If you're a financial-services company, can there be a scarier sound than the footsteps of Elizabeth Warren approaching you? Senator Warren is famous on Wall Street and beyond for taking on banks and other financial companies, criticizing many of their practices, and advocating for us American consumers. She's the one we have to thank for the relatively new Consumer Finance Protection Board, too. Warren's latest target is the annuity industry, and she has some eye-opening concerns.

Annuities 101
Annuities can be wonderful things, generating valuable income in retirement, often for the rest of your life. There are many kinds -- immediate vs. deferred (paying you immediately vs. starting at some point when you're older), fixed vs. variable (certain payouts vs. payouts tied to the performance of the market or part of the market), lifetime vs. fixed period (paying until death or paying for a certain span of time), and so on.

Immediate or deferred fixed annuities are smart options for many retirees or those approaching retirement. But some annuities, such as indexed annuities, are more problematic and less suited to many people, charging steep fees and/or carrying hefty early withdrawal penalties. Very often, there are simply being better-performing and more flexible alternatives out there.

Another problem with many annuities is how they're sold. This is what has Elizabeth Warren's interest.

What's the problem?
Warren sent a letter to 15 major annuity-selling companies such as Prudential Financial (NYSE:PRU), Allianz SE (NASDAQOTH:AZSEY)American International Group (NYSE:AIG), TIAA-CREF, New York Life Insurance Co., and Lincoln National Corp. (NYSE:LNC), putting them on notice and inviting responses. Some snippets:

"A preliminary review by my staff reveals that annuity providers offer a vast range of perks -- from cruises to international travel to iPads to diamond-encrusted 'NFL Super Bowl Style' rings to cash and stock options -- to entice sales of their products. I am concerned that these incentives present a conflict of interest for agents and financial advisors that could result in these agents providing inadequate advice ... and selling products that may not meet the retirement investment needs of their buyers."

She noted that more than $235 billion worth of annuities are sold annually in the U.S., and that per a financial analyst, "Because the business is highly profitable, and the product difficult to sell, insurance companies pay obscenely high commissions."

"Annuity agents that are more interested in earning perks than in acting in their clients' best interest can place Americans' savings and retirement security at risk."

Warren concluded by asking for information on the incentives the companies offer, the total value of incentives given out, and company policies on incentives and conflicts of interest.

Some salespeople earn big rewards by selling you annuities. Photo: Dale Frost, Flickr.

How is the industry responding?
At least several of the companies Warren targeted indicated that they plan to comply with her requests.

Meanwhile, though, the American Council of Life Insurers has pointed out that the industry is quite regulated, adding, "State regulations include extensive product disclosure, strong suitability standards, as well as truth-in-advertising and credentialing requirements."

The Insured Retirement Institute noted that per its research, "nine in 10 annuity owners are satisfied with their annuity-based investment." (That may be true, but most owners may never know how appropriate for their needs their annuity is or whether their salesperson was working toward a vacation in Africa or a leased Mercedes by selling them an annuity.)

The Labor Department has its eyes on this issue, too, and has proposed new regulations that would require that brokers have a fiduciary duty, meaning they would be required not just to recommend suitable investments for customers, but to act in their best interest, recommending the best options. Warren and many others like this proposal, but not surprisingly, Wall Street opposes it. 

What to do
We're not completely powerless bystanders in all this. If you're in the market for an annuity, or anyone you care about, such as a parent, is, then proceed with your eyes open. Ask questions about incentives the salesperson stands to earn. Ask whether a given investment is merely suitable for you or is actually your best choice. Don't let conflicts of interest decrease the quality of your retirement.

And in the meantime, be on the lookout for developments in the world of annuity sales.