Why So Much Misinformation on Indexed Annuities?
Dec. 13, 2010 -- To everyone selling indexed annuities, the products seem like a Godsend: Be able to deliver your clients a product that will protect them from loss in the event of market downturn, while also providing the potential to outpace traditional fixed savings instruments. To those unfamiliar with indexed annuities, but interested in hearing more about the compelling story, the sources of information are endless.
But what if the people looking for the information are your prospects? Where can they find reliable, credible information on these new products that they’ve never heard about? Where would you look? The Internet, newspapers and trusted financial services journals, right?
I don’t know about you, but that scares the hell out of me. Why?
For more than a decade, I have monitored the media on indexed annuities. I find all of the articles that make mere mention of the products, read them and correct the “reporters” and editors if necessary. And trust me -- it is too often necessary.
So, why does the media get it so wrong about indexed annuities?
People have a tendency to draw an inappropriate conclusion about indexed annuities and lawsuits. This causes some misconceptions about the products. In the early part of the turn of the century, a specific insurance company was involved in some class action lawsuits. The company was a marketer of a top-selling indexed annuity. Media translation: indexed annuities cause class-action lawsuits. Wrong! The facts are that ambulance-chasing lawyers cause class-action lawsuits. They are not exclusive to the indexed annuity market and not even to the insurance field. Ask any company with whole life or universal life blocks of business (and even Microsoft!) and they will attest that they have also been victims. The lawyers get paid and the insurance companies settle to get their names out of the mud. So, I am happy to report that indexed annuities are not a hotbed of legal activity. It is OK to be affiliated with this market!
Adding to the misconceptions are the advertisements about indexed annuities. Although indexed annuities are rarely advertised in the national media, you can easily open any insurance trade journal and find promotional ads for the indexed annuity “flavor of the month.” The problem is that 99 percent of the time, the products that are being advertised account for a minute portion of sales in the indexed annuity market. Case in point: ever see an ad for a product paying double-digit commissions? Only four products in the entire market pay a double-digit commission, and those products accounted for only 2.3 percent of the $8.7 billion in sales for the third quarter of 2010. Yet, advertisements for those products can be found in nearly every insurance newsmagazine! The same can be said for products with long surrender charges and exorbitant bonuses. It is sad that the most popular products aren’t the ones being used to catch agent’s attention. After all, what sounds better -- a six-year product with a 3.5 percent commission or a 12-year product with a 12 percent commission? My point exactly.
Sources are a major contribution to the problem. If reporters are looking for information on something that they are unfamiliar with, they find a source for that information. Financial reporters grasping for information on an unfamiliar product, such as indexed annuities, tend to reach out to their typical source for information on financial services products: Wall Street. So, what is so wrong about asking investment firms, broker/dealers and stockbrokers about indexed annuities? They don’t sell them (generally) and usually compete against the folks who do. Not to mention that they don’t have credible sources on indexed annuity product information themselves (i.e. commissions on securities and annuities are an apples-to-oranges comparison, folks!). Reporters need to look to insurance regulators, marketing organizations, insurance agents and credible third-party firms when searching for information on any insurance product. Which leads us to other problematic sources…
The Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). I hate to break it to the press, but these guys have absolutely no regulatory authority on indexed annuities. In fact, they don’t even understand the basics about these products (trust me -- as the person who has corrected SEC and FINRA on all of their communications relative to indexed annuities, these guys need a lot of continuing education on indexed insurance products). For you naysayers who say they don’t need to regulate them to issue notices on them, I’ve got news for you, too: SEC and FINRA are not like some all-seeing eye. These guys don’t have all of the facts. We’re talking about the folks that let Bernie Madoff skid by for years with warning upon warning. Don’t you think there might be a slight possibility that these two agencies might have it wrong about indexed annuities, too? There is no regulatory entity more seasoned on the ins-and-outs of indexed insurance products than the Iowa Insurance Division (38.62% of all indexed annuity sales flow through companies domiciled in this state as of the third quarter). This is a great place to start if you are looking for a regulator who knows what they are talking about when the words “indexed” are being uttered.
Perpetuation of Bad Information
The scariest part about all of this is that the internet has multiplied this problem. Where before, reporters would go directly to a live “source” for information on unfamiliar territory, now they just Google it. The problem lies in that anyone can post things to the web: credible or not (ever seen one of those questionable Wikipedia posts? I rest my case). Before I had to explain to reporters at Forbes or The Wall Street Journal why the best place to find information on the top-selling indexed annuities is not on the back of an insurance trade journal (see paragraph about ads above). They would realize the error of their ways, apologize, promise to do better next time, then seek us out as a source the next time. Now, I have a bunch of ignorant investment advisors (who are syndicated columnists) saying, “Of course I am right! I read that in an article that was published in The Wall Street Journal two weeks ago!” Oh, if only I could always get a correction printed!
The bottom line is that you have to know if you are using credibleinformation to learn about indexed annuities. Carefully evaluate what your source has vested in the conversation and where they may have obtained the information they’ve provided. It may open your eyes, and make you want to stop reading the “news!”
Sheryl Moore is president and CEO of AnnuitySpecs.com, an indexed product resource in Des Moines. She has over a decade of experience working with indexed products, and provides competitive intelligence, market research, product development, consulting services and insight to select financial services companies. She may be reached at [email protected].
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