Given the following information: A variable annuity is a tax-deferred retirement

Question

Given the following information:

A variable annuity is a tax-deferred retirement vehicle that allows you to choose from a selection of investments, and then pays you a level of income in retirement that is determined by the performance of the investments you choose. The market risk would be if the money invested in the mutual funds is not able to generate required rate of return due to bad market conditions, then it will be difficult for the banks to honor the claims of the customers. Early withdrawal risk occurs if the customers want to withdraw their funds early, the banks will have to change their investment strategies thereby impacting the end returns. A fund switch occurs if a customer wants to change the kind of investment fund the bank must have provisions for the same .

In order to minimize risk banks must make provisions for extra funds as a cushion against the adjustments or shortfall. The banks can enter into derivatives contract to hedge the investment portfolios, like total return swap contract .

Do  you think it is important that the customers should also be informed that the investment products are not a deposit or other obligation of a depository institution and not guaranteed by the offering institution?

Explanation / Answer

Yes it is important to let investors/customers know about the risk they are taking by purchasing any investment products. As mentioned in the information investment products suffer from market risk, early withdrwal risk etc.

Market risks are beyond control of anyone so returns are not guranteed like a deposit. Risk and returns are related. Higher risk ensure high returns and low risk provides low returns. As a fair business practice customers must be informed that investments are subjected to various risk and returns are not guranteed or subject to conditions.

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