Jack Marrion heads a research consultancy focused on the annuity industry and John Olsen is a practicing financial advisor.
Both Jack and John have previously published books that are widely recognized as authoritative resources for the industry.
I had an opportunity to speak to them about their most recent book titled Index Annuities: A Suitable Approach (click here to visit the website for the book).
Annuity Digest: Why did you decide to write and release the book at this point in time?
Jack Marrion & John Olsen: As you know, there is a great deal of interest in index annuities and a great deal of misinformation about them. We wanted to provide correct information, without bias. In addition, there is much current debate over the standard of care to which insurance agents selling products ought to be subject. We included three chapters dealing with suitability, as it relates to annuity sales.
Annuity Digest: Who is the intended audience, and what do you hope to accomplish with the book?
Jack Marrion & John Olsen: This book was written for any advisor who either sells or helps clients make decisions regarding index annuities. We hope that advisors who have read our book will be better able to advise clients about these products. We want to make clear that we are not “for” index annuities. Neither are we “against” them. Like all financial products, an index annuity is just a tool. In some situations, it’s the right tool; in others, it’s not.
Annuity Digest: The book makes some comparisons between index annuities and other annuity types. What other types of annuities are compared, and what are the high-level conclusions—particularly given the current interest rate and equity market environment?
Jack Marrion & John Olsen: While we compare and contrast different types of annuities, both immediate and deferred, we want to make clear that the various types are different because they’re designed to do different jobs. And it’s important to note that a comparison of two different types of annuities is not the same thing as asking which type is “better”. We don’t, for example, attempt to answer the question of “which is better, a variable annuity or an index annuity?”, because that question is unanswerable without a lot more information about the prospective buyer’s goals, situation, risk tolerance, and other factors.
Annuity Digest: Is the negative press and regulatory scrutiny that surrounds index annuities warranted? If so, is it the financial advisors or the products themselves that are the main drivers of these criticisms?
Jack Marrion & John Olsen: There are lots of horror stories about index annuities. Some have foundation in fact; others are the result of misinformation or misunderstandings. In our judgment, the sound reports of “bad annuity sales” are usually not so much about bad products as about bad sales practices. That said, it’s inaccurate to suggest that an annuity complaint must be due either to the product’s being bad or the agent’s selling it badly. Index annuities can be very complicated products and not all marketing material is as clear as it could be.
Annuity Digest: The book has a chapter titled “Hypothetical and Real Returns.” Can you provide the five minute overview of this chapter?
Jack Marrion & John Olsen: The chapter shows actual returns of a broad spectrum of over 300 index annuities returns since 1997. The main thing it demonstrates is that, even with effective participation as low as 20% to 30% and never including reinvested dividends, index annuities have not only been competitive with other vehicles, but have often had higher returns. The hypothetical section illustrates how to analyze hypothetical returns to determine bias.
Annuity Digest: Can you share your thoughts on the current suitability and the fiduciary standard—both your opinions on the topics and what you think is likely to play-out on the regulatory front this year?
Jack Marrion & John Olsen: This is a critically important subject, and one that will impact every advisor who sells any kind of financial product. At this point, no one knows what the SEC’s report to Congress will recommend. We may see a “unified” fiduciary standard, a “disclosure based” new standard, or something else. Even after the SEC makes it call, we won’t know all the implications. The one thing we can be sure of is this: We’re going to see changes. Some of them are already in the works. As states adopt the 2010 NAIC “Suitability in Annuity Transactions” Model Regulation or insurers adopt its provisions, agents will be compelled to complete a 4 hour course in annuities, and suitability of any annuity sale will be determined using new rules, including the 12 factors cited in that Model Reg. We cover this extensively in our book.
Annuity Digest: In light of the above question, can you discuss the book chapter titled “Suitability?”
Jack Marrion & John Olsen: In that chapter, we discuss the current regulatory environment, including that NAIC Model Regulation, the value of tax deferral enjoyed by deferred annuities and some of the myths about it, the important and widely misunderstood “source of funds” issue, and several compliance issues.
Annuity Digest: Can you also discuss the chapter titled “When is an Index Annuity (or Any Annuity) Appropriate?” Specifically, what are the main factors that determine whether an annuity is appropriate for a given individual?
Jack Marrion & John Olsen: In that chapter, we look at annuities as tools and examine them in the light of the tasks that they can, cannot, should, or should not, be called upon to perform. It’s a very utilitarian approach. We look at other ways to consider the question of appropriateness, including “principles-based” and “rules-based” approaches, suggest some “bright line” tests for determining suitability, and conclude with a discussion of how to help seniors make sound decisions.
Annuity Digest: The number of insurance companies offering index annuities seems to be shrinking. Is this a positive or a negative for the consumer?
Jack Marrion & John Olsen: It’s a temporary thing. Back in 2000, there were 45 index annuity carriers. During the next two years bond yields fell, option costs rose, and the number of index annuity carriers dropped to 29 by 2002. In 2008 there were almost 60 carriers and as the pricing environment became less attractive some carriers again left the market. When pricing improves more carriers will again enter the market.
Annuity Digest: Can you provide a glimpse of the future and tell us what index annuity distribution will look like five years from now?
Jack Marrion & John Olsen: Wall Street firms and advisors will sell the majority of index annuities.
Annuity Digest: Thanks very much for your time.
