Indexed Annuities Need More Regulation
Indexed Annuities are big business and are the path to big profits, yet they are essentially unregulated and sold by people who have no requirement to put their client's interest ahead of their own. It's time that Indexed Annuities and the people who sell them become properly regulated.
Indexed annuities and the agents who sell them are loosely regulated by the states. There is no federal body that exists that has full jurisdiction and this is how the insurance industry wants it to remain. The only license needed to sell an indexed annuity product is an insurance license issued by the state, which is simpler to get than a license to become a hairdresser. I've taken the insurance exam and I have complete confidence that after a few weeks of coaching, my 8 year old daughter could pass the exam (this is a whole story in itself, the cheating that is done to pass this test is rampant).
Here are few articles explaining indexed annuities and their path toward non-regulation:
Some Dismayed by Indexed-Annuity Regulation
Congress Sells Out Seniors: No SEC Regulation for Indexed Annuities
Equity-Indexed Annuities—A Complex Choice FINRA Investor Alert
Insurance companies do need to get state insurance department approvals in order to sell their products, but the approval is not in regards to the quality or efficacy of the product, it's normally a simple checklist. If you don't believe me, just start reviewing the top selling products, they are horrible.
Since insurance agents and insurance companies are hardly regulated in terms of the sales of these products, they've become goldmines for insurance producers (and the saving grace of insurers during this low interest rate environment). The commissions, though they've come done a bit over the years are still among the highest in the industry (only higher if you sell equity indexed life products) and the trips and incentives are downright outrageous.
It's nearly impossible to talk about an indexed annuity product without talking about the stock market (since the returns have some basis in how a specific stock index performs) and many of these products are funded via the liquidation of mutual funds or stock portfolios. There should NOT be an exemption for insurance agents selling indexed annuities, these are securities products.
There have been several attempts to bring these products under the purview of the Securities and Exchange Commission with each attempt being met by substantial lobbying and congressional leaders caving in. With the finalization of the Department of Labor's Conflict of Interest rule it is time that indexed annuities become properly regulated and those who sell them subjected to a fiduciary responsibility.
There is too much discontinuity right now in the "advice" industry (though we are moving in the right direction). A broker working with an IRA is subject to a fiduciary duty as is an insurance agent now, but as soon as that agent or broker looks to sell a non-IRA product...no duty is required. An insurance agent will be subject to a fiduciary duty when dealing with a client's IRA, but not when dealing with a client's 403(b) or 457(b) if it's non-ERISA - this must be fixed.
Subjecting anyone who gives advice to a fiduciary standard is the real answer, but even then the indexed annuity represents a different beast entirely from it's regular fixed annuity cousin (note: an indexed annuity is a form of a fixed annuity) and needs to be regulated as a security.
Insurance companies and their agents have had their way for too long. The tide is shifting in the fight for fiduciary advice and regulating these products is the next step. It's not a solution, but it's a start, the solution of course is a fiduciary standard for all.
Scott Dauenhauer, CFP, MPAS, AIF