When a federal push> to curb investor risk put certain annuities under the eye of financial industry regulators, the move drew complaints from insurers who insisted their products worked different than traditional securities and independently of the stock market.
On Wednesday, the Securities and Exchange Commission took the insurers protest to heart and issued a two-year stay on a rule that would have brought indexed annuities under the jurisdiction of the SEC and the eyes of the Financial Industry Regulatory Authority.
The insurance industry welcomed the move because they say the rule could have a negative impact on its ability to sell annuities, but the delay could also have a palpable effect on average investors. Academics and industry professionals say it could leave some of the products risks hidden from consumers but that it could also help prevent a drop in the number and variety of products available.
Here s a quick primer on the affected products. An indexed annuity is an annuity whose payouts are tied in part to an index of stocks or bonds the idea is that if the index performs well, the purchaser gets greater returns, but the product typically comes with a guaranteed minimum return, making it less risky than a pure investment in equities. The SEC has argued that the products carry an investment risk, which makes them more securities than insurance products.
The products are complicated, says John Cronin, the securities director for the state of Vermont. They truly are neither fish nor fowl. They re not a traditional fixed annuity, and they re not a variable annuity.
The SEC had moved to regulate these products in part because of complaints that deceptive marketing techniques had made them appear less risky than they really are. Originally, they were marketed as very simple, straightforward investments, says Bryan Place, a certified financial planner with Place Financial Advisors.
But investors often do not understand that the products they re buying carry a cap on the returns they ll see the index could see huge gains while the investor is capped at a return of as little as 4%, Place says. That cap can create a two-tailed risk: If the market s volatile to the downside, it can wipe out returns, and if it s volatile to the upside, you get capped out, and you don t recognize that solid return, Place says.
Indexed annuities also tend to be relatively high-cost products, and SEC regulation would provide investors with more clarity on the fees and sales commissions they re paying, says Dr. William Reichenstein, a professor of investments at Baylor University. The products may also include poorly understood penalties for withdrawing principal before the end of a contract, Place says.
Because these products carry the potential for more than a 1% or 2% return, in some cases an indexed annuity could be appropriate as an alternative to a CD for a risk-averse investor, Place says.
It s a good product for someone that is less willing to invest without some type of guarantee, says Craig Hemke, the president of Buyapension.com, an online annuity site that does not sell indexed annuities. I think the product is fine. It s just how it s marketed and the sales practices that have got the product put in a negative light.
If the new rule takes effect and indexed annuities are considered securities, consumers could benefit from more disclosure about the terms and risks of these products, says Don Humphreys, the president of Voyager Wealth Management. Under the new rule, indexed annuities would be regulated by insurance commissioners and the SEC, meaning you ve got two sets of eyes looking at the product, Cronin says.
More practically, SEC regulation would require anyone selling the product to be registered with the Financial Industry Regulatory Authority, essentially reducing the number of people who could offer them, Cronin says. Some companies might stop selling the products because of the extra expense and the legal expertise necessary to register them with the SEC, he says. I would suspect you d lose some products in the marketplace, Cronin says.