SEC Rule 151A
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[quote=Gordon Ramsey]
In short, they want more money, power and control and they don't deserve it.[/quote]
I wonder why the SEC wants more responsibility when they've failed so much lately with the duties they already have.
Jebediah, using your logic, a fixed annuity should be considered a security. The money goes into the general account of the insurance company. The insurance company invests some money in securities. Additionally, the rates are primarily based upon 10 year treasuries which are a security. As for EIAs being sold as stock returns with no downside, that is obviously incorrect, but making them registered products doesn't stop people from doing it. Registered people can sell the products now. Sorry, but no matter how we slice this, an EIA is not a security. A hallmark of a security is investment risk. There is zero investment risk in an EIA.I think there are two reasons for 151a. First, while an index annuity is an insurance product, it uses securities to generate returns. Should a person who sells a product that uses securities be licensed to sell the underlying securities? Second, and this is from strictly my own personal experience, EIA’s are sold as stock returns with no downside. Maybe this is uncommon and it is likely that I only see the people that are unhappy with the product. However, the story I hear is consistent.
And this is from my own personal experience: myself, and a few other people i am friends with in this industry do not sell these as "stock returns" with no downside. I use it as a bond/cd alternative that historically has outperformed those two asset classes. The only people I know that are unhappy with having owned an EIA over the past 10 years are those that were missold to from the get go and are having liquidity/CDSC issues. All of my clients couldn't be happier with their investments. Once again, any discussion of EIA's all come down to full disclosure to the client. If you have that, you will never have a problem. Period.Second, and this is from strictly my own personal experience, EIA’s are sold as stock returns with no downside. Maybe this is uncommon and it is likely that I only see the people that are unhappy with the product. However, the story I hear is consistent.
The problem isn’t a 20 year surrender charge. After all, and this isn’t quite apples to apples, a 25 year old putting money into a 401(k) has the equivalent of a 34 1/2 year surrender charge.
There is a problem with an insurance company approving a sale of a product with a 20 year surrender charge to someone who doesn't have 20 years. My point is that the problem isn't the product. It is how the product is sometimes sold, which is the same problem that all products have.[quote=AGEMAN][quote=anonymous]The problem isn’t a 20 year surrender charge. After all, and this isn’t quite apples to apples, a 25 year old putting money into a 401(k) has the equivalent of a 34 1/2 year surrender charge.
There is a problem with an insurance company approving a sale of a product with a 20 year surrender charge to someone who doesn't have 20 years. My point is that the problem isn't the product. It is how the product is sometimes sold, which is the same problem that all products have.[/quote] Yes, but they younger person who is stuck in a 401k may be stuck in the qualified plan until 59.5, but can change investments anytime they want to, but with an annuity with a 20 year surrender charge traps the person to that type of investment. Big difference!!![/quote] I'm not an EIA guy (my B/D won't allow me to sell them), but from what I understand, on certain EIAs you can change what index the crediting will be based on. So, there is zero difference. Well, except that unless you keep the money in the GIC, you can lose money in a 401k. You can't lose money in an EIA. Like anon said, the product is not the problem. Using the product incorrectly is the problem.How do you guys sell an EIA without ever talking “market” or “securities,” since those opposing 151A without a securities license in place must not discuss this detail when explaining the product?
And lets be honest and use real world here, (maybe not the cross section represented on this forum) the majority of sellers use them as a “market participation without the downside risk.” I have seen enough statements over the years, heard from plenty of clients, and sat in on way too many “presentations from wholesalers” while working at insurance companies to believe it is true. It is an incredibly easy sale for a reason, it is incredibly easy to mis represent what it does and how it works.
I am not taking anyone here to task, I am just saying they are inappropriately sold way too many times.Again, I'm not an EIA guy, but I would imagine the conversation would go something like: "Mr. Client, we have two options. One, a traditional fixed annuity. The other is a fixed indexed annuity. The traditional fixed annuity has a higher guaranteed rate than an FIA. The FIA has a minimum guaranteed rated but also gives you the potential for a higher rate of return than the traditional fixed annuity. Which is more important to you? A higher guaranteed rate? Or, the potential for a higher rate of return?"How do you guys sell an EIA without ever talking “market” or “securities,” since those opposing 151A without a securities license in place must not discuss this detail when explaining the product?
[quote=AGEMAN][quote=deekay][quote=AGEMAN][quote=anonymous]The problem isn’t a 20 year surrender charge. After all, and this isn’t quite apples to apples, a 25 year old putting money into a 401(k) has the equivalent of a 34 1/2 year surrender charge.
There is a problem with an insurance company approving a sale of a product with a 20 year surrender charge to someone who doesn't have 20 years. My point is that the problem isn't the product. It is how the product is sometimes sold, which is the same problem that all products have.[/quote] Yes, but they younger person who is stuck in a 401k may be stuck in the qualified plan until 59.5, but can change investments anytime they want to, but with an annuity with a 20 year surrender charge traps the person to that type of investment. Big difference!!![/quote] I'm not an EIA guy (my B/D won't allow me to sell them), but from what I understand, on certain EIAs you can change what index the crediting will be based on. So, there is zero difference. Well, except that unless you keep the money in the GIC, you can lose money in a 401k. You can't lose money in an EIA. Like anon said, the product is not the problem. Using the product incorrectly is the problem.[/quote] The product is the problem in this case, because there is a big difference in being able to buy anything you want in an IRA/401k and having only the choices the annuity gives you that you may be trapped in.[/quote] An IRA is one thing, but how many 401ks give the participant unlimited investment options? Do YOU offer your clients unlimited options? I don't. I give them a couple of options that will fit their situation. I explain the pro's and con's and let them choose. For the record, someone putting money in a FIA is NOT putting their money in the market. The index is used as a way to calculate credits to the policyholder. An agent who says that you get 100% market participation in an EIA is misleading the client. A bank investment advisor who does not understand how EIAs work and badmouths them as evil across the board is just as misleading. Again, FIAs are appropriate sometimes. Sometimes not. 401k's and IRAs are appropriate sometimes. Sometimes not. There is nothing black or white in this business. Stop treating it as such. It makes you sound ignorant.The EIAs I offer don’t have surrender periods past 10 years.
However, even if they DID, you need to know HOW they work so you know WHY they are structured the way they are. I can tell that you don't have a clue. BTW, deekay is FAR from ignorant on 401k & IRAs. A 401k IS a product. An IRA IS a product. No matter what you put in it, they are PRODUCTS - or more specifically, they are BUCKETS of PRODUCTS with a particular structure. What you don't understand is STRUCTURE behind STRATEGIES. But that's far above the context of this thread.The comparison that I made is not a fair comparison. That is why I said that it’s not apples to apples. My point is simply that the fact that one can’t get to their investment for a long time is not necessarily a bad thing. It simply needs to be understood. Surrender charges in fixed products are the tradeoff that people have to make for higher rates of returns.
Biofreeze is correct that full disclosure helps make the sale.theironhorse, can your friend who owns a restaurant talk about securities? How about your buddy, the attorney? How about your friend, the engineer? How about your friend, the garbage man? How about your friend, the car insurance agent? How about your friend, the life insurance agent? How about this? Can your friend, the mutual fund salesman with just a series 6 talk about the individual securities inside of a mutual fund? My point is that one does not need a securities license to talk about securities. One needs a securities license to sell securities. Using the logic that one can't sell EIAs without being securities' licensed would also stop one from selling traditional fixed annuities because they couldn't talk about the money being in the general account of the insurance company because some of this money is invested in securities.How do you guys sell an EIA without ever talking “market” or “securities,” since those opposing 151A without a securities license in place must not discuss this detail when explaining the product?
iceco1d, FIA and EIA are the same thing. He was talking about the difference between a traditional fixed annuity and a FIA/EIA.
FIA/EIA are fixed annuity. The difference is simply that money is credited in a different manner. There is absolutely nothing that makes them a security. They could come up with one that pays 4% if carrots outsell celery this year and 3% if celery outsells corn this year. If they did that, they still would not be a security and nobody would be arguing that they are a vegetable. The major hallmark of a security is the possible loss of principal. This does not exist in any type of fixed annuity, thus it can't be a security.[quote=iceco1d][quote=Gordon Ramsey]The EIAs I offer don’t have surrender periods past 10 years.
However, even if they DID, you need to know HOW they work so you know WHY they are structured the way they are. I can tell that you don't have a clue. BTW, deekay is FAR from ignorant on 401k & IRAs. A 401k IS a product. An IRA IS a product. No matter what you put in it, they are PRODUCTS - or more specifically, they are BUCKETS of PRODUCTS with a particular structure. What you don't understand is STRUCTURE behind STRATEGIES. But that's far above the context of this thread.[/quote] Gordon, I didn't intend on quoting your post, I intended on quoting anonymous's post. I really enjoy both of your posts, as well as deekays, on a lot of different issues. I can't find it anywhere close to reasonable that you would consider a 401K or an IRA as a "product," because it isn't. It's just a tax type. I know, you know this, but I don't see how you could even remotely argue semantics here. Now, as far as the "well a 401K could have a 30 year surrender charge," my personal opinion is that type of "comparison" should be illegal. It's not the same thing. 401Ks don't have unlimited investment options; but they do allow for rollover to IRAs, which do (basically). You can take a loan from a 401K. You can do a Roth Conversion on an IRA, and 5 years later access the conversion amount. You can do a 72t on an IRA. None of that is available to avoid a surrender charge in ANY type of annuity, or mutual fund. Comparing ANY surrender charge (be it an EIA, or a B-Share American Fund) to the tax penalties associated with early withdrawal should be illegal. In addition, the EIA has the SAME tax penalties on earnings as anything else before 59.5. And IF the EIA would have been within an IRA, that really blows the argument out of the water. Now, whoever posted the "you have the FIA and the EIA. FIA is higher guaranteed rate, EIA has lower guaranteed rate, but chance to do better" - that was great. PLUS, there is nothing wrong with saying that EIAs give you upside market potential...as long as you make it CLEAR that it isn't a 100% participation, and that it is indeed capped. Sorry for the rant.[/quote] Not a problem iceco1d. I've always enjoyed your posts too, so let's take a closer look at how deekay (and I) look at this: IRS penalties are there in 401k, IRA, etc. Then there are (what I call) "house rules". These "house rules" are product penalties - such as B-share CDSC or Annuity surrender charges. They aren't the same as IRS penalties, but should be considered in the overall strategy. You can do a 72q on a NQ Annuity to get money out sooner without a 10% IRS penalty. You can annuitize for a lifetime payout as well. At the end of the surrender period, you can move the money to a new annuity or take all the money out (depending on age and other factors that will go into this decision). If an IRA is also an EIA, then you can still do a Roth conversion. You still have the 5-year wait on IRS rules, but you'd still need to know about surrender charges depending on the time in the contract you do the conversion, but you can do it with the same contract. One should look at ALL ASPECTS of taxation & surrender charges TOGETHER to make an informed decision. When I'm talking about structure, I'm talking about the basics of cash flow from someone's paycheck or pocket into a "bucket" and then taking it out. For example: Someone is in the 25% tax bracket. Contributes $10,000 to 401k. Gets $2,500 tax deduction for the same year as contribution (simplified for the math here). Grows tax deferred. Comes out at an UNKNOWN tax rate in the future. (does anyone think taxes will actually go down?) If you put money in while in the 25% bracket and you withdraw at the 50% future tax bracket... where was your tax deduction? Limited options for accessibility - double taxation on loans against 401k balances, early withdrawal penalties if taken in cash, can lose money depending on investment allocation selected. Depending on the company, there can be a "match" depending on contributions. But what will they match on a $10,000 annual contribution? Even with "free money", how much of that money would also be eaten up in taxes at time of withdrawal? Or would this money just help offset the taxes that would be paid? OR... Same person in the same tax bracket Contributes $10,000 to NQ EIA No tax deduction for current year - so pays more taxes out of another pocket. Grows tax deferred. Pays taxes only on growth (not on principal) and only upon withdrawal. No company match because this is a "privately owned pension". "Has guaranteed interest rate AND an opportunity to earn a higher rate depending on the growth of a particular index and your participation/caps in that growth. The reason for this is because the insurance company is buying options on the index. They make money whether the market goes UP OR DOWN. But it takes TIME to realize the gains on the options they buy, so that's why these are set up with a longer time schedule than other annuities you may have seen. The company is buying the options with their money to credit to your annuity... not with your money, but with theirs." Same money, but different strategies. Do you pay taxes now or later? Which makes more sense for people? The answer is "Yes" depending on the goals, objectives and preferences of the client. Help the client see ALL ASPECTS of the decisions they make with their money, explain the alternatives available and let them choose. Because the client is still in control of their money... do they put it in the 401k "product" or the EIA "product"? It's still a buying decision made with the client's cash flow. The problem with many RR's is that COMPLIANCE is determining what you can present as a choice to consumers - because they don't want a lawsuit for "improper advice". They're afraid of their own risks, so they don't LET YOU talk about NOT putting money into 401ks, etc., because it would be considered by the general public as "bad advice". (Just remember that you don't advise the "mass public" but clients on a one-on-one basis.) Also, if you SELL 401ks, you want the participation to be as high as possible so you can earn as high of a trail of that entire company's balance - regardless of whether each individual should/wants to participate in the plan.Good post, Gordon. I would add that Compliance is determining that EIA’s can’t be sold because of the combination of worrying about lawsuits while at the same time not being able to make money from the sale.
Utimately, I'm convinced that none of this has anything to do with protecting clients and everything to do with the almight dollar combined with a quest for power. I should probably disclose that I can't sell EIAs and when I could, I didn't sell any.I disagree with the reasoning, because I can do both, sell EIAs and run a fee program. But I think that is the difference.. With being able to do everything I don't have to just use one product because that is all I have.Here’s the skinny on both sides…
Insurance-only guys loathe 151a because it would force them to register with a b/d, and possibly pass the S6 or S7 if they haven’t already. They like EIAs because they are a relatively easy sell “market participation with no downside risk to principle.” Some of them like the commissions too.
Investment guys want 151a because they don’t like having to compete with EIAs. Most of you know, I’m an indexing, fee-only, cost sensitive dude; and even I can acknowledge that attractiveness of EIAs, especially over the past decade or so, and the economy we will probably face for the next few years. I can sell EIAs. Many b/ds won’t allow it, for 2 reasons. #1 they get bad press. #2 the firms want fee-based business. They want trails & predictable revenue. They want to haircut products.
I think 151a is ridiculous (and I’ve never sold an EIA). Annuities aren’t securities. Period. As for disclosure, which is the REAL issue with MANY products - sure. And I think it needs to be simplified. Agents need to be able to easily understand and describe the products they sell, and clients need to be able to understand the main points. Give it to them plain, simple, and standardized. You pay this in years 1, 2, 3, 4. You can earn V% of up to X% of whatever the S&P 500 does. You will never earn less than Y% in any year. blah, blah, blah.
One more regulation that won’t solve any problems, but cause more headaches.
For everyone that is so against them, let me ask you this…say you are an insurance agent selling the 15% commission 20 year surrender EIAs, and rule 151a passes. Are you telling me that you won’t go out and get yourself a Series 6 so that you can continue raping people? Of course you would. And believe me, there are b/ds out there that will be more than happy to let you do it.
Won’t solve anything.
I agree. but this doesn't apply to everyone, because some people can't disclose everything because it goes against what they originally told the prospectDoes anybody understand that the more you disclose, the easier it is to make a sale?
[quote=iceco1d][quote=anonymous]iceco1d, FIA and EIA are the same thing. He was talking about the difference between a traditional fixed annuity and a FIA/EIA.
FIA/EIA are fixed annuity. The difference is simply that money is credited in a different manner. There is absolutely nothing that makes them a security. They could come up with one that pays 4% if carrots outsell celery this year and 3% if celery outsells corn this year. If they did that, they still would not be a security and nobody would be arguing that they are a vegetable. The major hallmark of a security is the possible loss of principal. This does not exist in any type of fixed annuity, thus it can't be a security.[/quote] That's a typo on my part. FA vs FIA/EIA. My bad, good catch. Interested comparison with the Series 6 btw. Gordon - Thanks for the compliment. FWIW, I agree with basically everything in your last post. My original post was strictly regarding the comparison of a tax to a surrender charge. [/quote] To the layperson, yes, comparing surrenders to tax code is not accurate. One is having to do with what rules the IRS lays out. The other is having to do with what the product manufacturer deems appropriate. My concern is that most people in our industry see a 401k as a good thing without question, but generally look at annuities with disdain. However, early withdrawals from either a 401k or annuity is going to hurt the client today and in the future. When advisors unquestionably recommend everbody contribute to a QP, but badmouth a NQ annuity simply because the QP doesn't have a surrender charge, it's ignorance pure and simple. We all know for a 30 year old, the penalties for early withdrawal will last for 30 years. But put someone in an annuity with a 20-year surrender? SCANDALOUS! Either way, the client is locking money up for a long, long time. And if we make blanket recommendations like "Contribute to you 401k", we're doing a lot of people a disservice. I mean, what happens if the client has some outstanding credit card debt, no savings, and no disability coverage? How wise is it to contribute to a 401k? Fact is, there are tons of people out there in this very same position. We must be careful of making black-or-white recommendations.theironhorse, can your friend who owns a restaurant talk about securities? who cares, how is it relevant? How about your buddy, the attorney? ditto How about your friend, the engineer? ditto How about your friend, the garbage man? ditto How about your friend, the car insurance agent? ditto How about your friend, the life insurance agent? not legally if in relation to making an investment recommendation between a fixed or variable product. How about this? Can your friend, the mutual fund salesman with just a series 6 talk about the individual securities inside of a mutual fund? very good point, never thought of it before. My point is that one does not need a securities license to talk about securities. One needs a securities license to sell securities. as i referenced in my earlier posts, i am talking real world here people. you don't sell fixed products to people, hanging yourself out there as any financial advisor, without questions coming up which you CANNOT answer with only a life and health license. the direct answer to my post was funny and reminds me of your explanation re: vul, sounds great in a role play or imaginary setting, but in real life is just garbage. Using the logic that one can't sell EIAs without being securities' licensed would also stop one from selling traditional fixed annuities because they couldn't talk about the money being in the general account of the insurance company because some of this money is invested in securities. [/quote] i have no problem with eia's. i have been looking at them more and more in the last 2 years as the product has evolved and become much more consumer friendly. but i do have a problem with the whole cloak and dagger way a good number of people sold them in the past.[quote=theironhorse]How do you guys sell an EIA without ever talking “market” or “securities,” since those opposing 151A without a securities license in place must not discuss this detail when explaining the product?
I'm going to steal the thread, but it is directly related to the topic at hand. Please name a question or topic that I CANNOT answer with only a life & health license? Keep in mind that answering questions & giving information and recommending securities & executing transactions are completely different things.you don’t sell fixed products to people, hanging yourself out there as any financial advisor, without questions coming up which you CANNOT answer with only a life and health license.