The Annuity Lead

The big deal being made out of equity index annuities being classified as securities by SEC Rule 151A is a big deal for the issuers, not for agents.  Individual agents have two ways to accommodate this change.

1. Your first option to deal with rule 151A is to go get a securities license and get affiliated with a broker dealer (BD).  This is not such a big. deal.  If you cannot pass the series 6 or 7 exam, you should not be in the business.  Any intelligent 6th grader can pass this FINRA exam.  There is no thinking involved on this exam.  It’s just a bunch of rules that you memorize and then regurgitate on a multiple choice exam.  MULTIPLE CHOICE—means that they GIVE YOU THE ANSWER.  You just need to pick the right one.  If you want to get this out of the way quickly, then you take a cram course that lasts Monday to Friday and then (if the testing center near you is open Saturday), you take your exam on Saturday when all of the rules are fresh in your head.  There you are done in six days.  Just do a Google search on “series 7 exam cram course.

2. Your second choice to deal with SEC rule 151A is to get an RIA certificate.  In almost every state ( you will apply for a State RIA certificate, not with the SEC), you need to have passed the series 7 license to get an RIA certificate.  So you need to do step one listed above.  Some good news here: most people think that in order to take the series 7 exam, you need to have a relationship with a broker dealer and be sponsored.  This is not true. You can contact you local Prometric testing center (they administer the FINRA exams) and tell them you are taking the exam to be an RIA.  You then won’t need a BD sponsor.   So you can just pass the series 7 exam and then get your RIA certificate.  What good will an RIA certificate be to you?  It will allows you to sell EIAswithout a BD affiliation and without complying with all of the BD rules.   By 2011, when EIAs become securities, most of the EIA issuers will offer an RIA version of the EIA.  Rather than an up-front commission, you will get 1% annually.  In the long run, you will earn more, as 1% on an EIA that grows in value for ten years will be more than the 8% you get up-front now.  If you are addicted to the upfront commission (i.e. you livesale to sale) then you simply change your mix of business to sell traditional fixed annuities with your 4% to 6% up-front commission as you build your own “annuity” from the 1% annual trailers you will get from fee-based EIAs.

Even though index annuities won’t technically be securities until 2011, there is a lot you can do with your RIA certificate right away.

a. You can sell variable annuities.  There are at least a dozen variable annuities on the market that have similar features to EIAs(guarantee of principal) and also offer riders with guarantee minimum income benefits (just doa Google search on no-load variable annuity).  These do not pay an RIA up-front commission.  You typically get 1% annually. (Note—as an RIA, you can also set your own fee schedule.  Say you buy a Vanguard Variable Annuity for your client and Vanguard has no RIA fees built in.  You can always charge your client 2% annually to manage the sub accounts in the annuity.  Of course, your clients will see the 2% fee because RIAs must disclose all fees and it will show on their brokerage statement).

b. You can offer fee based money management accounts and do what every Merrill Lynch broker has been doing for the last ten years.  You’ve been missing your clients’ big money to the Merrill Lynch guy.  People don’t put their big money in annuities.  They put their big money into stocks, bonds, mutual funds.  That’s’ why the average stock broker earns a LOT MORE than the average life agent.  The average stock broker controls a lot more money than you do.  The average guy at Merrill Lynch or any brokerage house knows next to nothing about stocks and bonds (you’ll find this out when you see what they ask on the series 7 exam).  All that stockbrokers do is develop client relationships and then hand the money off to mutual fund managers or third party money managers (separate account managers) and get 1% annually.  You could start doing this right away as you too know how to develop relationships and trust.  If you’re a decent marketer (or choose to become one), you could raise $100 million in 3 years and enjoy a million dollar income just from money management fees.  This IS as easy as it sounds.  It’s exactly what they do at Merrill Lynch.  It’s all about relationships and trust—you don’t need to know anything about selecting investments as someone else does that for you.  (see more about operating as a registered investment advisor).  Of course, if you want to continue to get your 8% upfront commission for EIAsor variable annuities, you can always join a BD in 2011 and put up with their ridiculous and arbitrary rules.

So the problem of EIAs being securities under SEC Rule 151A is not for the agent as you have choices.  The problem is more for the EIA issuers (who will adjust their distribution model to go through BDs and offer a 1% annual fee-based EIA for RIAs) and mostly for the independent marketing organizations.

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Seniors and pre-retirees generally form a major percentage of people who buy annuities. This is so because people start thinking about earning a constant income post retirement at this age. On the other hand, at this seniority, most people also have enough money to invest in annuities and other financial products. There is a huge debate among agent and financial circles regarding the ethics of selling equity indexed annuities to seniors.

Many insurance agents themselves feel that selling indexed annuities with long lock-in periods and low caps to seniors is a little unethical. The high commissions that you get with equity indexed annuities further add to this belief. Your decision to sell indexed annuities to seniors is all your own, but you also need to know and make your prospects aware about some of the main benefits of indexed annuities. While fixed annuities are a good product any day, equity indexed annuities could be the right choice for seniors who have concerns related to:

Inflation:  Investing in equities can go a long way in offsetting the effects of inflation. By advising seniors to invest in indexed annuities with asset allocation portfolios matched with their risk bearing capabilities, you let them put their assets in equities without their having to get directly involved with trading them.  However, it is important to tell your prospects about the amount of risk involved without exaggerating the results that could be expected.

Taxation: Most clients who have enough money to invest are out looking for options to save on tax. By investing in tax deferred index annuities, your client might be able to save a lot of money that would otherwise have gone as tax on mutual funds, stocks, deposits and savings. In spite of the fact that processing fees and charges related with equity indexed annuities are high and that the risk involved is much larger than that with other financial products, equity indexed annuities can provide an ultimate yield that will be much larger than other fixed and variable annuities. Along with telling your leads about the tax benefits that they can get with a particular indexed annuity, you should also make it a point to inform them about the conditions where taxes are applicable like withdrawals and income generation from annuity assets.

High Profits: Since the stock markets are going through a very lean phase right now, it might be the perfect time to invest in a stock index annuity because in the long run, the prices of stocks are bound to go up. Index annuity buyers who are ready to wait for at least five to ten years can expect unprecedented profits by investing in equity indexed annuities when they are at an all time low.

Outliving Annuity Payments: Many equity indexed annuities nowadays come with a guaranteed living withdrawal benefit clause. This can be a very lucrative option for seniors who want to invest in an annuity that lasts throughout their life time, no matter how long it is. You can sell such index annuities to seniors who worry about outliving their annuities.

Before you sell the annuity, ask yourself this.  If this same annuity were sold to your mother, would you be happy she made the investment?

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If you want to sell a lot of your product and do it ethically, you must be an expert.  You cannot and should not sell annuities that you don’t understand. Unfortunately, the majority of agents selling equity index annuities don’t understand the basic math of compounding.

Let me illustrate (refer to table below). The compounded return of an equity index annuity over 33 years with a 12% cap is 6.98% (this assumes a 100% participation–a hypothetical feature that is far more generous than anything offered on the market).  The return of the S&P 500 over the same period is 10.98%.  Therefore, it seems safe to conclude that an investor choosing an equity indexed annuity will earn 63% (6.98/10.98) of the market return and get principal protection.  One could assume that an accurate statement to a client is that they will have 1/3 less by investing in the EIA as opposed to investing in the market. But that ignores compounding.  Because if we start with $10,000 in year 1 in the equity indexed annuity and $10,000 in the market, we end up 33 years later with $311,407 in our market account 92,592 in our equity indexed annuity. We have 70% less in the equity indexed annuity because of compounding.  That’s not to say there is anything wrong with equity indexed annuities other than wholesalers and agents should understand the math of what they sell so that they make accurate statements to prospect and clients.  In 2008, you cannot be a salesman.  You are forced to be an informed retirement advisor.

This provides some insight into how the SEC got involved–lots of agents misrepresenting the product and what returns can be obtained, not intentionally, just of of ignorance of the annuity products they sell and how the math works.  Don’t sell what you don’t understand.

Related to this issue is agents failure to understand the stock market and how to invest in stocks.  This leads them to believe stocks are risky relative to fixed annuities and that stocks should be sold by seniors.  This point of view again, is ignorant because it ignores how the world REALLY works.

Having retirees get out of stocks is advice sure to bankrupt your clients.  The Trinity Study tracked various portfolios using actual year by year returns from 1926 to 1995. Here were the results:

The conclusion is that for a retiree withdrawing 7% of their nest egg annually, the probability of that net egg lasting for 30 years is 88% with a portfolio of 75% stocks and 25% bonds.  But if we get more conservative and reduce the exposure to the market to only 25% stocks with 75% bonds (you can substitute “annuities” for “bonds” in the preceding paragraph), the chance of their portfolio lasting falls to just 32%. In other words, stocks have helped portfolios retain a competitive return and have helped protect retirees from running out of money. 

But look at current events you say–people in stocks have lost a big chunk of their nest egg!  Retirees can’t afford that! This is only true of people who don’t understand that in retirement, risk assets are to be placed in buckets using the strategy explained in the Graangard Strategy (read this book) or in this article http://www.davidmacchia.com/Articles_Feb2005.html.  The point is, a retiree should have little if any exposure to the stock market for assets they will use in the next 10 years.  That way, markets like 2008 won’t have any impact on their lifestyle.  As long as the market recovers in 10 years, the 2008 drop is a non-event.

There is no such thing as a “good”  or “bad” investment or type of insurance.  It’s a matter of what is appropriate for the client’s situations and an accurate understanding and representation by the advisor.  This of course requires that the advisor understands the products they sell and doe not merely repeat what they have been told.  Unfortunately, issues like the above are not covered on securities exams or insurance exams so much self education is needed to be a valuable advisor with fundamental understanding.

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Seniors and pre-retirees generally form a major percentage of people who buy annuities. This is so because people start thinking about earning a constant income post retirement at this age. On the other hand, at this seniority, most people also have enough money to invest in annuities and other financial products. There is a huge debate among agent and financial circles regarding the ethics of selling equity indexed annuities to seniors.

Many insurance agents themselves feel that selling indexed annuities with long lock-in periods and low caps to seniors is a little unethical. The high commissions that you get with equity indexed annuities further add to this belief. Your decision to sell indexed annuities to seniors is all your own, but you also need to know and make your prospects aware about some of the main benefits of indexed annuities. While fixed annuities are a good product any day, equity indexed annuities could be the right choice for seniors who have concerns related to:

Inflation:  Investing in equities can go a long way in offsetting the effects of inflation. By advising seniors to invest in indexed annuities with asset allocation portfolios matched with their risk bearing capabilities, you let them gain potential growth without their having to get directly involved with trading equities.  However, it is important to tell your prospects about the amount of risk involved without exaggerating the results that could be expected.

Taxation: Most clients who have enough money to invest are out looking for options to save on tax. By investing in tax deferred index annuities, your client might be able to save a lot of money that would otherwise have gone as tax on mutual funds, stocks, deposits and savings. In spite of the fact that processing fees and charges related with equity indexed annuities are high, equity indexed annuities can provide an ultimate yield that will be much larger than other fixed annuities. Along with telling your leads about the tax benefits that they can get with a particular indexed annuity, you should also make it a point to inform them about the conditions where taxes are applicable like withdrawals and income generation from annuity assets.

High Profits: Since the stock markets are going through a very lean phase right now, it might be the perfect time to invest in an equity index annuity because in the long run, the prices of stocks are bound to go up. Index annuity buyers who are ready to wait for at least five to ten years can expect unprecedented profits by investing in equities when they are at an all time low.

Outliving Annuity Payments: Many equity indexed annuities nowadays come with a guaranteed living withdrawal benefit clause. This can be a very lucrative option for seniors who want to invest in an annuity that lasts throughout their life time, no matter how long it is. You can sell such index annuities to seniors who worry about outliving their money.

Get annuity sales leads in your local area – prospects seeking assistance now!

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