Many regulators have been clamoring recently about what they feel have been less than honest annuity marketing tactics employed by financial planners and insurance companies in order to get fearful investors to fork over their life savings in return for risky products that didn’t suit their objectives. Specifically, they are targeting sellers of so-called ‘variable annuities’ for misrepresenting the amount of exposure these products have to the financial markets overall and to the equity markets in particular.
The recent elimination of trillions of dollars in global net worth includes hundreds of billions dollars invested in index funds by insurance companies seeking moderate long-term returns on the principle they are given in return for a steady flow of annuity payments. As global equity markets have plummeted to their lowest point in over ten years, regulators fear that much of the principle that is supposed to repaid over the course of the annuity is lost, and that – as a result – insurers a) won’t be able to cover the payments and that b) in the case of variable payments, those depending on annuities as a primary source of income will not be able to make ends meet with payments that have in some cases fallen by as much as 50%.
Yet it is unclear just who is in the wrong here, if anyone, or if regulators are rattling their sabers in a concession to public pressure. Except in cases of outright fraud, investors are expected to have carefully read and understood all the prospectuses, all of which also include information necessary to make informed decisions about whether or not to purchase an annuity. Yet since so many of the buyers of annuities are older and have difficulty understanding (let alone reading) much, they could be easily convinced by a salesperson saying something that totally contradicts the acknowledgement of risks found in the sales literature.
The case against variable annuity sales is compelling when we consider the demographic of the victims – mostly older people or either know nothing about personal finance or do not have the wherewithal to manage their own finances at all. Yet should we let a couple of bad apples ruin it all? Guidelines governing annuity marketing already dictate that a variety of investor-aimed disclosures must be made in order for a sale to proceed; in cases where that is not adhered to, the crime is fraud, and it should be pursued as such.
Savers and investors should always know exactly what they are getting into and should buy financial services from individuals they trust. They should verify all claims made by a salesman by referring to sales materials and should feel justified – compelled, even – to alert the authorities should they find that a salesperson is misrepresenting the risks that concur with variable annuities.