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Annuities: The Good, The Bad & The Ugly Part 2

Annuities: The Good, The Bad & The Ugly Part 2

Clear Direction for Your Retirement:

Annuities: The Good, The Bad & The Ugly Part 2

In this series, we’re looking at the Good, the Bad and the Ugly about annuities but in reverse order. I stated last month that bad experience doesn’t necessarily equate to bad financial products; however, this month we’ll look at the “Ugly” of the annuity world. 

In part one last month, I wrote about the need for making financial decisions and especially financial product decisions without blinders. That means being educated transparently and fairly about the product at hand and by someone who is required to do so, namely, a fiduciary who has your best interest in mind. Furthermore, the decision should be based within the context of a broader financial plan that is unique to you. Typically, the bad experiences with any annuity products are due to a lack of the aforementioned items as well as the advisor not setting proper expectations with the client. 

In fairness of disclosure, I do believe some products are a better alternative as compared to others given the goals needed but at the core of the issue, I believe investors should have the choice and freedom to utilize the product they believe is best for their situation but be educated about the pros and cons of said choice. Additionally, annuities are not appropriate for everyone regardless of the type.

The Ugly

Now, it is here that I want to introduce the “Ugly” of the annuity world – Variable Annuities 

(VA’s). I’m sure many of you have seen ads by Ken Fisher of Fisher Investments who man-ages in excess of $200 billion in investment assets. He’s famous for his “I hate annuities” ads. Interestingly, the majority of issues he takes are with VA’s (but not exclusively so)

 and I agree with him in many respects (we’ll  discuss some of these issues next). However, even more interesting is the fact that VA’s are investment products (meaning you retain the market risk as annuity owner) and one of the primary competitors to managed market investments in the planning industry. If money is being invested in the market through a VA (not offered by Fisher), it’s not going to Fisher’s bottom-line fee-based money management. His concerns may be well placed regarding VA’s but in my opinion not completely trans-parent. Always follow the money.  

In fairness to Fisher however, he and I agree on the ugliness of VA’s but there are other annuity options out there (which we’ll discuss next month). I believe there are simply better ways to accomplish investing in the markets 

(thus taking market risk) without the two primary downsides found in a VA. Those are complexity and costs (expenses). 

Complexity

As a security product, VA’s are sold by prospectus. A prospectus is a preliminary printed statement describing an investment that’s given to investors. Quite literally, some of those VA prospectuses are over 1,000 pages long (no, that is not a typo). If you need a 1,000 pages to describe the complexity of your product, you’re too complex. There are much better ways to accomplish anything from asset accumulation to guaranteed income that don’t require a dictionary of explanation. Also, while I may not agree with Ken Fisher’s compensation transparency on annuities overall, he’s spot on regarding complexity and our next “Ugly” trait.

Costs (Expenses/Fees)  

I have been evaluating VA products for many years. In all that time and with the myriad of products I’ve reviewed, it is rare that I’ve found one that accomplished anything that couldn’t be accomplished elsewhere (outside the VA) with less risk and less expense to the owner. That didn’t always mean that the owner should get out of the product, sometimes you’re too far into a bad dream to wake up without screaming. 

The costs inside VA products are typically a summation of investment fees (cost of the mutual funds provided), mortality and expense charges of the contract (M&E) and rider fees 

(such as guaranteed income or death benefit riders). On average, the contracts I’ve evaluated have typically had total fees and expenses in the 2-5% range. Most hover around 4% all-in. That means, you’ve got to earn around 4% annually just to break even and begin to make any money. This typically causes VA owners to take unnecessary market risk to 

“keep up” and that’s not a good combination. Furthermore, there’s rarely a fiduciary giving them true investment advice or guidance as to  what they really own and how and when to use it appropriately.   

While there are obviously folks who are happy with their VA’s, my experience is that most don’t have any idea what they own, how expensive it is, how it works and when to use it. You are free to choose the product you desire but you are also free to wear the consequences. Choose wisely and get some counsel. We’ll cover alternatives to VA’s and the bad and good of annuities in our next couple of articles.  

I hope this is helpful to your retirement journey. Call us, come see us or visit us at www.woottonfinancial.com, we’d love the opportunity to help address your questions and concerns and provide you Clear Direction for Your Retirement®.

Investment Advisory services offered through Game Plan Advisors, Inc., a registered investment advisor. Insurance services offered through Wootton Financial Group, Inc. Game Plan Advisors, Inc. and Wootton Financial Group, Inc. are affiliated through common ownership. Neither Game Plan Advisors, Inc nor Wootton Financial Group, Inc. offer legal or tax advice. Please consult the appro-priate professional regarding your individual circumstance. Not associated with or endorsed by the Social Security Administration or any other government agency.
Please consider the investment objectives, risks, charges, and expenses carefully before investing in Variable Annuities. The prospectus, which contains this and other information about the variable annuity contract and the underlying investment options, can be obtained from the insurance company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
The investment return and principal value of the variable annuity investment options are not guaranteed. Variable annuity sub-accounts fluctuate with changes in market conditions. The principal may be worth more or less than the original amount invested when the annuity is surrendered.
Fixed Annuities are long term insurance contacts and there is a surrender charge imposed generally during the first
5 to 7 years that you own the annuity contract. Withdrawals prior to age 59-1/2 may result in a 10% IRS tax penalty, in addition to any ordinary income tax. Any guarantees of the annuity are backed by the financial strength of the underlying insurance company.
Indexed annuities are insurance contracts that, depending on the contract, may offer a guaranteed annual interest rate and some participation growth, if any, of a stock market index. Such contracts have substantial variation in terms, costs of guarantees and features and may cap participation or returns in significant ways. Any guarantees offered are backed by the financial strength of the insurance company. Surrender charges apply if not held to the end of the term. With-drawals are taxed as ordinary income and, if taken prior to 59 ½, a 10% federal tax penalty.  Investors are cautioned to carefully review an indexed annuity for its features, costs, risks, and how the variables are calculated.

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