Equity-Indexed Annuities: The Magic Bullet?

Roger, I am a Certified Financial Planner professional also and have been in the business for 23 years now. I dislike any article that attacks the compensation that financial advisors recieve. Nonone ever stops to talk about the hours advisors spend with their clients offering the clients proper products and services to meet their goals and articles like this just make financial advisors look like a villain all the time. You could have simply said that Equity Index annuities may have their own place in a client's overall investment and savings goals, especially for someone risk-adverse, a person who doesnt need to take much risk any longer or as a CD alternative. From here, you could have explained to the reader to beware of any advisor who only recommends Equity Index annuites without explaining other options the client has. I have sold them to only 5% of my clients, but the ones that have them, love the safety and higher earnings potential over CD's they've actually recieved.

I'm a independent financial advisor and independent insurance agent enabling me to offer both securities and insurance products. When you read these articles please be aware that most people giving advice are either a securtites (Mutual funds, Stocks Bonds, ETF's, 401k's, Variable Annuities )person or a insurance person (Fixed Annuities, Fixed Index Annuities, Life Insurance etc.). This person is clearly a securities person talking about insurance products (Index Annuities). So it stands that he would probably take a negative standpoint toward a Index Annuity. This article is very biased and one sided to say the least and focuses on the negative aspects. For instance, Index Annuities have NO market risk, therefore principal guarantee. Principle is guranteed and backed by the State Gaurantee Fund of the state that the business is written in (Usually $100k-$300 per person per company/account depending which state). Because of this I have a problem with the statement " So EIAs give you more risk (but more potential return) than a fixed annuity". Where is the risk when your principle is fully protected? IMHO, I think they are a good fit for people that are risk adverse for a PORTION of a person's portfolio. This is just one example. These articles given on here give such GARBAGE advise and are slanted because of the agenda they try to push. This is a Horrible Article.

Has anyone ever wondered why the insurance industry has lobbied so extensively against EIAs being regulated? Quick answer...because if the SEC/FINRA got their hands on this cr@p it would disappear. We all deserve to make a living (yes, honest financial advisors, too), but these products offer insane commissions, and if there's one rule of thumb about insurance products, the higher the commission for the rep, the worse the product is for the client. I agree with Ms Davis-Lloyd in that we the advisory community are rightly sick of being made out to be villains based on the unscrupulous behavior of some of our counterparts. We spend HOURS UPON HOURS devising solutions and preparing extensive financial plans, meeting with clients, traveling, researching, etc., and that service is worth fair compensation, but I will NEVER commit the money of someone who trusts me into this type of garbage. Never. Ever. Ever.

Just remember: if you can't walk out of the sales office and explain the plan 100% to your neighbor - don't buy it.

Roger, excellent article. It is the least biased of any that I've seen on the blogs and professional media websites. I've been in the industry since 1987 and am a licensed insurance agent and investment advisor representative.

Just want to clarify the guarantees of EIA's. While every EIA I've seen has guaranteed principal, in recent years few have more than a 1-2% minimum guaranteed interest rate. The actual return will vary and, like the stock market, nobody knows with total certainty what return a given contract will ultimately receive. But, if held to maturity, the minimum is the original principal plus the minimal guaranteed interest rate. The principal the investor receives when they surrender the contract can be less than the original investment when the contract is surrendered prior to maturity.

These products are not equity substitutes and their performance is not truly correlated to the market index that underlies the interest rate. This is due to the guaranteed principal and interest and the caps or less than 100% participation rates. In the past decade they compare very favorably to equities, due to the poor performance of the S&P500. Historically, they would trail, dramatically, in bull markets due to caps and partial participation rates.

They are often sold based on fear, but they do not offer a solution to fear particularly for investors who need growth.

Their best use, in my opinion, is as a bond alternative. If rates go up, bonds will lose value but an EIA will remain stable. With the Lifetime Withdrawal Benefit riders, they can also provide a guaranteed level of income similar to an immediate annuity but with more flexibility.

These are very complex products for investors to understand. Some are very well designed, many are not. Commissions do not come directly from the investor, but as you worded so well, they do reduce the return the investor might receive if no commission were involved. Commissions on the products I've seen and used begin at 1.5% for short time periods and are typically in the 4-7% range for five to ten year maturities. Most companies also offer agents the option of spreading the commission over the maturity similar to the fees an RIA charges, .75-1% per year. In my opinion, 4-7% average compensation is lucrative...

Keep up the good work!

I love my Euro-denominated savings account. It is point-to-point monthly tied to a stock market index and participates 80%. Each month there is either no interest (when the stock market went down) or 80% of the returns of the stock market. Still it is a savings account,
the money is not tied up in any way. I've been looking for such a product in US dollars, but it doesn't exist, it seems.

Neither does it necessarily follow that investing in one of these will keep you from reaching your financial goals (to paraphrase one of your one sided sentences).

Index Annuities are no more nor less lucrative for financial advisors than other investments. Your statement is unsubstantiated and inaccurate.

"Understand that EIAs and many other variations of this type of product are quite lucrative for the registered rep. While this in itself isn't bad, potential buyers of EIAs need to understand this and to realize that these lucrative payments are coming out of the returns they could be earning and could be behind the enthusiasm many reps have for selling EIAs"

So we are just supposed to ignore the 3-5% annually that comes out of a Variable Annuity in fees and M&E charges? This quote was spoken like a true rep that only sells securities....sounds a little like sour grapes to me....

Why not just buy the equities and cut the insurance company out of the deal?

While Mr. Wohlner offers some sound advice as to the types of questions to consider before purchasing an indexed annuity (or EIA), there are some points that warrant clarification in his article, including:

Strict suitability rules established by the NAIC ensure indexed annuities are sold fair and ethically to consumers. These requirements were designed to mirror the Financial Industry Regulatory Authority (FINRA) suitability standards for investment products.

All financial vehicles have to cover the provider’s sales and marketing expenses. Over time, the margins built into an annuity to cover commissions are not necessarily higher than the sales and marketing expense margins built into competing financial vehicles

Not unlike most financial products, indexed annuities do often have set terms and penalties. However, these terms are clearly disclosed, charges decline over time, and provide a known cost of exit.

If withdrawal is necessary, 9 out of 10 indexed annuities waive surrender charges in the case of events such as nursing home confinement, terminal illness, disability and unemployment.

For more facts on indexed annuities, visit indexedannuityinsights.org.

--Indexed Annuity Leadership Council

The author is a fee-only CFP, so he doesn't make any money if his customers buy a particular investment product.

I have a close family member who invests in equity index annuities. A few years ago I was asked to review the details for an equity index annuity. After a careful review of the product and back-testing the return using 150 years of stock market data I came to the conclusion that someone would be better off investing in a 5 year FDIC-insured CD at a large bank. One of the subtle features of that particular equity indexed annuity that I did not like was that the guaranteed minimum return wasn't really guaranteed at all. The insurance company could, at their option, reduce the minimum guaranteed return. I had to ask a lot of questions to find this out. Also, the penalty charged by the bank for early withdrawal of the money from the 5 year CD was quite a bit less than what the insurance company would charge for the equity indexed annuity.

Based on my experience dealing with my family member, I suspect that most of the people who buy equity indexed annuities really don't understand them very well. They are typically very risk-averse and have limited knowledge of investing. The old saying "buyer beware" seems relevant.