Taking Sides: Annuity ad claims send up red flags

When the going gets tough, variable-annuity sellers start to play games.

That’s the signal regulators at the National Association of Securities Dealers are picking up from the latest spate of industry advertising.

As the stock market stumbles and the economy grinds to a halt, the annuities industry is stepping up advertising that focuses on gimmicks designed to boost sales – dollar cost averaging and equity-index riders.

As InvestmentNews reporter Michael Fritz noted in his story last week, practices such as dollar cost averaging are generally sound techniques to spread the risk of buying into the market when prices are high. But regulators have been taken aback by some of the promotional claims.

Some companies claim in ads that investors can reap as much as a 21% return on their initial investment, even though the annuity is designed to pay in the 4% to 5% range.

That claim, among others, is “astonishing,” according to Thomas Selman, a senior vice president with National Association of Securities Dealers Regulation, the quasi-governmental arm that oversees advertising.

“Unethical” may be a more appropriate word.

Similar concerns have been raised about equity-index riders and the way they are being touted in ads. Mr. Selman says insurers are pushing the product without prominently disclosing all of its nuances. Often, he notes, companies are selling the options in a way that obscures the fact that investors are actually buying a variable annuity.

All of that is troubling enough, but what makes those questionable activities even more problematic is the fact that both the NASD and the Securities and Exchange Commission are already investigating the industry for questionable sales practices involving bonus annuities.

As Mr. Selman notes, the mere existence of blatantly misleading ads sends up a red flag. If that is how companies behave when they are trying to put on a public face to attract investors, he says, how does it handle other matters behind closed doors?

One can only wonder.

The NASD has yet to issue any formal directives or industry alerts regarding the latest concerns over annuity advertising. So what’s it waiting for?

Anytime an industry action compromises, or appears to compromise, investors’ trust, regulators should move quickly to halt the practice.

Given the penchant among law firms these days to file class actions on behalf of investors at the drop of a hat, companies that engage in those practices are begging for trouble. And they’re casting a shadow over everyone else.

An industry that won’t do enough to police itself will only end up straitjacketed by even more red tape. Then who will be singing the blues?