The vast majority of households surveyed by the Insured Retirement Institute and Cerulli Associates say they are unfamiliar with annuities or have no opinion of them at all, which can be thought of as an untapped marketplace for advisers.
IRI and Cerulli Associates found that 35% of households were unfamiliar with annuities in 2009; 29% had no opinion of them. Other opinions included: 13% said annuities are too confusing/complex; 12% cited the expense of the product, 10% said they are good way to protect assets; 8% believed the insurance companies selling annuities are untrustworthy; 8% also believed annuities are a good way to generate income; and 7.5% said weak balance sheets will prevent insurance companies from fulfilling their contracts.
As investors are still relatively unsure about annuities, the survey found insurance companies’ greatest challenge is attracting new advisers to their products (28%).Communicating complex benefits riders was the next greatest challenge (25%), followed by differentiating products in a crowded marketplace (23%).Dealing with negative press coverage or negative perceptions of the insurance industry were viewed as far less of a challenge, with only 5% saying each was their greatest challenge.
By “increasing the awareness of the overall value proposition annuities can offer,” the insurance industry will see more advisers and investors begin to accept the place annuities have in a diversified portfolio, said Cathy Weatherford, President and CEO of the Insured Retirement Institute (IRI), in a news release.
The survey also found that most advisers (67%) decide to place their clients’ assets into an annuity to serve as retirement income.Fifty-eight percent use annuities as a method of principal protection, and 37% go with annuities for its tax deferral benefits.
The most effective methods for insurers to use to gain interest of advisers new to annuity business is to demonstrate how annuities can supplement portfolios (75%) and to provide training tools to show the value of annuities (75%), IRI and Cerulli concluded.
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Charles Schwab on Tuesday agreed to pay more than $119 million to
settle charges of wrongdoing in connection with the marketing of its
Schwab YieldPlus Fund.
A Securities and Exchange Commission (SEC) news release said Charles
Schwab Investment Management (CSIM) and Charles Schwab & Co., Inc.
(CS&Co.) made misleading statements about the fund and did not
establish policies to prevent the misuse of material non-public
information. Schwab also deviated from the fund’s concentration policy
without first getting the required shareholder approval, the SEC
alleged.
CSIM and CS&Co. agreed to pay a total of $118,944,996,
including $52,327,149 in disgorgement of fees by CSIM, a $52,327,149
penalty against CSIM, a $5 million penalty against CS&Co., and
pre-judgment interest of $9,290,698. Some of CSIM’s disgorgement may be
deemed satisfied up to a maximum of $26,944,996 for payments made within
the next 60 days to settle related investigations by FINRA or state
securities regulators, the SEC said
The agency also filed a federal court complaint against CSIM’s
former chief investment officer for fixed income, Kimon Daifotis, as well
as Schwab official Randall Merk, an executive vice president at
CS&Co. and was president of CSIM and a trustee of the YieldPlus and
other Schwab funds. The SEC alleges that Daifotis and Merk committed
fraud and other securities law violations in connection with the offer,
sale and management of the YieldPlus Fund. The SEC said it is continuing to
pursue its case against the two executives despite having reached a
settlement with the company.
“All financial firms and professionals — including large mutual
fund providers — must be vigilant in accurately describing the risks of
the products they sell to the public, especially the widely-held mutual
funds that are the bread-and-butter investments of retail investors,”
said Robert Khuzami, Director of the SEC’s Division of Enforcement, in
the news release.
(Cont...)
Claims of Low Risk
According
to the SEC, Schwab and the executives failed to inform investors
adequately about the risks of investing in the YieldPlus Fund. For
example, they described the fund as a cash alternative that had only
slightly higher risk than a money market fund.
The SEC found that
the YieldPlus Fund deviated from its concentration policy when it
invested more than 25% of fund assets in private-issuer mortgage-backed
securities (MBS). Schwab's bond funds, including the YieldPlus Fund and
the Total Bond Market Fund, had a policy of not concentrating more than
25% of assets in any one industry, including private-issuer MBS. The
funds violated this policy, and the Investment Company Act, by investing
approximately 50% of the assets of the YieldPlus Fund and more than 25%
of the Total Bond Fund's assets in private-issuer MBS without obtaining
shareholder approval.
Furthermore, according to the SEC, the
YieldPlus Fund's NAV began to decline, and many investors redeemed their
holdings as the credit crisis unfolded in mid-2007. While the YieldPlus
Fund's NAV declined, CSIM, CS&Co., Merk, and Daifotis held
conference calls, issued written materials, and had other communications
with investors that contained a number of material misstatements and
omissions concerning the fund. For example, in two conference calls, the
SEC said Daifotis made false and misleading statements that the fund
was experiencing "very, very, very slight" and "minimal" investor
redemptions.
The SEC also found that CSIM and CS&Co. did not
have policies and procedures reasonably designed — given the nature of
their businesses — to prevent the misuse of material, nonpublic
information about the fund. For example, they did not have specific
policies and procedures governing redemptions by portfolio managers who
advised Schwab funds of funds, and did not have appropriate information
barriers concerning nonpublic and potentially material information about
the fund. As a result, several Schwab-related funds and individuals
were free to redeem their own investments in YieldPlus during the fund's
decline, regulators alleged.
(Cont...)
FINRA Allegations
In
a related case, the Financial Industry Regulatory Authority (FINRA)
also announced Tuesday that it has ordered Charles Schwab & Company,
Inc., to pay $18 million to repay investors in YieldPlus. The $18
million consists of the $17.5 million in fees that Schwab collected for
sales of the fund, plus a fine of $500,000, both of which will have been
designated as restitution to customers.
FINRA's investigation
found that despite changes in YieldPlus' portfolio that caused the fund
to be disproportionately affected by the turmoil in the mortgage-backed
securities market, Schwab failed to change its marketing of the fund. In
written materials and in conversations with customers, some Schwab
representatives omitted or provided incomplete or inaccurate material
information relating to the fund's characteristics, risk and
diversification, and continued to represent YieldPlus as a relatively
low-risk alternative to money market funds and other cash alternative
investments that had minimal fluctuations in net asset value (NAV).