The Annuity Game

Ulli Uncategorized 2 Comments

While I don’t always agree with Paul Farrell’s viewpoints, he did write a nice piece about annuities called “Clip Job.” If you own an annuity, or are consider investing in one, you owe it to yourself to read the entire article. Here are some highlights:

Although I rarely write about annuities anymore, over the years I’ve built a huge file of “colorful” articles on annuities. “Colorful” is my metaphor for some juicy and brutal titles that sound more like they’re ripped from tabloids. The message is painfully clear: The press loves trashing annuities, year after year after year.

But what’s really striking is how the critics are still hammering away at the same old problems, suggesting that all the bad press, criticisms, lawsuits and piñata whackings have had little effect on changing the annuity industry’s bad behavior.

Indeed, sales have roughly doubled in a decade. And as InvestmentNews put it in a special report on insurance products last fall: “Acceptance of annuities seen to be on the rise.”

Don’t get me wrong, there really are honest annuity companies and brokers out there. And annuities do work for many investors: “We’re not condemning the product,” one senior executive at the Financial Industry Regulatory Authority, the securities industry’s “self-policing” agency, was quoted as saying in BusinessWeek. But “we have concerns about the way they are sold.”

Along with FINRA, however, there’s a vast patchwork of state agencies and insurance industry regulators that make effective policing tough.

In fact annuities have countless, hidden flaws that all too often remain undisclosed until it’s too late: excessive commissions, lower returns, payout delays, surrender fees and long lock-ins. Still annuity sales climb.

As BusinessWeek puts it: “Potential buyers can ignore the sales fluff and dig into the fine print to figure out if an annuity is right for them. But that can be a real slog.” Some prospectuses can run “over 500 pages, so you know why most buyers wind up relying on a sales spiel.”

The big reason annuities sell so well is simple: Sales commissions are lucrative for annuity sales agents, some as high as 14%. As a result, the industry attracts aggressive hustlers with questionable ethics preying on vulnerable customers, especially the elderly, a pattern that gives the rest of the industry a bad name.

Bashing annuities has been major league sport among independent experts who’ve analyzed them. Here’s a montage from my files over the years, about how bad things have been for a long time:

Smart Money: ‘Can’t get a bigger commission’

In “Ten Things Your Variable-Annuity Seller Won’t Tell You” you’ll hear that “legions of brokers, insurance salesmen and independent financial advisers are clamoring to sell them. Why’s that? ‘You can’t get a bigger commission for anything else these days’ … about twice what your broker usually gets for peddling a mutual fund.”

Bloomberg: ‘Good for one lady in Iowa’

“When I was in the insurance industry,” said finance professor and annuity expert Moshe Milevesky, “we used to joke that there probably was one lady in Iowa for whom the product was good.”

Wall Street Journal: ‘Treat them like blind 12-year olds’

In a critique of the “Annuity University,” one of their trainers tells salesmen the best way to sell to potential senior-citizen customers: “Treat them like they’re blind 12-year-olds.”

InvestmentNews: ‘Sellers are burning consumers’

“Too many sellers are burning consumers … buyers of variable annuities have no idea what they’re actually buying, and many have been lured into an inappropriate investment vehicle. … Many, if not most, elderly will see little or no benefit from a tax-savings strategy that can take 10 to 15 years to pay off.”

The story goes on featuring other ‘sales techniques.’ Over the years, I have been asked by many readers and clients about my view of annuities. Here are two facts I have found based on personal experience:

1. I have never met a client/reader who told me that he was happy with the annuity he or she owned. Au contraire; most asked for my assistance in getting out from under it.

2. All annuity owners I have come in contact with did not go out to buy an annuity. It was sold to them.

And that has been the rub. They were sold an annuity; they did not do the research and selected one based on their criteria and needs. My view is that, especially today, with instant access to the internet and just about all the information you could ever want, it has never been easier to spend a little time and do some annuity research to educate yourself. Whether you then choose to work with an agent, or contact an insurance company directly, is up to you.

Since I believe that there is never a reason to buy a “load” mutual fund, there is also no reason to ever pay a ridiculous “up front commission” to buy an annuity product.

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Comments 2

  1. I hope I am not like the lady in Iowa. Fidelity Retirement Annuity allows me to park money in sector mutual funds tax exempt. The cost above the maintenance fee is .25- with no insurance guarentee. I can periodically exchange funds at no additional cost as long as I watch the under 60 day redemption fee. There is no front load. I put $5000 in each sector. When one or more funds go over $5200, I move +$200 ea. to a money mkt. When they go down to $4800 or lower, I add +200 ea. from the money mkt. My understanding is, as long as I am trading under $5000 I avoid the frequent trader policy. I am a single mom enhancing my retirement package. Am I missing something? I watch the maintence fee passing on funds that extend beyond the $1 range. I am ahead so far, considering the market now. I use this “turtoise” approach with around 20% of my portfolio.

    Lady from “Houston

  2. I, too, own an annuity for the future guaranteed monthly income stream, as I came late to retirement savings. Signed, an editor on Wall Street who covers both mutual funds and annuities.

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