Think Twice Before Investing in Equity Indexed Annuities

shutterstock_189135755As long time readers of our blog know, this is not the first time we have alerted investors to the potential pitfalls to investing in equity indexed annuities. Recently, the Wall Street Journal ran an article concerning a probe being conducted by Sen. Elizabeth Warren (D., Mass.) regarding sales incentives for annuities products issued by insurance companies. The senator’s investigation comes on the heels of a speech given by Luis Aguilar, Commissioner to the Securities and Exchange Commission (SEC), before the North American Securities Administrators Association (“NASAA”), stating that the SEC is looking closely at sales practices with respect complex securities including equity-indexed annuities, leveraged and inverse-leveraged exchange traded funds, reverse convertibles, alternative mutual funds, exchange traded products, and structured notes.

According to news sources, the senator’s focus is on indexed annuities which have become widely known within the industry for granting perks to agents. Sen. Warren is said to have quoted from some of the marketing materials aimed at insurance agents describing sales incentives including “four days in the heart of California’s wine country at the prestigious Calistoga Ranch and Spa”; a trip to South Africa to visit Cape Town and Kruger National Park; and the ability to win “tour the Mediterranean on a private yacht, like royalty, celebrities, and the wealthy elite.” According to the report, Sen. Warren is concerned that earning perks may provide a greater incentive for making recommendations that acting in their clients’ best interest.

Equity indexed-annuities promise a return tied to a stock-market index while protecting against losses if the market falls. Sounds good right. Except there are serious limitations built into the products which make them both very expensive and limited to almost CD like returns. Accordingly, if the market has a blockbuster year, your equity-linked annuity will not perform in kind.

While many advisors use the stock market link as part of the sales pitch, financial advisers and agents interviewed for the article and who understand indexed annuities say they describe the products as more like enhanced bank CDs then an equity related investment. Even in an up market the consumer would likely only get a single digit return and those terms can be changed by the insurer at any time. In addition, to the restrictions on returns these are very long term contracts that come with steep early withdrawal penalties range from three to 16 years.

Investors who have suffered losses may be able recover their losses through securities arbitration. The attorneys at Gana Weinstein LLP are experienced in representing investors in cases of unsuitable investments and brokerage firms failure to supervise their representatives. Our consultations are free of charge and the firm is only compensated if you recover.

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