The fight against fixed indexed annuities is far from being over, however.  Here are several articles that appeared in response to the Harkin Amendment:

·         Jane Bryant Quinn on CBS Money Watch wrote, Congress Sells Out Seniors: No SEC Regulation for Indexed Annuities (Be sure to read Sheryl J. Moore’s 32-point response to this article)

·         FINRA, the Financial Industry Regulatory Authority, posted an Investor Alert about indexed annuities

·         Senator Daniel Akaka (D-HI) said in hearings for S.A. 3920, “Deceptive sales practices have been found to be used in these products. An individual in Hawaii pushed equity index annuities to collect high commissions at the expense of senior investors. Those investors least able to effectively evaluate financial products need these federal protections, without question. And they’ve been suffering.” (see full article)

·         Kevin Keller, president of the Certified Financial Planner Board of Standards, said, “These are products that are ripe for abuse among the elderly. It’s important for consumers, especially the elderly, to have the protection of the SEC.” (see full article)

·         Barbara Roper, director of investor protection at the Consumer Federation of America, in her letter to Congress wrote, “If adopted, this amendment would open a gaping hole in investor protections without any assurance that the insurance regulation relied on in its place is adequate or effective.” (see full article)

·         Denise Voigt Crawford, the Texas Securities Commissioner and president of the North American Securities Administrators Association said in her letter to Congress, “It’s a hybrid product, so the questions in play here go beyond just equity-indexed annuities themselves and raise issues concerning who is going to regulate these hybrid instruments on a going forward basis.” (see letter to Congress)

The list of consumer groups and financial professionals who are against indexed annuities is endless.  What is their beef?  Here is a summary of the issues that I have found after reading numerous articles and following indexed annuities almost from their inception:

·         Deceptive and/or high pressure sales practices

·         High commissions

·         High / long surrender charges

·         Lack of disclosure

Most annuity producers and companies who market indexed annuities, especially those who are members of the National Association for Fixed Annuities (NAFA), have already adopted marketing methods and procedures that deal with the above concerns.  Passage of the provisions of the 2010 NAIC Suitability in Annuity Transactions Model Regulation opens producers and companies to fines, discipline, and civil action if they cannot prove that they adhered to these higher suitability standards.

In short, assuming the final provisions of the Finance Reform Bill remain intact and the law is signed by President Obama, those involved with the development, distribution, administration, and purchase of fixed indexed annuities finally won after a long fight.  This win comes with a price, however.  All the players in the fixed indexed annuity industry must strictly follow the provisions of the 2010 NAIC Suitability in Annuity Transactions Model Regulation or the enemies of indexed annuity products will continue their attack with more ferocity than ever before.

I talked to an annuity producer who sold a million dollar indexed annuity to a seventy-year old man only to have the commission reversed nine months later. The man’s son, who had heard that annuities are “bad investments,” called a local attorney to get the his father’s money back. The attorney called the insurance company and accused the producer of the following wrongdoing:

·         He did not tell the customer about the $180,000 first year surrender charge

·         He claimed the policy had an 8% guaranteed interest rate

·         He encouraged his client to sell $1,000,000 in stocks to buy the annuity

·         He did not ask the client about his investments, income, or expenses, and did not explain how the annuity would fit into the client’s overall financial plan

The producer disputed all these representations, but had little documentation to prove it.  Because the producer had such a weak case, the insurance company had little choice but to settle. The $80,000 commission charge-back nearly put this producer out of business.

The 2010 NAIC Annuity Suitability Model Regulations, which will very likely be in effect in every state by the end of the year, will make it easier for financial lawyers to threaten companies and submarine your book of business. Here’s why:

Insurers are now responsible for the supervision, training and sales practices of their agents. These lawyers will claim that the annuity producer was inadequately trained and therefore the company is responsible for an unsuitable sale. Companies will have to prove that the annuity producer was trained, and that he used sales methods or techniques not approved by the company.

These lawyers may claim that the annuity producer did not gather enough information from the consumer. Companies will have to prove that prior to making an annuity recommendation, annuity producers obtained information about the consumer’s 12 areas of suitability:

·         Age

·         Annual income

·         Financial situation and needs, including the financial resources used for the funding of the annuity

·         Financial experience

·         Financial objectives

·         Intended use of the annuity

·         Financial time horizon

·         Existing assets, including investment and life insurance holdings

·         Liquidity needs

·         Liquid net worth

·         Risk tolerance

·         Tax status

These lawyers may try to demonstrate that the annuity producer did not fully inform the consumer about all the ramifications of owning the annuity product. Companies will have to be able to prove that the annuity producer informed the consumer of:

·         the features of the annuity

·         the potential surrender period and surrender charge

·         potential tax penalty if the consumer sells, exchanges, surrenders or annuitizes the annuity

·         mortality and expense fees

·         investment advisory fees

·         charges for and features of riders

·         limitations on interest returns

·         insurance and investment components

·         market risk

The 2010 NAIC Annuity Suitability Model Regulations require companies to set up a special suitability approval department, similar to a life insurance underwriting department, which will examine each sale to ensure that the agent used suitable methods and sales practices. The purpose of this department is to gather information and to determine whether the annuity sale could be defended against those who may try to attack it.

Since it is now clear that the insurance company is always responsible for the product issued, they are now putting in place systems, standards, and training to protect their business. In the future an annuity sale will resemble a life insurance sale in that customers will have to qualify before their annuity application will be accepted. Annuity producers who are not willing or able to provide the necessary documentation to defend the fixed annuity industry against lawyers such as those listed in AnnuityLawyers.com, will find many of their annuity applications denied by the company, and may ultimately be forced out of the fixed annuity business.

Here is what you can do to succeed in today’s litigious environment:

·         Join and NAFA and learn about product suitability, advertising guidelines, and to educate yourself so you can represent yourself as an annuity professional.

·         Use software such as ImagiSOFT’s DataNet to prove that you have gathered information about the consumer’s 12 areas of suitability, disclosed the features of each annuity that you sold, and have documented every step of the sale.

·         Use company-approved advertising materials, illustrations, and disclosures.

·         Keep the recording of a five-minute summary interview with your client where you discuss the purpose of the annuity, the source of funds, the advantages of purchasing the annuity, the potential disadvantages such as surrender charges, the timeframe for the product, and the financial problem this product solves for your client.

·         Discuss the annuity with the beneficiaries. Explain probate, settlement options, and potential tax implications.

·         Let your customers know that you keep detailed records and to call you for a review if they have any questions about any of their annuity products.

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•  Insurance companies are now responsible for unsuitable annuity sales which means they will have more exposure to litigation and disciplinary action
• Every annuity transaction must be reviewed for suitability prior to policy issue
• Prior to making annuity recommendation producers must gather information about the consumer in 12 areas of suitability information
• Companies must train and monitor the sales activity of their annuity producers

See Related Articles:

Wisconsin Regulators Eye Annuity Suitability

Insurers to be responsible for fixed-annuity suitability

NAIC Acts On Annuity Suitability - Contract Resales

Suitability 101

 

A Wall Street Journal article published on
March 26, 2010 quotes Senate Banking Committe Chairman, Christopher Dodd, as saying, “It is my hope that shortly after our return on the second week of April that we will come to the floor of the U.S. Senate to debate, hopefully a full-throated debate, about how we reform the financial services sector of our nation.”

If this bill passes, the stronger, tighter, NAIC Suitability in Annuity Transactions Model Regulation passed on March 28, 2010 may become immediately effective in all 50 states.

Here is a quote from page 966 of the Senate’s Restoring American Financial Stability Act of 2010:   …adopted rules with respect to fiduciary or suitability requirements in the sale of annuities that meet or exceed the minimum requirements established by the Suitability in Annuity Transactions Model Regulation of the National Association of Insurance Commissioners (or any successor thereto);

Page 1427 from the House’s Wall Street Reform and Consumer Protection Act of 2009 that passed on December 17, 2009 states: “SUITABILITY AND SUPERVISION RULES FOR ANNUITY PRODUCTS. A State shall have adopted rules that govern suitability requirements in the sale of annuities which shall meet or exceed the minimum requirements established by the National Association of Insurance Commissioners Suitability in Annuity Transactions Model Regulation in effect on the date of the enactment of this Act, or any successor thereto.”

Does this mean that insurance companies and annuity producers may have to be ready for these new laws by June first? Probably not, but they will almost certainly be in effect in most states this year. 

·         the 10% tax bracket sunsets. This means that those filing Joint tax returns will pay 15% instead of 10% on the first $17,200 of income ($8,600 Single), an $840 tax increase.

·         the marriage penalty will return. Taxpayers who file a Joint return will pay 25% on $29,050 of their income instead of 15%. This is a $2,905 increase for Joint tax payers with Adjusted Gross Incomes of $174,800 or more.

·         the 31% income tax bracket will be replaced by 33% and the 35% tax bracket has been replaced by 39.6%.

·         If HR 3200 becomes law, add a 1% surcharge to the 31% tax bracket, a 2% surcharge to the 39.6% tax bracket, and a 4.4% surcharge on income that exceeds $1,000,000 – that’s 44%.

So what does this mean in dollar and cents terms?  Here are the tax calculations for a $1,000,000 Roth IRA conversion for a retired married couple, filing a joint return, who have an Adjusted Gross Income of $250,000 and itemized deductions of $50,000:

2010 Taxes Without Roth IRA Conversion: $41,811

2010 Taxes With $1,000,000 Roth IRA Conversion:  $386,848

Roth IRA Conversion Cost: $345,037

2011 Taxes Without Roth IRA Conversion: $43,484

2011 Taxes With $500,000 Roth IRA Conversion:  $241,716

2012 Taxes Without Roth IRA Conversion: $43,173

2012 Taxes With $500,000 Roth IRA Conversion:  $240,280

Roth IRA Conversion Cost: $395,339

In this situation, your client would save over $50,000 in Federal Income Taxes by attributing the $1,000,000 income from the Roth IRA Conversion to 2010 instead of $500,000 in 2011 and 2012. Clients who have lower incomes and/or smaller rollovers may find that splitting the income between 2011 and 2012 is ideal, but in this situation, this is clearly not the case.

Take home message: Before making a Roth IRA Conversion recommendation, first calculate the income tax ramifications for your client.

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In 2010 thousands of retirees will get conned by misinformed or unscrupulous salespeople who will talk them into an unsuitable Roth IRA conversion. If you want to become one of those people who, like Bernie Madoff, make themselves rich at the expense of their unsuspecting clients, here is a step-by-step guide:

1)    Use a Roth IRA Conversion calculator similar to the one offered by CalcXML.  This calculator is perfect, because it leaves no trace; your name does not appear, nor does the name of your client. Throw away the second page to avoid embarrassing questions about your input.

2)    Use a lower tax bracket in the pre-retirement, “accumulation” years than the post-retirement, “distribution” years.  This printout uses 25% and 33%.

3)    Since this client does not have $250,000 of ready cash to pay the taxes for the conversion, use “Option 2,” where the taxes are painlessly paid from the existing IRA funds.

4)    Sell a product that has a 25% premium bonus and explain that the bonus will cover the income taxes.

Informed financial professionals can instantly see problems with the above scenario:

1)    Ethical financial professionals never use calculators that omit their contact information, the client’s name, assumptions used, pertinent disclosures, and includes a sentence about seeking the advice of an income tax professional.

2)    A Roth IRA Conversion calculator that uses “Tax Bracket” fields can be manipulated to deceive the client as I did in the sample printout. As a minimum it should have an input for “Adjusted Gross Income” and use the income tax rates that President Obama proposed for 2010 and beyond.  Nobody who has $500,000 added to their income in a single year is in a 25% tax bracket!

3)    The software should take all income tax ramifications into account.  The sample printout does not take into account the fact that the client is age 56, and would incur an additional $25,000 tax penalty (10% early withdrawal penalty).

4)    Taking into account both of above mentioned potential tax issues, the income tax impact for this client is about $250,000 higher than what was disclosed!

5)    Products with premium bonuses may help offset current income taxes, however, a premium bonus is never “free.”  There is always a cost somewhere, often in the form of lower interest rates.

I recommend the following safeguards to protect consumers from tax penalties and financial institutions and their representatives from potential lawsuits:

1)    Insurance companies, marketing organizations, and broker / dealers should train their representatives about a how a Roth IRA conversion will affect a client’s current and future income tax situation, and how to determine whether it is suitable for their client.

2)    Insurance agents and registered representatives should insist that a licensed income tax professional review the tax calculations and assumptions of Roth IRA conversions over $100,000.  This may save the client tens of thousands of dollars in taxes, and a tax professional’s endorsement may shield against a future lawsuit.

3)    File a complaint with the appropriate supervising authority against any insurance agent or securities representative who uses the above unethical approach to Roth IRA conversions. 

4)    Financial institutions should review all calculations and reports, including the tax professional’s review, before implementing a Roth IRA conversion.

ImagiSOFT, Inc. is sponsoring a promotion to help the National Association of Fixed Annuities (NAFA) fight this SEC rule. The heart of the SEC’s arguments center around suitable sales.  Through September 1, ImagiSOFT is offering a FREE two-year license to DataNet, a powerful software system to help you make higher quality annuity sales by following state suitability laws. Click this I Love Suitability link for details. This page gives an overview of state suitability law and how DataNet addresses these issues.  This page also explains how to get a lifetime free license to DataNet when you donate $250 or more to the NAFA Opposition Fund.

Lack of suitable annuity sales is the key argument that the SEC has used to defend their position why they should regulate fixed annuity sales instead of the states.  This argument has deep flaws. State suitability laws state that each agent should have a “system” to ensure that suitability laws are being followed, and that records must be kept (depending upon the state) from 3 to 10 years.  If you sell fixed annuities, make sure that you are not part of the problem — use a compliant “system” to follow state suitability laws, even if it is a thick, paper file.

Lastly, write a letter / email to your State Insurance Commissioner.  Tell them that you are following state suitability law, that you have a “system” to comply with the law, and that you believe that the state suitability law adequately protects consumers in your state.  Also write your State Representative and give him or her the same message, with the admonition to support the “Indexed Annuities and Insurance Products Act of 2009” recently introduced by Congressmen Greg Meeks (D-NY) and Tom Price (R-GA).  For more information see http://www.nafa151a.com/.

Please let your colleagues and associates know about ImagiSOFT’s free two year license to DataNet by sending them a link to this site.  The two-year free license offer ends September 1, 2009 so do this now.  The future of everyone who sells fixed annuities depends upon winning this fight!

See http://www.youtube.com/watch?v=iOyXfcB9r6s

Here are some highlights:

“It’s a ludicrous penalty (obviously understands that annuities have a 10% tax penalty prior to age 59 1/2) – you shouldn’t get out now. This is an Equity Indexed Annuity. That means that your principal is protected – you are going to get $225,000 out of this annuity.”

(By getting out) “You are looking at product picking . . . this product here, this timing here . . . you really need to sit down and work out a plan to decide what you are trying to accomplish over time . . . what is this money for?”

“You started with $175,000 and now have $225,000 now? I wish I had a product that had grown from $175,000 to $225,000 in the past five years, that’s not bad.

“Don’t try to time it [the market] we saw what happened today . . . if you put all your money in one day, you could lock in your losses.”

“This is a 5.15 – I figured it out – a 5.15% rate of return for the past five years. You should patting yourself on the back – actually thanking that person that sold you the equity indexed annuity – stick with it!”

It is refreshing to see a few positive statements made by the press and about fixed indexed annuities.

The take home message for agents: sell the product that is best for the client as Mark’s agent obviously did. Five years ago, when Mark was age 34, he must have been looking for a safe place to put $175,000, for the long term, that had tax deferral, and the potential to earn an interest rate higher than most other safe-money accounts.

]]> http://annuityillustrations.com/?feed=rss2&p=26 http://annuityillustrations.com/?p=25 http://annuityillustrations.com/?p=25#comments Tue, 07 Apr 2009 22:05:37 +0000 Michael J. Prestwich http://annuityillustrations.com/?p=25

The other day in Costco I found the small book, Jeffrey Gitomer’s Little Teal Book of Trust: How to Earn It, Grow It, and Keep It to Become a Trusted Advisor in Sales, Business, and Life. Over the years, I have found that lack of trust, or credibility, is the number one reason people fail in the financial services industry. What is worse, your prospect won’t tell the salesperson that lack of trust is the reason they didn’t buy, but they offer an excuse such as, “I want to shop around,” “the rate is too low,” or a million other things. Here is an outline of Jeffrey’s book:

·         Tell the truth. This is the number one element of trust AND relationships.

·         Do what you say you will do. This is a test for being trustworthy and reliable.

·         Communicate in a timely manner. This shows you are responsible, on top of it, and that you care.

·         Bring value beyond your product or service. What you do to help others be more successful is a true reflection of your character.

·         Be on time. Being on time shows you respect the other person’s time.

·         Be friendly. Smiling people are the gateway to open communication.

·         Be sincere. This can only come from belief in what you do, loving what you do, and caring for others.

·         Show and say genuine thanks. Be grateful for the opportunity to be of service.

·         Be consistent. I believe this element of trust is the most difficult to master because it combines all the other elements.

·         Give trust. You become trustworthy by giving trust.

This may be the best $20 you will ever spend.  Buy it, and live by its principles.