Introduction
Had Jane Austen lived in the 21st century, her Mrs. Dashwood might have added: “and very complicated, too.” As most financial advisors can attest, annuities have evolved into very complex financial instruments. That complexity has stirred up a debate. On one hand are those who can list 10 good reasons why everyone should invest in annuities, while an equal number of advisors have lists of reasons why no one should invest in annuities, ever. As with most debates, the truth can be found somewhere between the two extremes.
At one time, an annuity was a simple concept — it was simply a series of payments. The word “annuity” comes from the Latin word for year, annum. Initially, an annuity was a fixed annual payment paid to the recipient for the remainder of his or her lifetime. It was simply a type of pension (and what concerned Mrs. Dashwood was that once her husband agreed to pay his half-sisters an annuity, he would be “on the hook” to make annual payments for the rest of their lives — a very serious business, indeed).
Today most annuities pay monthly income, and the word “annuity” has come to describe any stream of payments for a guaranteed period of time. The payout period may be fixed, such as ten years, or the annuity period can be measured in terms of the recipient’s life. The concept of an income stream that lasts a lifetime is, for many, a very comforting thought. There are, however, financial advisors who twist this reassuring concept into a fear-driven sales pitch: “What if you outlive your income?” Such sales practices, coupled with the complexity of today’s annuities, have prompted regulators to enact new suitability rules for advisors who recommend the purchase of annuities to their clients.
Florida DFS — Annuity Suitability Enforcement - The Need
Before you begin the study material, please review the following two press releases issued by the Florida Department of Financial Services in 2008. As you can see, the suitability of annuity recommendations — or the lack of suitability in these cases — can have major financial and personal consequences for annuity purchasers. The Department has taken its responsibility to protect the annuity-buying public very seriously.
CFO Sink, AARP Team Up to Find Greater Protections for Senior Investors in Florida
Solutions discussed during second meeting of Sink’s Safeguard Our Seniors (SOS) Task Force
With seniors age 65 and older expected to soon represent 30 percent of Florida’s population, Florida Chief Financial Officer Alex Sink challenged members of the Safeguard Our Seniors (SOS) Task Force to consider meaningful financial protections for senior investors. The task force was created to help better protect Florida seniors against financial fraud, with an immediate focus on annuity fraud.
“The number of complaints from Florida seniors about annuities has nearly quadrupled in the last three years,” said Sink. “Better financial protections for our growing population of senior residents and tougher consequences for those who defraud our seniors demand our immediate attention.”
The task force also heard from a guardian of Joseph Seale, a former resident of Ft. Myers. In 2006, following the sale of Seale’s home, a life insurance agent sold three annuities with a 15-year surrender period to Seale, then 85 years old, that tied up all of his liquid assets. The Department was able to recover more than $256,000 for Seale, representing the original investment without penalty. The agent, who made over $13,000 in commissions selling inappropriate annuities to Seale, had his license revoked by the Department.
Florida DFS Takes Action Against Agents Selling Unsuitable Annuities to Seniors
The Florida Department of Financial Services continued its enforcement actions against agents who sold unsuitable annuity products to senior citizens. These cases illustrate the serious financial and personal harm that can result when agents recommend annuity products that are not appropriate for a client’s age, financial situation, and investment objectives — particularly when those products carry long surrender charge periods that lock up a senior’s liquid assets for years or decades.
The Department’s enforcement actions underscore the importance of thorough needs analysis, complete disclosure of product features, and genuine assessment of suitability before recommending any annuity product to a senior investor.