In America, ILAS is called a “variable annuity”, and it is despised by everyone who understands it (excluding the swindlers who create and sell it). If you try Googling the phrase “variable annuity rip-off“, you’ll find hundreds of articles damning the product, many published by well-known financial news organizations, such as Bloomberg, the Wall Street Journal, and Forbes. Personal finance guru Suze Orman angrily denounced it on CNN, saying “I hate variable annuities with a passion…I think variable annuities were created for one reason, and one reason only, to make the financial adviser selling you those variable annuities money.”
A classic Forbes article written in 1998, titled “The Great Annuity Rip-Off“, explains to readers, “A variable annuity is a mutual fund-type account wrapped in a thin veneer of insurance that renders the investment earnings tax-deferred. The tax deferral is just about the only good thing you can say about these investment products. Almost everything else about them is bad”. The article then goes on to explain that the previous year’s reduction in the capital gains tax rate to 20% practically wiped out the tax advantages of variable annuities. But stunningly, annual sales went up 16% to $85 billion.
“That tax change should have stopped annuity sales cold. The salespeople who push these things should have moved on to products more suitable for their clients, like plain old mutual funds. Shares of the leading variable annuity vendors — such as Hartford Life, Nationwide Financial Services and SunAmerica — should have collapsed.
None of these things has happened. Their shares are up 30% and more over the last year. What on earth is going on?
Its the old story: Annuities are sold, not bought.”
In other words, sophisticated investors spurn variable annuities. The products are almost exclusively sold by sleazy salesmen to uninformed consumers. In 2002, the Wall Street Journal published an exposé of “Annuity University”, a seminar where salesmen were trained how to scam seniors. According to Tyrone Clark, the seminar’s organizer, “You’ll waste time if you think you can impress [seniors] with charts, graphs, printouts or use sophisticated words…They buy based upon emotions! Emotions of fear…Tell them it’s like a CD — it’s safe, it’s guaranteed…Toss hand grenades into the advice to disturb the seniors…Tell them you can protect their life savings from nursing-home and Medicaid seizure of assets. They don’t know what that is, but it sounds scary…It’s about putting a pitchfork in their chest…You’re there to solve their problems, but you have to create those problems first. No problem, no sale…you tease them with the solutions…Show them their finances are all screwed up so that they think, ‘Oh, no, I’ve done it all wrong.’ This will make you money.”
Two months after the Wall Street Journal’s article, securities regulators filed a complaint aiming to shut down Annuity University. The complaint alleged “that Mr. Clark and his companies ‘recruited and trained associates specifically to target the elderly and to scare them into selling their securities holdings for the purposes of purchasing annuities with exorbitant commissions’…’In an effort to cloak their associates with legitimacy as financial advisers,’ the complaint said, Mr. Clark and his companies ‘fraudulently touted their financial planning skills … and used such specious titles as ‘Certified Elder Planning Specialists’ (‘CEPS’) to mislead the elderly and disguise the fact that the associates were insurance salesmen.'”
Reporting on a separate scandal, consumer expert Clark Howard informed listeners about the insurance company Allianz getting “slapped on the wrist” for ripping off the elderly. According to Mr. Howard, they were “selling them what I call ‘garbage annuities’, and they’re paying a 10 million dollar fine, which is nothing compared to the havoc and harm that annuities cause to so many people’s financial security, their tax bills, their lives.” Mr. Howard warns consumers to be wary of advisers pitching annuities, since, “There’s almost never a circumstance that an annuity is called for.”
In 2002, the capital gains tax rate in America was reduced to 15%. Bloomberg subsequently published an article titled, “Why Variable Annuities No Longer Make Sense“. According to the article, “Every time new U.S. tax legislation rolls around, certain investments…end up smelling like rotten eggs…The most pungent investment these days — much to the chagrin of the insurance industry — is the variable annuity. This vehicle combines an insurance product that pays a death benefit like a life insurance policy and allows investment in an array of mutual funds. The new tax law has made this largely an unnecessary instrument to own.”
“”Because variable annuities were often sold to unsuspecting investors who are trapped by the surrender charges that were levied within a decade of original purchase and locked into exorbitant annual fees, they’ve been the subject of numerous complaints to insurance and securities regulators.
The U.S. Securities and Exchange Commission, which rarely receives comments on insurance products, saw investor complaints on variable annuities nearly double from 2000 through 2002 — from 375 complaints to 686 complaints.
Now every regulator from the National Association of Securities Dealers to the National Association of Insurance Commissioners is cautioning investors about annuity perils.”
According to Kiplinger, “In 2005, the North American Securities Administrators Association, the trade group for state securities regulators, cited dishonest annuity sales practices as one of the top ten threats to investors…Agents often don’t explain investment risk, fees or surrender charges. Even more egregious are cases in which agents have forged signatures, withheld key disclosure forms and lied about fees and potential returns. And…some agents churn clients’ accounts — moving money from one annuity to another while earning an additional commission each time.”
So what do all these American media reports mean for Hong Kong, where it’s estimated that 75% of investment products sold to consumers are ILAS products?
Before I answer, I first need to point out that ILAS and variable annuities are different in one important way. Thanks to Hong Kong’s do-nothing regulators, ILAS products generally rip off consumers far worse than variable annuities do. Lock-in periods are longer and surrender penalties are higher. To take just one example, Standard Life’s Harvest 101 guarantees investors an almost 100% loss on the first two years of contributions to a 25 year contract. (The loss occurs through long-term administration fees, if not from a surrender penalty.) As far as I know, no variable annuity in America comes close to being this awful. According to the SEC’s website, a typical surrender penalty for a variable annuity is 7% during the first year, and the lock-in period is usually 6-8 years.
Compared with what’s happening in America, Hong Kong consumers are getting slaughtered.
If that’s not bad enough, the only potential benefit of variable annuities and ILAS for most consumers is the possibility to defer capital gains taxes, but Hong Kong citizens don’t pay any capital gains taxes! So, if a variable annuity is generally acknowledged to be a ripoff for Americans, it implies that ILAS is even worse for Hong Kong citizens.
I’ve said it before, and I’ll say it again: Hong Kong has been financially raped and pillaged by the insurance industry. The scoundrels who are responsible deserve a heaping dose of their own medicine.