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SEC supervising EIAs

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Jul 8, 2005 5:50 pm

Can’t be a bad thing, can it?  It seems some of the most aggressive sales and seminars in my area is on these and I am not sure that the clients are getting the whole story. Just had someone free-look one for 500k that they NEVER should have been in. Maybe if the people selling these actualy had to get securities licensed it may help.

Jul 8, 2005 6:37 pm

I don't know.

I'm for better regulation, not more.

Jul 8, 2005 11:33 pm

If the SEC is going to require FIAs to be registered, then they might as well include all fixed annuity and life products.

While we're at it, let's include CDs, INCLUDING Equity Index CDs.

Next, let's registered DDA and NOW accounts.

Frankly, we should probably register pocket change, too. *cough*

The states have done a better job of regulation, but this is about politics. The SEC, and by fiat, the NASD, want MORE control over the lives of those that sell product.

I've seen what happens when a FIA is registered -- they suck, plain and simple. Nobody would want to own a registered FIA. The participation rates suck, the margins suck, the guarantees suck, and the agent comp sucks. Nothing about them is positive, from either the consumer or distributors point of view.

This is what happens with overregulation.

The NASD is a shining example of overregulation gone wrong. The last thing in the world any prudent person should wish for is MORE NASD involvement in any single thing. They are out of control, and archaic. The NASD should be abolished. It's no longer an SRO, per its charter, and it's also not a law enforcement agency, in appearance, or in function. It serves no legitimate purpose, except to keep some failed brokers employed, and as a jobs program for liberals and egalitarians.

FIAs are unique, and although still a fixed insurance product, they are not comparable to bundled securities, like mutual funds, UITs, or variable contracts.

For an FIA to work efficiently, where both the contract owner and the contract issuer benefit, requires distribution, and the current system fosters that requirement. NASD regulation would hinder that requirement, making the contract no longer profitable for any party. That means they simply won't sell, and if they don't sell, they cease to exist.

That's the ultimate goal of the SEC and NASD -- the abolition of the FIA. Nothing else makes any sense.

Why does distribution play a vital role in the efficiency of the FIA contract? The same reasons that distribution plays such a vital role in the efficiency of the life insurance policy.

In summary: The law of large numbers.

A company cannot insure one life for a substantial net amount at risk, for just one modest recurring premium, BUT they CAN if they have thousands of insureds paying thousands of recurring premiums.

FIAs work well ONLY because of the same law of large numbers.

Some less-than-brilliant failed planners have tried to create their own FIA on a client by client basis. It simply cannot be done.

Anyone that understands how insurance works, and who has examined the FIAs in detail (in particular, those with No Moving Parts), can clearly see how the insurance companies can credit HIGHER interest than a plain vanilla current yield annuity, WITHOUT any additional risk, AND pay reasonable (or even unreasonable) distribution costs. I'll define reasonable as 1% times the number of years until policy maturty, plus or minus 1% from that total. Longer maturity periods allow companies to amortize distribution costs more efficiently, which is why longer maturity periods often make good sense for the contract owner (higher credited interest, despite higher distributor compensation). Efficiencies in the amortization of distribution costs has a positive impact on the ratings of the carrier, which decreases the reinsurance costs and regulatory oversight, both of which contribute to the bottom line -- and that's generally a positive thing for everyone. That's why those that stomp around complaining about lenghty policy maturities are merely advertising the fact that they don't know much, don't think much, and aren't willing to learn much.

Bottom line: It takes many contract owners for the FIA concept to work.

Adding a registration requirement will ruin that.

For those that don't know, the FIA concept is not new (over 30 years now), even though retail distribution is (just 10 years). The fixed interest contract where interest is linked to a passive index has been around almost as long as the passive indices themselves (ask any pension actuary).

An acronym: GIC.

The failed planners that argue that a FIA will not credit more interest than a tradtional fixed annuity are out of their depth. Here's the skinny: Why do large pension plans buy GICs instead of traditional fixed annuties? Because GICs paid (and pay) more interest (this is historical fact, as well as current news).

In all likelyhood, a registration requirement will not meet the defintion of a security burden, and this discussion will be moot.

The most likely result will be state required suitability, which should be in place already. The blame there lies at the feet of the NAIC, and the several insurance commissioners. One can also blame the companies (I know I do).

In a round table discussion of some fairly brilliant folks (i.e., members of Top of the Table, some M Financial folks, and quite a few who are actuaries with designations like FSA and FSPA), several put forth the arguement that a variable annuity with a guaranteed minimum income benefit built into the contract is more insurance than investment (especially if investment choices were limited to passive indices) -- enough so that an arguement for DE-registration is possible -- totally countered any support for broadening the definition of a security, which is required for the SEC to prevail. The securities lawyers present were all nodding in agreement. Having heard this debate first hand, I find the argument compelling.

For fun, I've tossed this grenade in the laps of some not-quite-so-brilliant regulator types from Rockville. They stuttered and stammered, and could not come up with a cogent counter argument, even when given weeks to prepare. I find that most amusing, because it shows that brains and talent continue to flow where it is best rewarded, and the cream does indeed rise to the top, when economic freedom is paramount.

Jul 11, 2005 2:21 am

Something needs to be done by someone. I’ve been in the business over 7 yrs and EIA’s are first and foremost in being the most misrepresented product I know of. Sometimes I actually think the agent has so little knowledge about the product he can’t explain it. All he can say is what Allianz or someone else told him to say. He knows if he can avoid the details ( caps, % of participation, extended surrender periods, etc.) he just might make a sale. A sale that ranges from 7-12% w/no breakpoints.

Jul 11, 2005 2:58 am

[quote=Nokindadancer]Something needs to be done by someone. I've been in the business over 7 yrs and EIA's are first and foremost in being the most misrepresented product I know of. Sometimes I actually think the agent has so little knowledge about the product he can't explain it. All he can say is what Allianz or someone else told him to say. He knows if he can avoid the details ( caps, % of participation, extended surrender periods, etc.) he just might make a sale. A sale that ranges from 7-12% w/no breakpoints.[/quote]

I've been in the business longer than that, and I can say the same thing about most every distribution channel (the worst offenders are fee-only planners that have never been licensed, but I digress), regarding almost every product.

There are plenty of RRs that are pitching VUL showing 12% hypos, even in this market. The sneakiest are putting 100% in the S&P 500 index fund, artificially lowering the management costs, to improve the long term numbers on a ledger. The worst offenders show max TEFRA premiums into an increasing death benefit contract, and then they send in an application using the same premium solving for maximum level death benefit and maximum target. People don't open the policies when they get them, so they don't know, until I show up.

The SEC and NASD have supervised this product from the beginning, and they can't even come close to getting the job done. I don't see them as the solution here.

To add insult to injury, it took a FULL DECADE for the NASD to respond to our demands that they allow stochastic projections. An RIA that isn't an RR could show them all day long (although few knew how). Instead, the bastiges at the NASD did the Ostrich manuever, and let millions of people buy products based on blue sky insurance illustrations.

State regulation, combined with company level suitability documentation, would be the best solution, in my opinion. Companies will resist, but that is to be expected. The NAIC needs to get on the ball, or they may find their existence become even less necessary.

The insurance industry would be smart to stop using the term equity, and stick to fixed. Jack Marrion has been saying this for years, and I think he's spot on with this recommendation. That's why I call them FIAs, because that's a more suitable label.

Jul 11, 2005 4:38 am

Roger, your “link” is quite interesting. Is that your site? If so, stay there…

Jul 11, 2005 6:46 am

[quote=Guest1]Roger, your "link" is quite interesting. Is that your site? If so, stay there..[/quote]

Feeling inferior, you are. I'll do as I please.