The Financial Industry Regulatory Authority (FINRA) is a non-governmental, Self-Regulating Organization (SRO) that writes and enforces rules that govern over 4,000 securities firms and well over 600,000 brokers in the United States.
One of the jobs that the organization has taken on is the role of educating investors to protect them from activities of industry players that could prove detrimental to the end investor. This role is something that is near and dear to me as well. We live in a country that provides many freedoms and one of those is the freedom to sell things to people that may not be good for them. This is why regulators are often left with little choice but to post warnings and hope the public sees them.
Here are some excerpts from FINRA’s website (www.finra.org) that, I believe, contain valuable insights for investors regarding annuities.
Variable Annuities
The marketing efforts used by some variable annuity sellers deserve scrutiny—especially when seniors are the targeted investors. Sales pitches for these products might attempt to scare or confuse investors. One scare tactic used with seniors is to claim that a variable annuity will protect them from lawsuits or seizures of their assets. Many such claims are not based on facts, but nevertheless help land a sale.
Investing in a variable annuity within a tax-deferred account, such as an individual retirement account (IRA) may not be a good idea. Since IRAs are already tax-advantaged, a variable annuity will provide no additional tax savings. It will, however, increase the expense of the IRA, while generating fees and commissions for the broker or salesperson. Also, if the annuity is within a traditional (rather than a Roth) IRA, the government requires that you start withdrawing income no later than the April 1 that follows your 70½ birthday, regardless of any surrender charges the annuity might impose.
Equity-Indexed Annuities
EIAs give you more risk (but more potential return) than a fixed annuity but less risk (and less potential return) than a variable annuity.
Your guaranteed return is only as good as the insurance company that gives it.
Caution! Some EIAs allow the insurance company to change participation rates, cap rates, or spread/asset/margin fees either annually or at the start of the next contract term. If an insurance company subsequently lowers the participation rate or cap rate or increases the spread/asset/margin fees, this could adversely affect your return.
EIAs are long-term investments. Getting out early may mean taking a loss. Many EIAs have surrender charges.
Fixed Annuities
An annuity’s “guarantee” is only as strong as the insurance company that issues the annuity. There may be state guarantees in the event of an insurance company’s failure, but annuities are not guaranteed by the FDIC, SIPC or any other federal agency if the insurance company that issues the contract fails.
Payments in a fixed annuity typically do not have cost-of-living adjustments to keep pace with inflation, so the value of the money you receive in your payments may decline over time. Annuities with inflation protection can be purchased but the cost, in general, is significantly higher.
It may be difficult to get your money back once you pay the premium to the insurance company. Even if you only receive a few payments under a fixed annuity contract, the insurance company may not be obligated to continue payments to your spouse or refund your premiums to your estate.
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If there are changes to your fixed annuity and you want to withdraw your money early, you could incur surrender charges that cut into your returns
Remember: As with all areas of life, there is no such thing as a free lunch. Annuities are often marketed in such a way that they will appeal all of the things we want in an investment: guarantees, high returns, easy access to our money. However, the reality is often quite different from the illusion created by the advisor who stands to gain handsomely from the purchase. It is not unusual for agents to be paid 6 or 7% of your deposit in commissions and some products pay over 10%. That creates a significant perverse incentive to mask or completely avoid talking about the negative aspects of annuities by the salesperson.
