Sales pitches often misrepresent and fail to disclose important facts about equity-indexed annuities, according to Mel Lindauer in his August 13, 2010 Forbes article, “The Truth About Equity-Indexed Annuities.”
Despite claims that they are simple, equity-indexed annuities are so complex that most people who sell them have an insufficient understanding of how they operate, according to the article.
While investors are typically told that the product provides “stock market-like returns with no risk,” that is misleading. The non-guaranteed return, which may be described as being pegged to the S&P 500 stock index, is actually determined by a complicated formula that causes it to be much less than implied. Also, the “guaranteed” return can be as low as 1 per cent and only applies if the product is held to maturity.
The claim “you can’t lose money” is not exactly true either. It only applies if you hold the product to maturity (and if the issuer is solvent at that time). Investors are often mislead into believing their money can be withdrawn at any time, but that comes with a gotcha. These products impose a surrender fee for certain withdrawals that can result in a significant loss of principal, and even more if the underlying investments have declined in value.
In addition, any quoted “guaranteed” monthly income benefit only applies if the investor annuitizes and the income benefit may include a return of principal, according to the article.
It is telling that the insurance industry has fought the SEC’s attempt to regulate equity-indexed annuities as securities, because that would entail requirements and duties that the industry wants to avoid. Courts have ruled that the SEC does have the power to regulate equity indexed annuities and classify them as securities, but the court order also requires the SEC to consider a host of factors which complicates the picture, according to the article. Both the SEC and the Financial Industry Regulatory Authority (FINRA) have issued warnings about equity-indexed annuities.
Last but not least, the article pointed to a comprehensive paper on the problems and complexities of equity indexed annuities that was prepared by Craig J. McCann, Ph.D. of Securities Litigation & Consulting Group, Inc. At the request of the North American Securities Administrators Association, which is composed of state securities regulators, Dr. McCann prepared the paper in support of the SEC’s proposal to provide federal investor protections to purchasers of equity-indexed annuities. Dr. McCann reportedly concluded:
“Existing equity-indexed annuities are too complex for the industry’s sales force and its target investors to understand the investment.
–This complexity is designed into what is actually a quite simple investment product to allow the true cost of the product to be completely hidden.
–The high hidden costs in equity-indexed annuities are sufficient to pay extraordinary commissions to a sales force that is not disciplined by sales practice abuse deterrents found in the market for regulated securities.
— Unsophisticated investors will continue to be victimized by issuers of equity-indexed annuities until truthful disclosure and the absence of sales practice abuses is assured.
Mel Lindauer’s conclusion: “just say ‘No’ when someone tries to sell you an Equity-Indexed Annuity. Then turn around and run, don’t walk away.”
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry’s attorneys have extensive experience in representing investors in equity-indexed annuities. For further information, please contact us.