Annuities, Life Insurance and Regulations
A new regulation and a push to change another rule could impact both what annuities are offered to you and who can sell you life insurance.
First, InvestmentNews reports that nine states have adopted the National Association of Insurance Commissioners’ annuity suitability model. (All states are anticipated to eventually adopt it.) This regulation calls for more stringent state-required annuity exams and courses for advisers. A greater focus on making sure the offered products are suitable for the specific client being pitched is among the goals of the new rules.
Financial advisers will have to take a one-time general annuity course and specific training for each product they sell. Since the application of the rules may vary from state to state and from annuity provider to annuity provider, there is some concern about unintended consequences. The biggest fear is that some advisers work only with the largest annuity providers (e.g., Prudential, MetLife, Jackson National Life) and avoid offering products from smaller providers. There is no evidence that this has happened yet, however.
Additionally, Primerica is pushing to have changes made to life insurance state licensing exams. The company is claiming that the current exams are too difficult and may be racially biased, according to an article in The Wall Street Journal. Whether the company’s claims have validity is a subject of debate. The article cited a Virginia insurance commissioner as saying that 38% of Primerica’s recruits passed the state’s licensing exams for the two years ended June 2010. Other training programs had pass rates of 51% to 83%.
Regulatory compliance is important and we support reasonable steps that protect the interests of individual investors. Regulations, however, are no substitute for asking questions. You should ask as many questions as needed to ensure you fully understand the investment offer being pitched, including all fees, risks and terms.
Sources: “Annuity Exam Overload Could Prompt Product Pruning,” by Darla Mercado, InvestmentNews, April 17, 2011; “Insurer Pushes to Weaken License Test,” by Leslie Scism, The Wall Street Journal, April 25, 2011.
Bloggers: U.S. Economy Is “Uncertain”
Economic bloggers, when asked to describe the economy, used the word “uncertain” most frequently in a Kauffman Foundation survey. The organization asked many of the top 200 economics bloggers in mid-April 2011 for their views of the economy.
Some of you may remember that we wrote about the inaugural survey last year, in the March 2010 AAII Journal. A bit more than a year later, we thought it would be interesting to check back. Please note that the comparisons are not precise, as only around 50% of respondents have participated in all of the quarterly economic surveys.
The overwhelming majority of respondents (81%) assess U.S. economic conditions as being “mixed” in this year’s survey. A larger number (16%) describe the economy being “strong with uncertain growth” than those who believe the U.S. is facing another recession (4%). In January 2010, 59% thought conditions were “mixed” and 23% though the U.S. was “facing recession.”
Sixty-three percent currently think the U.S. economy is performing about the same as indicated by government statistics, while 32% think the economy is performing worse. Last year, 48% thought the economy was performing worse than the statistics implied. Few think the economy is doing better: 5% in April 2011 and 6% in January 2010.
Another ongoing trend is that most economic bloggers think the government is too involved in the economy: 64% now and 71% in January 2010. When recently asked what the government should do, 84% suggested reducing “regulatory burdens and fees on new firm formation.”
As for what is forthcoming over the next three years, more than 70% of respondents expect global output, interest rates, inflation and employment to rise. Just 5% expect interest rates and 5% expect inflation to increase strongly. (Four percent thought inflation will decrease or decrease strongly.)
Keep in mind that many economic bloggers read other economic blogs, thus creating the potential for a herd mentality. Similarities between forecasts have been well-documented for corporate earnings projections, and economists are influenced by the same human factors as stock analysts. Thus, while the survey’s responses are interesting, they are not a precise analysis of current or likely future conditions.
Source: Kauffman Economic Outlook, Second Quarter, 2011.
Nine Stocks With Big Gains
The last 10 years may have not been friendly to stock investors, but that does not mean that there weren’t opportunities to realize big gains. Last month, an article on MarketWatch.com by Jeff Reeves of InvestorPlace.com identified nine stocks that have appreciated by more than 900% since September 11, 2001.
Those stocks are:
- Apple (AAPL), +3,930%
- Amazon.com (AMZN), +2,120%
- CNOOC Ltd. (CEO), +1,140%
- Green Mountain Coffee Roasters (GMCR), +2,840%
- HMS Holdings (HMSY), +4,670%
- IMAX (IMAX), +3,390%
- Intuitive Surgical (ISRG), +1,830%
- F5 Networks (FFIV), +1,170%
- Priceline.com (PCLN), +1,530%
Though the returns are eye-popping, what is really significant are the business models behind the price increases.
Apple launched its iPod music player in October 2001. The product was followed by the company’s iTunes store, the iPhone and, most recently, the iPad. In addition, the company has built a huge business offering applications, music and movies. This combination has helped create a process for generating additional sales from hardware sales and built a loyal customer base.
Green Mountain Coffee Roasters and Intuitive Surgical both created markets for themselves by offering products that fulfill needs. Green Mountain Coffee Roasters’ Keurig coffee machine is popular for its no-mess ability to quickly brew a single cup of coffee. Intuitive Surgical’s da Vinci robotic system assists surgeons with minimally invasive operations.
CNOOC Ltd., F5 Networks, Amazon.com and Priceline.com have benefited from targeting the right markets. CNOOC has been a big beneficiary of China’s growth and F5 Networks has profited from the rapid growth of the Internet. Amazon.com and Priceline.com managed to succeed where other online firms failed and are profiting from consumers’ willingness to shop online.
In all nine cases, there was improvement in the revenues that helped drive the price higher. Though speculation can drive stock prices higher over the short term, it is the company’s business model and management’s ability to steer the company in the right direction that impacts long-term performance. This is why it is always important to look at a company’s underlying fundamentals when analyzing the prospects for a stock.
Source: “9 Stocks Up Over 900% Since Sept. 11, 2001,” by Jeff Reeves, MarketWatch.com, May 5, 2011.
From the Bookshelf
“Investors always have a scenario in mind and information serves to confirm or contradict that scenario,” writes Paul Azzopardi in “Behavioural Technical Analysis: An Introduction to Behavioural Finance and Its Role in Technical Analysis” (Harriman House Ltd., 2010).
In his book, Azzopardi details several concepts of behavioral finance and how they influence the decision to buy, sell or hold. A primary concept throughout the text is that investors do not act in a rational manner. Rather, as he puts it, “They sometimes do the unexpected, either willfully, inadvertently or out of habit.”
Among the less rational things that investors do is reject reality, particularly new information that contradicts current beliefs. This can lead to anchoring and adjustment bias, where investors believe a stock is worth one price even if it is trading at a completely different price.
Azzopardi does a good job of explaining the various concepts of behavioral finance and showing how these concepts result in temporary lower (support) and upper (resistance) price limits for stocks. However, the best application of his text may be as a tool for monitoring one’s own potential mental mistakes.
Ben Stein and Phil DeMuth provide suggestions for diversifying your portfolio in “The Little Book of Alternative Investments: Reaping Rewards by Daring to be Different” (John Wiley & Sons, 2011). Their thesis: If stock market returns are likely to be below their historical averages over the next several years, investors should seek to add “a higher degree of stock market de-correlation.”
Stein and DeMuth suggest investors start by moving 10% of their stock holdings into commercial real estate—via real estate investment trusts REITs—and commodities. They then suggest allocating an additional 10% of stock holdings into low-cost mutual funds and exchange-traded funds ETFs that mimic hedge fund strategies.
The writing is interspersed with touches of humor. The topics are serious, however, and the authors deserve credit for bluntly addressing the risks and expense of many investments. They also, correctly, advise investors to focus first on getting their stock and bond allocations right before venturing into alternative strategies.