Words from the Wise

Set forth below are a few cautionary opinions and comments, from financial writers and regulators.

About buying annuities only for the long-term 
“The registered representative should inquire about whether a customer has a long-term investment objective and typically should recommend a variable annuity only if the answer to that question, with consideration of other product attributes, is affirmative.” – National Association of Securities Dealers Notice to Members 99-35. 

“Variable annuities’ costs and complexity make them best suited for long-term investors, but some products were sold to people with short-term financial needs or to elderly people unlikely to live long enough for the tax benefit to outweigh the extra costs.” – Los Angeles Times, August 19, 2001, “Boom Fades for Variable Annuities,” by Liz Pulliam Weston. 

“. . . many experts say that you need to own a variable deferred annuity for at least 15 years to make it a more worthwhile investment than doing so on your own with, say, a mutual fund. That number is somewhat less for fixed annuities, but it’s still something to consider.” – MSN Money, “Annuities Offer Tax-Deferred Growth, But at What Price?” by Ginger Applegarth. 

About fixed annuities 
“. . . there is not much that is fixed with most fixed annuities. Normally, the rate is guaranteed for one year; the seller then sets a new one. In doing so, many vendors say they intend to pay the attractive rate they are then offering new customers, but they are not required to do so and some do not. Their only duty is to pay a low statutory rate – now about three percent in most states.” – New York Times, March 8, 1998. “Investing It; Fixed Annuities: New Twists and Old Gnarls,” by Linda Corman. 

About over-selling of variable annuities 
“Variable annuities are sold more aggressively than fake Prada handbags on the streets of New York City. . . . But popularity is no indicator of practicality. – Smartmoney.com (a joint venture with Dow Jones Company), Retirement Section, “What’s Wrong with Variable Annuities?” 

About the expenses of annuities 
“You will pay for each benefit provided by your variable annuity. Be sure you understand the charges. Carefully consider whether you need the benefit. If you do, consider whether you can buy the benefit more cheaply as part of the variable annuity or separately (e.g., through a long-term care insurance policy).” – Securities and Exchange Commission investor brochure, “Variable Annuities: What You Should Know.” 

“Variable annuities offer beefy commissions, as much as 8%. Sales agents typically receive between 50% and 90% of that. – Wall Street Journal, February 16, 2001, “Shifting Annuities May Help Brokers More than Investors,” by Jeff Opdyke. 

“If you choose to select a variable annuity look at low-cost annuity providers . . . which have low expenses and no redemption/surrender fees.” – Investing for Women web site, April 23, 2001, “Variables to Consider for Variable Annuities,” by Gary Schatsky. 

About including an annuity in your IRA 
“In addition, if you are investing in a variable annuity through a tax-advantaged retirement plan (such as a 401(k) plan or IRA), you will get no additional tax advantage from the variable annuity.” – Securities and Exchange Commission investor brochure, “Variable Annuities: What You Should Know.” 

About switching or exchanging annuities 
“Generally, the exchange or replacement of . . . annuity contracts is not a good idea. The concern is that many switches may be little more than ‘churning,’ the practice of excessive trading that typically generates a commission for the broker while providing little benefit for the investor.” – Wall Street Journal, February 16, 2001. “Shifting Annuities May Help Brokers More than Investors,” by Jeff Opdyke. 

“If you are thinking about [an] exchange, you should compare both annuities carefully. Unless you plan to hold the new annuity for a significant amount of time, you may be better off keeping the old annuity because the new annuity will impose a new surrender charge period.” – Securities and Exchange Commission investor brochure, “Variable Annuities: What You Should Know.”

About credentials and finding an advisor 
"Individuals may call themselves 'senior specialists' to create a false level of comfort among seniors by implying a certain level of training on issues important to the elderly. But the training they receive is often nothing more than marketing and selling techniques targeting the elderly." - Patricia D. Struck, President of North American Securities Administrators Association, in December 12, 2005 release by NASAA titled "Regulators Urge Investors to Carefully Check Credentials of 'Senior Specialists'."

"... bogus senior specialists commonly target senior investors through seminars where the specialist reviews seniors' assets, including securities portfolios. Typically, the specialist recommends liquidating securities positions and using the proceeds to purchase indexed or variable annuities products the specialist offer." - Patricia D. Struck, in December 12, 2005 release quoted above.

May 2007

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This is Part 3 of the Special Report - go to Part 4.