FINRA Closely Monitoring Exchanges from Variable to Fixed Indexed Annuities

Fixed indexed annuities are replacing variable annuities in many circles.  Some people are opting to buy fixed or indexed annuities from the start, while others are making 1035 exchanges from a variable annuity that they currently own.  FINRA is more closely monitoring these annuity exchanges, especially since broker-dealers are selling more indexed annuities than ever.  This information comes from Investment News’ “Fixed annuity sales receiving added scrutiny from Finra,” by Bruce Kelly and Darla Mercado.  Some of the main things FINRA is looking at are the clients’ costs and the disclosures given.  FINRA wants to make sure that clients are exchanging variable annuities for fixed indexed annuities for the right reasons and that they know any downsides associated with their 1035 exchange.

Many of the insurance companies that sell variable annuities have stopped offering living benefits or drastically cut down on their generosity.  This has caused an increased interest in fixed and indexed annuities from broker-dealers, who are looking to meet their clients’ need for living benefits.  In 2012, broker-dealers made up 8.9% of the fixed annuity market share.  That number increased to 11.4% in 2013.  The increase is one reason that FINRA has stepped up their monitoring of broker-dealer 1035 annuity exchanges.  FINRA says that companies must have the proper procedures and monitoring in place for these exchanges because they involve the sale of securities.  An executive vice president for FINRA said that this closer monitoring is necessary because the regulatory firm doesn’t believe that all companies have the proper controls and procedures in place.

Indexed annuity sales were $38.6 billion last year.  That was a 13.2% increase from 2012.  LPL Financial is the biggest independent broker-dealer.  Their fixed annuity sales increased significantly in the first quarter of this year, as did their commission revenue from sales of fixed annuities.  Fixed annuity commission revenue increased 70.8% from the first quarter of 2013 to the first quarter of 2014.  Their variable annuity sales were down 2.1%.  LPL says that their increase in fixed annuity sales is from indexed annuities and a new three-year fixed annuity product that has an attractive interest rate.  The company says that they have the proper procedures in place to deal with 1035 exchanges and customer information.

What concerns FINRA with these 1035 exchanges is whether or not clients are receiving the whole picture.  The FINRA rep says that there are added costs to the client when they make an annuity exchange.  She also points out that some clients are not informed about surrender charges they will receive if they are still in the surrender period of their variable annuity.  They want to make sure that clients are not told that their fees will decrease when the opposite is actually true.  FINRA is looking for full disclosure to clients, a cost-benefit analysis and quality documentation.

While variable annuities are securities products registered with the SEC, fixed annuities are not.  Fixed indexed annuities offer a combination of the two products, so there has been a lot of talk about how to monitor these relatively new annuities.  Indexed annuities have less risk and less potential return than with a variable annuity, they also have more risk and more potential return than with a fixed annuity.  It doesn’t look like FINRA is more closely monitoring large firms like Allianz Life who sell a lot of indexed annuities.  These large firms have already implemented procedures and controls with all of their annuity products.  Some smaller firms don’t have the same kind of monitoring in place, so FINRA is working to make sure that all clients making a 1035 annuity exchange are treated fairly.

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