It seems that the regulatory world is, once again, threatening to curtail or at least tighten the rules regarding variable annuity sales. This is the latest in a series of efforts over the years to increase awareness to purchasers of the risks and fees associated with variable annuities; almost all of the previous efforts having met with great resistance and thus achieved little results.
Why the fuss here?
There are three areas that seem to be at the heart of the regulatory concerns:
1. Unlike fixed annuities, variable annuities can go both up and down in value, depending on the performance of the funds invested inside the annuity contract. If the contract owns X shares of a mutual fund and it goes down in value, then the contract value goes down proportionately. Some people may believe that buying an annuity eliminates the possibility of loss but, with variable annuities, that is not always the case. All annuities are certainly not created equal.
Virtually all annuity contracts have a decreasing surrender charge should the contract owner chose to surrender the contract before the surrender charge period expires (generally a 7-10-year period). This charge reduces the amount that the contract owner can receive at termination should the contract be surrendered early. While there is no surrender charge applied if the contract owner dies and many contracts provide a surrender charge-free 10% annual withdrawal, it is still possible that the charge – if applicable – could offset some or all of the gains made in the contract to date. Again, many annuity purchasers may not have been informed of this before moving forward.
While both fixed indexed annuities and variable annuities have a fee for adding a lifetime income benefit rider, variable annuities have several additional fees. They may have an annual management fee of up to 1% of policy assets. They typically have a mortality expense charge (ranging from 1.0-2.5%) to pay for the insurance associated with the guaranteed death benefit. And, the investments held in the policy – usually mutual funds – often have sales charges to buy, sell or hold which could add several additional percent in fees. All told, it is not uncommon for these variable annuity annual fees to be in the 4% range, which is a good deal for the insurance company and the financial advisor who sells the policy but not such a good deal for the customer.
Given the above, you’d think that these securities would not be a popular choice among investors yet that’s not the case.
Why?
First, because few people who buy an annuity really understand what they are buying or the fees associated with the product. Someone they trust suggested a product, gave them the required disclosures (all 78 pages!) and signed them up. Second, most financial advisors associated with brokerage firms only offer variable annuities and choose not to offer either traditional fixed or fixed indexed annuities. Given that they are the recipients of a portion of all the fees, it is not surprising that they favor them. Remember that more individuals work with financial advisors associated with brokerage or investment firms than with independent investment advisors. Third, the firms with which they are associated also receive a portion of the fees, so they also benefit from limiting the range of options offered to their customers.
The old saying, “buyer beware” is very fitting when considering investing in a variable annuity. Make sure you are adequately educated when it comes to all annuities. As I stated above … all annuities are NOT created equal. There are very specific differences in the varying types of annuities and what they can offer. Make sure you are investing in the type of annuity that fits your needs best … not your broker’s needs.
Do your homework. Ask questions. Get second or third opinions. Know your needs (believe it or not, many people don’t really know what their needs are so they just go with whatever is suggested to them at their bank or investment firm). Work with someone who puts your best interest first.
Frederic “Ric” Schilling is a Florida native, born in Jacksonville, Fl. Ric is President and founder of Senior Guardians of America, a local North Florida firm specializing in tax reduction, long term illness planning, asset protection, probate avoidance and life income planning. Ric is a National Speaker and Advocate on Senior Issues and has been featured by the Florida Times Union and WJXT, TV-4 in Jacksonville as an authority on Estate Planning and Retirement Issues. Senior Guardians has an A+ rating with the Better Business Bureau and is a member in excellent standing with the National Ethics Association. Ric Schilling is a Certified Financial Fiduciary (CFF). You may contact Ric at 904-371-3302 or 888-891-3381. Please visit: www.seniorguardian.com
This article is not intended to give tax or legal advice. Securities offered through Center Street Securities, Inc. (CSS), a registered Broker-Dealer & member FINRA & SIPC. Investment Advisory Services offered through Center Street Advisors, Inc. (CSA), a SEC Registered Investment Advisor. Schilling and Associates (d/b/a Senior Guardians of America) and CSA are independent of CSS.
