SEC Bulletin Targets VA Charges, Expenses

By Linda Koco

An investor bulletin on variable annuities from the Securities and Exchange Commission includes a caution to investors to watch out for policy charges. This effectively keeps alive the festering controversy over the nature, extent and use of annuity policy fees and charges.

Published by the SEC’s Office of Investor Education and Advocacy (OIEA), the bulletin advises investors to “be aware that product charges may go toward your financial professional’s compensation.”

It also points out that the financial professional “may receive higher compensation for some products (and for different share classes of the same product) than for others.”

The “be aware” comment may not surprise annuity industry professionals. SEC documents have repeatedly warned investors to learn about and question “fees and expenses” in various financial products before they buy.

Stepped up messaging

An earlier version of the bulletin, published in 2014 and now retired, brought up expense considerations, such as paying extra for features such as living benefits, as well as the impact of surrender charges and the role of the mortality-and-expense risk charge.

However, the new version, published a few weeks ago, steps up the expense conversation in a new callout box. This includes not only the “be aware” comment but also commentary on share classes in variable annuities and fees.

“A variable annuity may offer different share ‘classes’ with different charges (including mortality and expense fees) and different surrender charge periods,” the bulletin states.

“For example, ‘L class’ shares may have a shorter surrender charge period, but may have higher ongoing fees, while ‘B class’ shares may have a longer surrender charge period and lower ongoing fees.”

The document also suggests that investors “consider how long you expect to own the variable annuity and your need to access funds when you think of any tradeoff between the length of the surrender charge period and the level of ongoing fees.”

Because fees are paid from the amount invested, the fees “can reduce your potential investment return,” it adds.

Why the expense focus?

This increased expense commentary comes at a time when the SEC’s complaint list for fiscal year 2015 does not include variable annuity charges and fees on the top 10 list of complaint categories. In fact, the list does not show variable annuity complaints in the top 10 list at all.

This raises a question about why the new bulletin is coming out now. It could be because a focus on charges and expenses is top of mind in Washington right now.

The SECs list of examination priorities for 2015 is an example. In 2015, the staff decided it would be targeting risks to retail investors that can arise from the many offerings now available for the retirement years. At the very top of this list of priorities was “fee selection and reverse churning” by financial professionals serving retail investors.

Costs and expenses are also a key issue in the ongoing debate in Washington over the Department of Labor’s proposed fiduciary rule. The current version of the rule includes controversial provisions that would curtail commissions, purportedly to reduce conflicts of interest and to level the cost/expense playing field. This has been a sore point among many insurance agents and financial advisors, who are working hard to have the provisions removed while many fee-based advisors see no problem with it. The push-and-pull from all sides is keeping expense issues in the air.

The growing interest in, and use of, robo-advisors to deliver financial advice to consumers is having the same effect. It’s not a “Washington issue” but the contention that automated advice will be delivered at lower cost to the consumer does get referenced in various compensation discussions there.

Education needed

Whatever the reason, it is apparent that the goal of the new investor bulletin on variable annuities is to illuminate charge and expense issues along with basic variable annuity information.

The SEC positions such bulletins as educational material, and the document is set up that way. However, the bulletin also has a touch of an alert or warning about it. For instance, it includes four discussion boxes titled, in bold face, “Caution!” It also warns that “you could lose money.”

The likely purpose is to ensure that the reader does some investigation before buying. “Ask questions before you invest — in anything,” it says.

However, the language is strong enough in some places that readers may interpret the words as comparable to yellow police tape telling people to stay away from a building or area. This, in addition to the heavy emphasis on expenses and charges, could cause potential variable annuity buyers to get cold feet rather than to do research.

The bulletin encourages readers to run the information by an advisor. “Don’t be afraid to ask the financial professionals who are trying to sell you a variable annuity whether the product is right for you,” it says.

Also: “Keep asking them questions until you are satisfied with their answers. And write down their answers, so there won’t be any confusion later as to who said what.”

But for advisors, providing proactive outreach may be more effective, especially for clients who have expressed interest in variable annuities and may be researching the products online. Some advisors routinely do this by sending pertinent information to clients with a “Lets’ talk about this” message attached.

The alternative, of waiting for the customer to bring concerns forward after obtaining the SEC material elsewhere, may never come to pass.

InsuranceNewsNet Editor-at-Large Linda Koco, MBA, specializes in life insurance, annuities and income planning. Linda can be reached at [email protected].

Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at [email protected].