DOL Fiduciary Rule Failure #322-The Prudent EIA Sale

January 31, 2017

The DOL is picking winners and losers for your retirement account. I see the losers being true fiduciaries who are trying to expand the work of fee-only, holistic advice among the public. Due to the changing nature of the DOL's Fiduciary Rule and its unknown status in the new administration, my firm has had to begin to charge higher minimums for new clients, though at this point we have not turned clients over to call centers as other firms have. 

 

One winner of the Fiduciary Rule may be Equity Indexed Annuities (EIA) which are terrible growth products, terrible income products, and are often sold by lies by agents who are not regulated by anything more than insurance agencies, and may not even have to be giving you a product that's in your best interest if this exemption stands. 

 

Here's a summary of a conversation with an investor on his interpretation of the benefits of an EIA from recent sales pitch: 

  • 6% annual growth

  • No fees

  • More income than a high-quality annuity benefit that he bought many years ago

 

These are all not true. They are lies. 

 

They are the same story I hear every time I meet someone who is being pitched, or has bought an EIA. 

 

Most actual financial experts estimate that EIAs 'may' earn around what cash or short-term bonds earn over long periods. They are sold, however, as providing stock market returns (with "no fees!" despite massive commissions!).

 

I have a client who is trying to move out of her annuity. It does not guarantee 1.5% over the next year, but it will only allow 1.5% maximum! 

 

I've seen bank accounts that pay more than 1.5%. The market is up nearly 2.5% in one month!

 

If the market continues on this path it will have one of the best years in history... and this investor will be limited to 1.5%.

 

Sound like at all like the product whose sales pitch is, "market returns without the risk"? 

 

She still has 10+ years left before she can withdraw her funds without massive penalties. The penalty serves to recoup the massive sales commission paid to the agent who sold the product. 

 

This sounds to me like "conflicted advice" that doesn't deserve an exemption to the DOL's Fiduciary Rule... which... we're told is to stop "conflicted advice" from advisors. 

 

I've analyzed the income of the current benefits my client above has, which he EIA agent felt were poor, and I could not find a no-commission insurance product that would match them. As a Fee-Only advisor who does not receive commissions, my sources traditionally pay much, much more, since these products pay very large commissions. They certainly pay more than EIAs. 

 

Perhaps unless the EIA agent pretends his product will earn 6% per year. If that product existed in the real world however, I and other fiduciaries would have been recommending it over the last several years of low interest rates. 

 

The DOL says, "when prudently recommended, fixed indexed annuities can promote investor interests because of their combination of limited financial market exposures and minimum guaranteed values."

 

The problem of course is these products are never prudently recommended. They are almost strictly sold by advisors who are not securities licensed, and they only sell these products. 

 

They pay less than traditional annuities. I can not say I know of a fiduciary who has ever recommended one. 

 

The DOL shouldn't be in the financial advisory business. And, they shouldn't allow exemptions for products that are among the most abusive of savers and investors. 

 

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