FIAs: Think Before You Run Away!

By Michael Mastowski

I heard our state’s consumer advocate touting his expertise on our local conservative talk radio station recently. His 60-second cautionary advice was in regard to an insurance product. He said that if this product were presented to one of his listeners, they should “run the other way.” That's pretty aggressive advice for a product that has not only saved but made money for many people and is becoming a large part of many retirement portfolios. I'm talking about fixed index annuities.

As I began to calm down from the anger I felt for yet another uninformed radio or newspaper personality hammering away at a product that I firmly believe in, I decided that something must be done to level the playing field and shed some light on this situation. Why do we seem to always have a target on our backs? Could I write a fair and balanced paper on a product that I sell? I decided the answer was yes; someone had to do it.

The truth is that we (those of us who sell FIAs) are probably more to blame for causing this terrible mis­understanding than those who criticize what we do. Let me explain further.

For many years, plain vanilla fixed annuities were offered by numerous insurance companies primarily for one reason - safely saving for retirement. Back in the 1970s, ’80s and most of the ’90s, it was not uncommon to be able to offer a client a 5 percent rate guarantee for any number of years. Simple, right? You give your money to the insurance company for a specified period and in return they pay you 5 percent every year. Everyone was happy.

In the mid ’90s, however, some companies started experimenting with a new version of this product called an equity index annuity. That was the first big mistake. All they were trying to do was develop a new method to calculate your client’s interest rate. Your client was not in any type of equity position. Your client’s principal was protected and the rate earned was based on a calculation derived from a common index (S&P500, NASDAQ, etc.). In the event the index was negative, the return would be simply a zero. What a great idea! Offer people a better-than-average chance at a better-than-average return!

As equity index annuities became more popular after 2001 and insurance companies got more creative with them, the Securities and Exchange Commission started sniffing around. All because we got away from a set, fixed number. In 2005, a ruling came out of Washington that these products were not securities and were considered a fixed vehicle, hence the name was changed to a fixed index annuity. So our industry continued on its merry way but also continued to market these vehicles incorrectly, which I believe was to our detriment. Promising someone “market-like returns” with no downside risk is not correct and also makes FIAs sound too much like a security product. How about offering someone a fixed annuity that uses a common index to simply determine your rate of return? In the 20-plus years I have been in this industry, I have seen returns everywhere from zero all the way up to and even over 20 percent. However, all the research indicates that the average return is generally around 5 percent over most 10-year periods. Sound like a fixed annuity?

Now, let's put everything in perspective. There are many choices and types of products on the market today, and all of them – including FIAs - have pros and cons. Certificates of deposit are another option available to consumers. Mutual funds, stocks and bonds also are very popular. If you were looking at options that were available for your client’s money, many variables would play into the equation such as age, size of the portfolio and risk tolerance, etc. I doubt someone who is considering placing $50,000 into one of these vehicles would view a CD in the same way they would view putting the money into a stock portfolio. One is very safe, and the other can be very rewarding as well as very risky, (i.e. you can lose money).

Michael Mastowski is federal benefits specialist/vice president with Munro Legacy Planners, Woodstock, Ga. He may be contacted at [email protected].