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.
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).
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.
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®.