Terra Extraneus

Investment News writer Darla Mercado reported that fixed and variable annuity sales by banks fells 4% in April and that for the third consecutive month, fixed annuities out sold variable. She quoted Jackson National Life Distributors, LLC as blaming the decline and the change in the mix of sales on “market volatility.”

It certainly could not be because consumers have figured out that for every nine well meaning and competent annuity sellers, there is one idiot, or fiend, on the loose using variable annuities to the detriment of their customers and attracted by commissions that are too high and consumers that are too gullible.

This is sad because variable annuities should be a good product. Why is it a poor product for the average consumer, especially consumers over 50?

Once the sale is made, banks, insurers and the financial services industry think they can turn their back on them. A variable annuity is like a car, it requires maintenance. The underlying funds and fund choices get out dated, hammered by the market or suffer from bad management, just like anything else. But, once sold, the only protection the consumer has from huge losses of principal is the selling agent. If the selling agent is an idiot, lacks worth ethic, or is perpetually on to the next big sale, the consumer is all alone with a product they do not have the tools to manage. Even some selling agents lack the tools to manage large numbers of these accounts and have to look at them manually in a disciplined manner.

I thought it was funny that Jackson National spoke out on the situation. I have a Jackson National product and it has lost 20% of principal and all earnings to date in the last quarter. This loss is purely market driven because I have one of the good agents and I litigate in this area for a living so I know something about it.

The other reason variable annuity products can be dangerous to older people is because the financial services industry uses terms that the consumer does not realize have meaning that will lead to unintended consequences. Everyone wants to be “moderate,” right? No one wants to be “speculating” or too “conservative” when it comes to financial risk. But, if the customer tells the securities industry that they are, indeed, a “moderate” investor, the customer is in reality telling the industry the customer is comfortable risking some principal loss, maybe as much as half.

Also, the term “growth” sounds like a good thing, right? Like “moderate,” to obtain growth means the acceptance of risk of principal. Most of the portfolios of elder customers I have reviewed, that is, persons well above retirement age, contained too much investment in “growth.” Most “growth” investments take at least five years to produce that “growth.” Most “growth” investments will fall at the same rate they rise. Very few “growth” investments are based on the stock issued by large corporate entities, but rather by the smaller and more vulnerable companies. But, too many customers move most of their principal into these products.
Fixed annuities on the other hand, too boring in good times, become more popular when the economics become uncertain.

It is amazing to me that organizations like AARP, the SEC, or the Congress, do not seem to recognize these defects. If the SEC would simply ban surrender charges or severely limit their use, variable annuities would not be the product of choice. If the SEC required an annual positions review in the variable account by the selling broker dealer, that might reduce the risk because supervisors would be forced to fill in the gaps left by the weaker members of their sales forces.

Market volatility should not be the only policeman on the street.