In Focus

February 6, 2006

he time has come to shine a spotlight on Equity-Indexed Annuities! Consider these recent headlines: "Why Big Insurers Are Staying Away From This Year's Hot Investment Product" (Wall Street Journal); and "Reps Rap Broker Reins On Equity Index Sales" (Investment News).

What's the problem? According to two PhDs, Craig McCann and Dengpan Luo, equity-indexed annuities "are complicated investments sold to unsophisticated investors without the regulatory safeguards afforded to purchasers of similar investments." In their study, published here on FinancialCounsel.com, they conclude that "the net result of equity-indexed annuities' complex formulas and hidden costs is that they survive as the most confiscatory investments sold to retail investors." The study reports that commissions are as high as 10%-12%, surrender charge periods last 10 years or longer, and the insurance company pockets 42% of the spread associated with gains in the equity index.

Some insurance companies, perhaps under pressure from regulators, are not offering these products. These companies include Northwestern Mutual, MassMutual Financial Group and MetLife. Yet others, like ING Group, is a big seller. And Hartford Financial Services is considering selling the product, according to the Wall Street Journal.

Likewise, several brokerage firms won't allow their brokers to sell the product unless they offer it themselves or it appears on their approved list.

Investors need to carefully read the McCann / Dengpan study before investing in Equity-Indexed Annuities. They also must compare this product to a simple, low-risk portfolio of stocks and Treasury securities. McCann and Luo do just that, finding that this low-risk portfolio nearly always is far better than Equity-Indexed Annuities.

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James J. Eccleston is a securities attorney, representing customers as well as brokers and brokerage firms nationwide in arbitration, litigation and regulatory matters. He maintains an informative website at www.FinancialCounsel.com. He is an equity partner with Shaheen, Novoselsky, Staat, Filipowski & Eccleston, and can be reached at 312-621-4400.