NAIC suitability provision for annuities a ruse

I have enjoyed reading InvestmentNews for many years because of its straightforward reporting and timely items of interest.

I found the article “Iowa insurance regulator faults NAIC suitability provision,” which appeared on InvestmentNews.com June 9, to be of interest in terms of the stealth undercurrent of what we have been exposed to.

First, equity index annuity providers and marketers became panicky when the former NASD, now the Financial Industry Regulatory Authority Inc. of New York and Washington, started to push for broker-dealer oversight on the sale of these complex products. Then the Securities and Exchange Commission was forced to consider classifying and regulating these products as a security.

Fear gripped the distribution channels that didn’t want to get another license or be conformed to suitability standards.

They then started to rename these products “fixed” index annuities — subtle but effective. Drop the word “equity” in exchange for “fixed.”

Now, all the production/sales figures combine these newly named annuities (a rose is a rose) with true fixed annuities, thus further blurring the line of consumer activity. It is rare when one can find sales figures representing a line of demarcation between these two very different products.

Second, I sense that Jim Mumford, first deputy insurance commissioner and securities administrator in the Iowa Insurance Division in Des Moines, is more upfront and sharper than the rest of the National Association of Insurance Commissioners group in Kansas City, Mo. He recognizes that low-bar suitability for “fixed” annuities is totally unacceptable for the index annuity because it is more complex and often sold with misleading presentation, which a number of class actions and state fines imposed upon providers and marketers prove.

Mr. Mumford is right on target, seeing through the ruse and not letting this situation sneak under the radar.

As an insurance and annuity analyst who often provides consultation and expert witness services, the opportunity to see someone who is “really” fulfilling his responsibility to the consumer is refreshing.

Joseph W. Maczuga

Executive director

Fee Advisors Network

Troy, Mich.

Mechanism for delivering webcasts should be same

With the timely manner in which you offer new ideas and regulatory updates, I would like to offer a suggestion.

Financial advisers and planners are plagued with multiple opportunities to view webcasts and multimedia presentations. The problem I am left with as an adviser is the multiple platforms and different platforms in which these seminars are delivered.

It would make my life so much simpler to have InvestmentNews as the industry standard repository so that the investment companies would be able to provide a link and the delivery mechanism is standard.

I am a technology-driven adviser, but my frustration grows daily with this issue.

Garrett Gatch

Principal

Concord & Lexington Inc.

Ventura, Calif.

529 plans shouldn’t be go-to college savings vehicle

I read the article “Affluent households ignore 529 plans, study says,” which appeared in the June 15 issue, with great interest.

Yes, the tax benefits of a Section 529 college savings plan are wonderful, but they aren’t the end-all solution for college savings, as some people think.

I look at a 529 plan as more of an estate-planning tool for well-off grandparents, not as a college savings plan for parents.

A 529 plan should only be funded if all other options are first maxed out, such as a Roth individual retirement account, an Education IRA/Coverdell or any other qualified plan.

Perhaps you aren’t asking the right questions as to when and where a 529 plan best fits into an overall financial plan.

Maybe the adviser world is doing a better job of pointing out other options for college savings to clients, and that is why 529 plans aren’t being used to a greater extent.

Scot Hanson

Certified financial planner

Educators Financial Services Inc.

Shoreview, Minn.

Regulators are panicking in the face of criticism

In response to Securities and Exchange Commission Chairman Mary Schapiro’s comments about fiduciary standards, if someone dressed up as a police officer and committed a crime, should all police officers be subjected to criminal investigations?

That appears to be the logic behind the proposal that would subject close to 9,000 investment advisory firms to a “surprise audit.”

When will the regulators quit panicking in the face of public criticism over Bernard Madoff and R. Allen Stanford, and turn on their common sense?

They were not investment advisers; they are criminals who stole and lavishly spent money that didn’t belong to them.

They used the label “investment adviser” because it gave them access to clients’ funds. If they had called themselves yoga instructors or interior designers, they wouldn’t have been able to steal enough to live a billionaire’s lifestyle.

The regulators need to quit pretending that they are protecting the public simply by increasing the regulatory burden on legitimate advisers. That only provides work and fees for accountants, attorneys, compliance officers and regulatory agencies.

Instead of trying to spread their limited resources over the entire industry, they need to establish straightforward safe-harbor guidelines for the majority, namely the “plain-vanilla” investment advisory firms that have under custody client assets at non-related third-party custodians. Why increase regulation on 9,000 firms in order to try to catch a handful of criminals who disregard regulatory requirements entirely?

Regulators need to spend their limited resources applying tougher standards to firms that choose to adhere to riskier business practices in which clients aren’t easily able to monitor the transactions and/or assets in their accounts. Most importantly, the regulators need to go after false advisers such as Mr. Madoff and Mr. Stanford who misuse the label “investment adviser” in order to defraud clients.

Regulators could enlist help from the public to beef up the ability to spot and stop a scam in its infancy. Cash rewards for information leading to the successful prosecution of the Bernard Madoffs of the future would turn everyone into a bird dog for fraud.

Imposing more complex and costly regulations in an attempt to appease public outcry makes the regulators appear increasingly impotent. Catching financial scams early, throwing the perpetrators in prison and publicizing successful prosecutions will do more to improve the industry and increase public confidence.

Carolyn Santo

Principal

Essential Financial Ltd.

Kailua, Hawaii

Related Topics: Letters To The Editor