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Variable annuities, invariable gullibility


VARIABLE ANNUITIES - investments that combine market risk and a life insurance guarantee - are on the hot seat again.

The regulatory wave that in recent years has swept over Wall Street analysts and mutual fund market-timers appears to be headed to sales practices and pricing of variable annuities.

But this time it will be difficult for ordinary investors to express shock and awe.

Few investors knew the extent to which brokerage analysts shilled for favored companies.

Fewer still understood how mutual funds were manipulated, at their expense, to profit from discrepancies in prices of underlying securities.

By contrast, the press has inveighed for years against variable annuities. In its coverage, Forbes magazine asked: "How gullible can investors get?"

Nonetheless, annual sales of variable annuities, as measured by the National Association of Variable Annuities, increased last year by 9.9 percent, to $126.4 billion.

Sales of equity mutual funds, by comparison, declined 5.7 percent, to $847.8 billion, according to the Investment Company Institute. Variable annuity sales at banks climbed 44 percent last year, to $18 billion, said James McIntyre, counsel to the American Bankers Insurance Association.

A report by the Securities and Exchange Commission and NASD (formerly the National Association of Securities Dealers) said "high commissions, typically above 5 percent for variable annuities, help drive sales of these products."

"The No. 1 issue is suitability," said Mary Schapiro, NASD vice chairman.

"Variable annuities are being sold to people for whom they are not suitable" in terms of multiple fees and the many years required before they can become reasonable investments.

Critics attribute the latest spotlight on annuities to efforts by the federal government and industry self-regulators to appear vigilant, in competition with consumer protection initiatives by New York Attorney General Eliot Spitzer.

"There is some sense that maybe this [joint SEC-NASD report] was issued to get something out in the public so the SEC and NASD are not beaten to the punch by Eliot Spitzer on an issue," said Donald Walters, deputy director and general counsel of the Insurance Marketplace Standards Association, a group of life insurance companies formed in 1996 after an earlier outpouring of complaints about the sales of annuities.

As the financial-services industry attempts to get its hands on the assets of an ever-aging population, variable annuities bear extra scrutiny.

As a rule of thumb, the older and richer you are, the less useful these products are for you. But if you are old and not rich, they can be a disaster.

The insurance feature of annuities has at least one advantage, said Christine Courtnage, senior vice president at Bank of America. Unlike other savings, money in an annuity may be untouchable by creditors.

"The only reason I bring it up anymore is from an asset protection standpoint, for somebody in a very high-risk situation, somebody who is an obstetrician or neurologist," Courtnage said.

If you fail to read and understand the fine print of an annuity contract, you're the one guilty of malpractice.

Bill Barnhart is a columnist for the Chicago Tribune, a Tribune Publishing newspaper. E-mail him at

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