COMPLEXITIES OF ANNUITIES ESPECIALLY REGISTERED INDEX-LINKED ANNUITIES (RILA'S) DRAW ATTENTION OF SEC, SO HEADS UP, SIE CANDIDATES!
FINRA's Content Outline for the Securities Industry Essentials (SIE) Exam lists Annuities under Section 2.1.4, meaning that the SIE Exam covers these packaged product investments and asks questions about them. A few days ago, on the SEC website, I saw that the SEC is paying close attention to the complex structure and details of a particular type of annuity, named Registered Index-Linked Annuity (RILA), in its SEC OIAD Report on Activities—Fiscal Year 2023. Here is just one paragraph from this SEC publication in regard to RILA's. I intend to present more segments in future blogs from this SEC Report on RILA's.
"REGISTERED INDEX-LINKED ANNUITIES (RILAs)
"What Are RILA's and How Do They Work?
"RILA's are tax-deferred retirement savings vehicles that advertise potentially reduced market risk relative to investing directly in financial markets. Like many other retirement savings vehicles, money is first added to the overall vehicle and then the investor allocates that money to specific investments. Unlike many other retirement savings vehicles, because of their structure, withdrawal penalties, and other features, RILA's are complex, long-term, and illiquid products that typically require investors to make a significant number of complicated decisions with perhaps unintuitive consequences.
"Investors fund purchases of a RILA contract through premium payments; the initial minimum amount required to purchase a RILA varies substantially from $10,000 to $25,000. Premium payments and investment earnings are allocated by the investor to investment options. These investment options are shorter-term investments that often last 1, 3 or 6 years (a period typically referred to as the “investment term” or “term”); as such, these investment options may not individually last as long as the RILA contract itself. Thus, the investor may need to pick investments several times over the life of the contract."
"https://www.sec.gov/files/2023-oiad-annual-report.pdf"
From the above SEC discussion of RILA's, one sentence especially bears re-reading:
"Unlike many other retirement savings vehicles, because of their structure, withdrawal penalties, and other features, RILA's are complex, long-term, and illiquid products that typically require investors to make a significant number of complicated decisions with perhaps unintuitive consequences."
Note that this comment implies that the SEC and other financial authorities will not take lightly the wholesale recommendation of these RILA's to clients.
Candidates for the SIE should therefore study Annuities and the structure of RILA's and their complexity before taking the SIE exam, and especially before recommending them to clients after becoming registered.
Bob Eder discusses RILA's and Indexed Annuities in his Study for the SIE Exam. Here is a sample of Bob Eder's discussion:
Registered Index-Linked Annuities (RILA) (2.1.4)
A registered index-linked
annuity, unlike an EIA, does not offer a minimum guaranteed rate of interest.
However, a RILA provides protection on the downside if the indexed annuity
falls in value. In return, the RILA also normally includes a cap that limits how
much the annuity owner may earn. The downside protection is assured by the
presence of any buffers or floors. Thus, a RILA offers more protection against
loss than an EIA, but less potential profit because of the cap.
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