is 6.91%. More importantly, the indexed annuity commission received by the agent averaged 7.81% of premium during the same period. With only 90 basis points difference between the commissions available and the commissions paid, the common assumption that “high commissions” are used as inducement to sell very elderly people unsuitable annuities is repudiated. Furthermore, over 98% of all fixed annuity products reduce commissions by 50% or more with some paying 0% at older ages (typically age 75 and above). This is very dissimilar to mutual funds or other market risk products that do not waive surrender charges or guarantee certain minimum positive returns in the event of death, nursing home confinement, terminal illness, RMDs, creation of a lifetime stream of income, etc. I am unaware of any other financial instrument that reduces surrender charges (or contingent deferred sales charges) due to age.
Furthermore, the average commission that was paid to agents is well below asset fees paid out year after year. And, unlike asset fees, annuity commissions are not taken out of the purchaser’s premium, but rather are paid directly to the producer by the carrier. A no-surrender charge product with a typical 1% annual asset fee as opposed to say a 7-year surrender charge product with a 6% commission will actually have a higher cost to the client and will thus reduce the potential return to the client, not increase it. An asset based trail must recover an increasing cost over time from the spreads and since the spreads cannot be increased (in most cases), they start out higher at the outset than spreads on products with traditional stacked front end commissions and contingent deferred sales charges. Just as a typical “A” share mutual fund will actually cost a client less if the asset is held for a longer duration than a “B” share mutual fund will, so will a stacked front end commission on the annuity cost less than the asset based trail over the same duration.
Data Source: Advantage Group Associates, Inc., Sheryl Moore, President
Annuity Definition
