The Wall Street Journal
Weekend Investor – August 17, 2013
Fixed Indexed Annuities Merit Caution
Investment Appeals to Conservative Investors but Can Be Complicated and Carry Hidden Risk
By Leslie Scism
Conservative savers are flocking to an insurance product with a controversial past: fixed indexed annuities.
For investors seeking steady retirement income—typically drawn to products such as certificates of deposit and safe-haven bonds—these annuities can make sense. But be aware: They are complex, and they vary in quality and security.
Fixed annuities are a type of savings contract with a tax-deferred interest component. “Indexed” versions link the annual interest to a stock-market benchmark, most commonly the S&P 500. Insurers promise to protect buyers against market losses but cap the upside gain they pay. They also typically exclude dividends from the calculation of payouts.
To reduce confusion, insurers who called the products “equity-indexed annuities” have by and large dropped the word “equity.”
What to consider when buying an indexed annuity
- Indexed annuities can be complicated, so work with a trusted adviser.
- Insurers sometimes pay fat commissions, so the particular product an agent favors may not be the best for you.
- Upside gains can be sharply limited.
- Stock dividends typically aren’t included in the upside calculations.
- ‘Surrender’ charges apply to early withdrawals.
- Tax penalties also can apply to early withdrawals.
- Many advisers suggest buying from insurers rated at least ‘A’ by A.M. Best.
Comments August 17, 2013
The Financial Industry Regulatory Authority (FINRA) is the largest independent regulator for all securities firms doing business in the U. S. Its chief role is to protect investors by maintaining the fairness of the U.S. capital markets. In their Investor Alert, entitled “Equity-Indexed Annuities—A Complex Choice” they address how “…EIAs are anything but easy to understand” and how it is possible to lose money in these products. They “Caution!” how some EIAs allow the insurance company to change participation rates, cap rates or spread/asset/margin fees and how this could adversely affect returns.
Once of the greatest weaknesses of fixed index annuities (FIAs) and equity-indexed annuities (EIAs) is the typical lack of stock dividends inclusion in upside calculations. A historical review of the importance of dividends emphasizes this weakness. Between 1926 and 2012, 43% of the annual total return of the S&P 500’s annualized return was derived from the payment and reinvestment of dividends, while capital appreciation/depreciation has contributed the rest.
Work closely with a privately owned (not owned by stockholders) Registered Investment Adviser (RIA), that is required by law to place clients’ interests before any other party – including its owners, when evaluating a fixed index annuity or any other financial product.
Aaron Skloff, AIF, CFA, MBA
CEO – Skloff Financial Group
Aaron Skloff, Accredited Investment Fiduciary (AIF), Chartered Financial Analyst (CFA), Master of Business Administration (MBA), is the Chief Executive Officer of Skloff Financial Group, a Registered Investment Advisory firm. The firm specializes in financial planning and investment management services for high net worth individuals and benefits for small to middle sized companies. He can be contacted at www.skloff.com or 908-464-3060.