A recent article in Investment News caught my attention. I didn't believe the headline, fewer investors read through a VA prospectus in 2012. How do you get fewer than none?
The article cites a poll conducted by the Insurance Retirement Institute and Cogent Research LLC. Participants had at least $100,000 in investable assets exclusive of real estate. According to the study:
- 14% claim to read the prospectus "most of the time"
- 3% say they "always" read the prospectus
- Participants who claim to do the reading, report that they actually read only 7% – 16% of the document
The variable annuity prospectus, in my opinion, is a perfect example of good intended regulation which hurts more than it helps.
The prospectus is supposed to provide an overview of the actual annuity contract so that prospective purchasers can make an informed decision before they buy. The document explains the details of the contract, the costs and fees, as well as the benefits. In variable annuities the prospectus also provides information about the various investment options known as sub-accounts.
A typical variable annuity contract may be 15 to 50 pages. It is a legal document. For those of us who are not attorneys, the prospectus is supposed to help us understand the contract.
But a typical variable annuity prospectus has ten times as many pages as the contract itself. It is not the legal contract, but it is still written by lawyers and not easily followed by a typical layman. Yet the law requires that every variable annuity purchaser first receive a copy of the prospectus. We are always compliant with the law, but many times I have had investors ask if I would just throw it away for them. Even more tell me that when the big heavy envelope comes in the mail, it gets tossed before it gets opened. The problem is so widespread that some advisors have written articles for their clients on which parts of the prospectus to read and which parts to skip.
Variable annuities can be complex investment vehicles. To fully understand them you need to understand the product as an insurance product, investment vehicle, and the potential tax implications. The intent of the rules and regulations are to provide that comprehensive information in one resource. But if the resource is no less complicated than the contract, are the regulations successful in protecting the consumer or the issuing company?
I am in favor of educating and protecting the consumer. To do that, I think variable annuity issuers should provide simple plain language summaries of their product; something an investor would actually read. Apparently I am not alone in my opinion. It is reported that as a result of this recent study the SEC is considering simplifying the VA prospectus.
Let's hope they do.