Essay About Variable Annuities Face New Test And Corporate Finance

Corporate Finance – Bond Analysis
Corporate FinanceNews Report #1Greg GlanderSource Material – Prior, Anna “Variable Annuities Face New Test from the Government” Wall Street Journal, 8 Feb. 2016A variable annuity in an investment vehicle, in reality an insurance contract, in which the insurance company guarantees a minimum monthly payment after the initial investment amount is accumulated, either through a lump sum deposit or payments over time. The “variable” part comes from the payments, which fluctuate based on the performance of the portfolio of investments that the annuity manager has chosen. Fixed annuities guarantee a fixed payment for the term of the insurance contract. Variable annuities are widely used for retirement savings programs. Under a new rule proposed by The Department of Labor, financial advisors and managers who promote and sell variable annuity products would be held to a “fiduciary” standard. The fiduciary standard means that the seller of the annuity has to act with his or her customer’s best interest in mind, avoiding conflicts of interest, and possibly losing out on income in the form of commissions. As it stands now, issuers of variable annuity products make commission on the front end based on the investment, and recurring income in the form of annual fees. In this model there is no real incentive for the manager to act in the best interest of the client, and in fact could potentially manage the annuity in such a way that damages the client but enriches the annuity seller. Under the new proposal, investors would pay smaller ongoing fees based on portfolio performance. These upfront commissions also lead to agents selling these investments to consumers who may not be best served by them. Companies that aggressively market and rely on variable annuities could be significantly affected by the new regulation, while those with a more diversified portfolio will be less so.