The U.S. Securities and Exchange Commission (SEC) announced last week that it will allow brokers to sell variable annuities to investors by providing a simplified disclosure to investors about the features, fees, and risks of the investment. While the SEC’s stated goal (improving investors’ ability to make informed purchase decisions) is a worthy goal, the new rule may actually be a step backwards.
While the SEC claims that the changes permit the use of a “concise, reader-friendly prospectus,” we, as investor protection advocates, worry that, given the regularity with which variable annuities are the subject of abusive brokerage firm sales practices, this will simply allow brokers to omit important information during the sales pitch for a variable annuity.
Variable annuities are incredibly complex products often riddled with opaque terms and conditions, high annual fees, high surrender charges, and illusive tax benefits. In our experience, many advisors who sell them do not have a thorough understanding of the complexities of these annuities. It is not clear whether, or to what extent, providing a summary disclosure document could fully convey these complexities will lead to informed investor decision-making. In many cases, it is not reasonable to expect that even the best summary disclosure document will clearly convey key information in a way that most Main Street investors will be able to truly understand.
Under the new rule, detailed information about a variable annuity or variable life insurance contract must still be made available online, but the investor would have to demand to receive access to it. In our experience representing individual investors in cases involving these products over the past 20 years, very few people will make any such requests.