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Uncapped Indexed Annuities Are Not the Next Big Thing for Investors

Indexed annuities sales have grown exponentially over the last couple of years as agents and brokers are recommending them as fixed income or guaranteed lifetime withdrawal components of investors’ portfolios. In fact, first quarter sales of indexed annuities hit $10.9 billion, which is up by approximately 39% from the year-ago period, according to investment news sources. Now, as broker-dealers unveil “uncapped indexed annuities,” a product that purports to give conservative clients a way to benefit from surging equity markets without limitations while protecting downside risk, investors are urged to remain wary in order to detect misrepresentations and avoid misunderstandings related to the product.

Indexed annuities are complex products that come in all shapes and sizes. One popular indexed annuity type is an “equity-indexed” annuity. Equity-indexed annuities are a hybrid of both fixed and variable annuities but their returns vary more than a fixed annuity and typically less than a variable annuity. So, equity-indexed annuities are more risky than fixed annuities but less risky than a variable annuity. Equity-indexed annuities offer a minimum guaranteed interest rate combined with an interest rate linked to a market index. Because of the guaranteed interest rate, equity-indexed annuities have less market risk than variable annuities. Equity-indexed annuities also have the potential to earn better returns than traditional fixed annuities when the stock market is rising. However, investors do not capture the full amount of an equity-indexed annuity’s performance because carriers use a cap. For example, an annuity contract could have a cap that allows the account to capture 5% of the gain; so, if the index rises 15% in a given period, only the 5% portion will be used to calculate the return to investors. In addition, equity-indexed annuities come with fees that are higher than any investment — sales commissions to brokers can go as high as 12% and surrender charges can go as high as 18%.

Uncapped indexed annuities, as the name suggests, do not use caps to limit returns. However, that does not mean that clients are now able to earn equity-like returns from this product. Insurance carriers are using another mechanism to limit returns in the form of a spread. The spread is set for a period of time and then reset by the carrier, normally on an annual basis, but this can vary based on the product type. Moreover, carriers can update the spread for new contracts on an on-going basis. That way, the spread for products sold in a given month is calculated based on a set of interest rate and options market assumptions plus other components. Should those factors change the following month, the spread and the assumptions will be updated for new contracts sold afterward. So, for investors, “uncapped” does not necessarily mean one can reap equity-like returns with downside protection.

A few of the broker-dealers already in the uncapped indexed annuity game include Allianz, Nationwide Life Insurance Co., and the Annexus Group. Allianz has launched the Core Income 7 indexed annuity, and, in February 2014, Nationwide Life Insurance Co. launched its New Heights uncapped indexed annuity in collaboration with the Annexus Group, a firm that specializes in product design. Janney Montgomery Scott is also looking into offerings.

The Financial Industry Regulatory Authority (FINRA) released Notice-to-Members 05-50, an August 2005 memo reminding broker-dealers of their supervisory duties with respect to indexed annuities. The memo was also intended to push firms to adopt procedures to adequately oversee that indexed annuity business. However, procedures on overseeing indexed annuity business can vary from one firm to another. Therefore, financial advisor or registered representative misconduct with respect to indexed annuities is a relentless compliance issue that broker-dealers face.

If you have suffered losses in an uncapped indexed annuity due to your broker’s unsuitable recommendation and/or misrepresentations, call Robert Pearce at the Law Offices of Robert Wayne Pearce, P.A. for a free consultation. Mr. Pearce is accepting clients with valid claims against financial professionals for unsuitable recommendations, mismanagement of accounts and/or other unauthorized and illegal conduct.

The most important of investors’ rights is the right to be informed! This Investors’ Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over , Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities, and investment law issues. The lawyers at our law firm are devoted to protecting investors’ rights throughout the United States and internationally! Please post a comment, call (800) 732-2889, send Mr. Pearce an email at pearce@rwpearce.com, and/or visit our website at www.secatty.com for answers to any of your questions about this blog post and/or any related matter.