Annuities - Equity Indexed Annuities - The Next Big Scandal

I believe that Equity Indexed Annuities and the sales practices used to sell them may well be the Next Big Investment Scandal you will hear about. You need to understand why and to think twice before you purchase one of these products.

We have seen many scandals the last few years relating to mutual funds, variable annuities and more recently, to insurance companies. The common theme in all of these scandals has been the existence of hidden conflicts of interest.

There is an unspoken trust when someone purchases a financial product. When someone is uncomfortable making a purchase on their own, they seek out the advice of a financial advisor. They expect that advisor to make a recommendation that is in the client's best interest, not the advisor's.

Unfortunately, most financial advisors are compensated solely by the commission they receive from selling financial products. The more they sell, the more they make. If they don't sell, they don't eat. This alone creates a tremendous conflict of interest between them and the client.

Consumers understand that conflict of interest in other purchases they make. You wouldn't expect a car salesperson to recommend a vehicle that isn't offered by their dealership. So consumers view the salesperson's recommendation with a healthy dose of skepticism.

That same skepticism should be applied to the purchase of financial products as well. Those who purchase mutual funds or stocks are fully aware of the commission they're paying. However, few Equity Indexed Annuity consumers are aware of the commission their advisors are making off of their purchases. I'm not against an advisor making a living; what concerns me is when the client is not made aware of the powerful forces influencing what their advisor is recommending.

This is why I feel Equity Indexed Annuities may be the Next Big Investment Scandal. The hidden conflict of interest between an advisor and client is greatest when an Equity Indexed Annuity is being recommended. There are huge incentives designed to motivate an advisor to recommend an Equity Indexed Annuity over any other financial investment they offer–incentives that aren't disclosed to the client.

An advisor can make more commission from selling an Equity Indexed Annuity than they can from any other investment they offer. A lot more. In some cases, the amount of commission is three to four times greater than on an investment like a mutual fund.

Equity Indexed Annuities (EIAs) are not regulated at the federal level, but by each state's Insurance Commissioner. Even though Equity Indexed Annuities are technically an insurance product, they are being marketed as an investment. But all an agent has to do to be able to sell them is sit through a five-day course and pass a simple test on health and life insurance.

The structure and sales practices of almost every other commission-based investment product are regulated by the Securities and Exchange Commission. Mutual funds, stocks, bonds and variable annuities are all regulated at the federal level. Equity Indexed Annuities are not.

If an advisor were to place 100% of a client's investable assets into a variable annuity or a single stock or mutual fund, they would likely face fines and possible revocation of their license. At the very least, they would be opening up themselves and their firm to potential lawsuits. Yet, I often hear of advisors telling a client that they should put 100% of their money into Equity Indexed Annuities.

Under federal regulation, an advisor can't recommend a client pay a 7% penalty to get out of one annuity and move then move that money into another high commission product. That's just like a stockbroker getting you to constantly buy and sell stocks so they can earn a commission–it's called churning. Yet, I see advisors using the 'bonus' offered by some Equity Indexed Annuities to do just that.

I am an advocate for the individual investor, and apparently one of the few in the financial services industry willing to speak out against this popular product. But Equity Indexed Annuities are beginning to attract attention. I was interviewed by CBS MarketWatch just last week about the dangers associated with Equity Indexed Annuities. Those in Congress are recognizing the need for federal regulation of insurance products.

So think twice before buying an Equity Indexed Annuity. The agent may not have your best interests at heart.

To find out more about the dangers of Equity Indexed Annuities, give me a call, send me an email or read my other articles at www.guardingyourwealth.com. They will tell you what the agent isn't.

Mr. Voudrie is a Certified Financial Planner and the President of Legacy Planning Group, Inc., a Private Wealth Management firm in Johnson City, TN. For more information email jeff@guardingyourwealth.com.