EQUITY INDEX ANNUITIES ARE BAD!
The FINRA (a Financial Regulatory agency) Investor Alert on EIAs is worth reading.
Back in the early 2000’s, these annuities were the rage of the day. They offered downside protection, with hopes of better than average returns. 10 years later, they are not all they hoped for.
Do you have indexed annuities? If so, I’ll show you how to get out of them, and into something you can control (pick your allocation, better market-based returns, no lengthy holding period). The best part- NO COMMISSIONS TO AGENT! That is important because with indexed annuities, the agent/broker will most likely make more money on commissions than the investor will earn on returns!
If you have an annuity, call me today for an ANNUITY RESCUE PLAN.
Beware of Equity-Indexed Annuities
In its January 2014 posting of disciplinary actions, FINRA disclosed that it had disciplined a broker in Wisconsin for ‘selling away’ (i.e. selling without the approval of his firm) over $8 million of equity-indexed annuities (EIAs) over a period of several years.
Equity-Index Annuities are a problematic product, so much so that they were the subject of a FINRAInvestor Alert dated September 13, 2010 entitled “Equity-Indexed Annuities: A Complex Choice.” In this Investor Alert, FINRA outlined some of the complexities inherent in EIAs. These include the following:
- EIAs have characteristics of both fixed and variable annuities, in that they are often guaranteed a minimum return, but their overall return will track (and thus vary with) an index;
- Generally, the minimum returns of EIAs are less than the returns offered by fixed rate products and the variable upsides are not as great as those offered by pure play variable annuities; and
- While an EIA could potentially offer a promising blend of the positive features of both a fixed and variable annuity, this blending comes at a cost of contractual provisions that are almost always more complicated and that do not eliminate completely the negative attributes of either the pure fixed rate annuities or the pure variable rate annuities.
The FINRA Investor Alert on EIAs is worth reading. However, there are some additional negative attributes of EIAs that this Investor Alert does not mention.
Critically important, the minimum guarantees in EIAs can be miserly low and the haircuts on the investment upsides can be ridiculously high given that these haircuts are administrative fees on index-linked products on which the annuity provider does not take risk, but the investor certainly does.
For instance, according to the FINRA Investor Alert, a guaranteed minimum return might be 87.5% of the annual premium paid plus 1% to 3% interest; obviously less than a positive return for that year.
The upside fees and haircuts can range from 3.5% to 20%. These fees can come in the form of participation rates (e.g. the investor participates in 80% of the index’s appreciation) or spreads or margins (e.g. the investor gets the performance of the index less a spread of 3.5%.)
If an investor was fortunate enough to have chosen an index that performs strongly for several years, they may well be very disappointed with how much of the upside they are sharing with the annuity provider (who does not share their risk) and how much their actual returns pale in comparison to the winning index that they picked.
Because EIAs so favor the annuity providers, brokers who can move this product are compensated well. How well? The brokerage firm employing the broker in Wisconsin who was disciplined by FINRA had a list of approved EIAs. However, the broker in question chose not to sell these, apparently willing to risk his job on the fatter commissions in the EIAs that he could sell away. (FINRA Case #2013036091101.)