Insurance agents who work primarily with equity index annuities say the Securities and Exchange Commission's proposal to regulate the products as securities would impose greater costs on their firms and hand over control of their production to broker-dealers.
Insurance agents who work primarily with equity index annuities say the Securities and Exchange Commission's proposal to regulate the products as securities would impose greater costs on their firms and hand over control of their production to broker-dealers.
That assertion raised the ire of registered representatives and financial advisers, who said that as long as an agent is operating a clean practice, additional scrutiny shouldn't be a problem.
"Why would having someone look at what you do put you out of business?" said Thomas E. Murphy, registered principal at TEMAA Financial in Dallas. The firm has $80 million in investment accounts inside exchange traded funds and $50 million inside various insurance products but doesn't sell equity index annuities.
"If the industry did a better job of self-policing, we wouldn't be dealing with this." Mr. Murphy said.
Regulation of the equity index annuity as a security would require those who sold the products to answer to the Financial Industry Regulatory Authority Inc. of New York and Washington, as well as the SEC, by becoming securities-licensed or becoming associated with a registered broker-dealer.
That level of federal oversight would be in the best interests of consumers, proponents said.
"These products are like principal preservation funds and other products that are inherently suspect and should be subject to the same federal scrutiny," said Mercer E. Bullard, assistant professor at the University of Mississippi School of Law and president of Fund Democracy Inc. in Oxford, Miss. "It [might] capitalize on people's inability to understand that with reduced risk comes reduced return and, for products like this, usually higher expenses."
NEW LAYER
However, insurance agents who generate the bulk of their revenue with these annuities say that the new layer of regulation will raise costs for their practices and permit broker-dealers to have the final say on whether they can sell these products in the first place.
Affiliation with a broker-dealer comes with a number of costs for the firm that wants to participate. Costs can include licensing, staff fingerprinting and other compliance expenses that get passed on to the reps. On top of that, firms have to pay additional fees if they come up short on gross dealer concession for specific products.
"If you're not selling enough product, then maintaining the license becomes expensive," said Jeffrey J. Taggart, an independent agent with Taggart Co. in Cody, Wyo. He is also president of the National Association of Insurance and Financial Advisors of Falls Church, Va. "All of the regulation is burdensome at best, and the potential for lawsuits can scare you to death."
Mr. Taggart said he "can count on one hand" the times he has sold an equity index product in the last two to three years, but he expects far-reaching effects if the rule follows through.
"You'll see people who will stop selling the product completely and go to different products to meet the needs," he said.
Another worry that agents have is that broker-dealers, concerned about the equity index annuity's complexity and bad reputation, will restrict the carriers they can use or bar their sale altogether. Following Finra's Notice to Members 05-50 in 2005, firms were given details on supervising the sales of the products. Some firms required a review of the sale — even if it is outside business — while others, such as Raymond James Financial Inc. of St. Petersburg, Fla., cleared some equity index annuities through a short list of carriers.
"Most broker-dealers brought them in-house and don't care if they sell them; they don't want the liability," said Scott Stolz, president of Planning Corporation of America, Raymond James' insurance general agency. "We're a believer in the concept, but we want to make sure good products exist." The firm expects to post $75 million in equity index annuity sales this year, a small fraction of their predicted $2.4 billion in sales of variable annuities.
A number of agents have come to the insurance industry from the securities field, having dropped their licenses after becoming fed up with the SEC and Finra. They assert that the rule would disrupt their business because their markets aren't driven by selling investment products but rather by insurance and savings vehicles.
"I have my Series 7 and 66, but I'm trying to get out of securities entirely because my market doesn't warrant or require it," said Frederick C. Whitford, president of Retirement Design Group Inc. in Monterey, Calif. He says that 95% of his business is in annuities, primarily in fixed products. "My clientele doesn't require equity participation; if they can get 5% or 6% over time, they're happy," he added.
Full fee and surrender charge disclosure, as well as knowledge that the principal is safe, are concepts the consumer needs to understand, Mr. Whitford noted. "There are people who don't disclose surrender charges and options on getting money out, like in the Dateline episode," he added, referring to the TV news exposé of poor sales practices with equity index annuities. "We saw some idiots who shouldn't sell that way, but I do a ton of due diligence to make sure it's appropriate," Mr. Whitford said.
Registered reps insisted that federal oversight of the sales will ensure adherence to proper selling standards as well as a shakeout of bad agents. "One of the problems with a state-based regulatory structure is that you can have someone sanctioned in one state, but they can go to another," said Mr. Murphy. However, under securities regulation, arbitration and litigation are possible alternatives.
Although the outcome of the proposed rule is still in flux, those who sell equity index annuities and call for reformed oversight of the products hope that SEC regulation won't eliminate the product altogether.
"The SEC needs to approach this [in] a way to make this more consumer-friendly as opposed to just making them a security," Mr. Stolz said. "It's good for people who want more than 2% but don't want to get into the stock market. We're afraid they'll destroy the product for that person."
E-mail Darla Mercado at dmercado@investmentnews.com.
