Have you ever considered why an industry that offers dependable transfer-of-risk focused solutions to those interested in protecting their retirement assets can generate so much hate? The industry being referenced is of course the Annuity Industry, which somehow has many people bashing it….many of which are not even exactly sure why after getting past the “annuity hater talking points” described further in this article. So why is the annuity industry receiving such flack? Is it justified? Who is spreading the sour milk?
First, this article is very different than what we typically publish (educational articles about annuities and retirement income planning from independent annuity advisors across America). This article is more of a public service announcement which sheds some light on a very real and troubling problem that is rearing its ugly head in retirement planning communities across the country. Further, it is most useful to you (plus your friends, family, and community for that matter) if you take action and apply this simple lesson out in the real world.
Please know that this article is not an attempt to make readers think that the entire annuity industry is made up of 100% perfect sales associates who utilize purely ethical sales practices (this another very real and serious issue will be addressed in a separate article). The “annuity hater test” described below simply explains an easy, common sense approach that pre-retirees and retirees can utilize to identify who to rely upon for unbiased retirement planning guidance, and more importantly….who to avoid. This is not being written to belittle those who do fail this innocent test. In fact, our belief is that the massive force behind the prevalence of annuity hating stems from our basic human nature to be biased towards whatever we’re most familiar with….not from malicious intentions.
So what is this innocent test that is supposed to uncover a person’s true bias against the annuity industry? Well, it’s simply an inconspicuous 6 word question that can be extremely telling if genuinely asked to whoever you are relying upon for retirement planning guidance….or whoever you are thinking about relying upon for guidance.
Here is the magic question: ”What are your thoughts about annuities?”
The answer to this simple question will show if the person of interest is able to overcome human nature and give unbiased retirement planning guidance. Most troubling of all is that many financial advisors who were trained in the Wall Street world blatantly fail this simple test, and this is a significant reason why the annuity industry has received so much scorn in both investment and retirement planning communities across the country.
So how can someone fail such simple test consisting of only an open minded question you’re likely wondering?
Note: Since Wall Street focused advisors are typically the most blatant in displaying their bias against annuities, we’ll use the term “Wall Street advisor” to describe the person of interest being tested for overall simplicity going forward.
The Wall Street advisor that you test will pass or fail very quickly and without having any idea their bias is being examined. Here’s how it works….if the Wall Street advisor actually starts listing negative attributes of annuities without specifying any particular types of annuities in an attempt to dissuade you from the word “annuity” or “annuities”, then the Wall Street advisor immediately fails….he or she has failed to provide you factual information, so you’ll be best served looking elsewhere for unbiased retirement planning guidance. It’s really that simple.
Here’s why someone who bashes the word “annuity” with specific negative attributes can be accurately labeled as an annuity hater….the word “annuity” is simply an umbrella term for a broad group of products that serve a wide array of customized purposes. What is true for one annuity product type is often completely false for another. For example, a Multi-Year Guarantee Annuity (MYGA – referred to by many as the “CD Annuity”) is almost completely different from a Variable Annuity. MYGAs give owners the ability to get known, fixed rates of interest for short durations (just like CDs) and they have very low commissions with no fees due to their simplistic design. Variable Annuities, on the other hand, more closely resembles Wall Street style investing by providing owners with upside potential based on underlying assets similar to mutual funds while most often charging annual fees and no commissions. Variable Annuities actually require the sales associate to have a securities license to sell them given their close equivalency to investing. As you can see, the annuity spectrum of product types spans from very safe CD-like offerings to more risky investment-like offerings, so trying to attach specific negative (or positive) attributes to the broad-based umbrella term of “annuity” is far from being transparent to those looking to truly assess their options.
Bonus question!!! If you want to have fun with a confirmed annuity hater who just failed this simple test, be sure to ask him or her the following question: “What are your thoughts about investments?” This one will likely get a very different response. Most likely, the annuity hater will be more energetic and respond to your question with questions of his/her own asking for more clarification. Or, he/she will break down the umbrella term of “investments” to its various segments like stocks, mutual funds, CDs, etc… and explain pros and cons of the different types of investments.
Given the wide variety of investment offerings available out on the marketplace, anyone would of course sound ridiculous trying to talk you into or out of an umbrella term like “investment”, right? Well, this same premise holds true to the “annuity” question, yet, it is shocking how many Wall Street advisors are out there completely misrepresenting the annuity industry due to the lack of emphasis their Wall Street focused mentors and trainers provided to them on annuities while they were learning the ropes.
So what exactly do these annuity haters typically say about “annuities”? Are their talking points valid?
Most Common Annuity Hater Talking Points:
- “Annuities are way too expensive….their high fees and high commissions make them uncompetitive with managed portfolios.” Their argument that annuities are full of high fees and commissions is false on multiple levels. First, some product types have very low commissions with no fees at all, so this statement is a complete misrepresentation of the annuity industry as a whole. For instance, product types like Single Premium Immediate Annuities (SPIAs) and Multi-Year Guaranteed Annuities (MYGAs) have ZERO fees and provide insurance agents with commission levels that are often a fraction of what real estate agents make for helping you sell your house. Further, the product type known for high fees (variable annuities) often have very low (if any) commissions….and the product type known for high commissions (Index Annuities….aka hybrid annuities) charge owners with fees only when the owner elects to purchase added benefits called riders….which are purchased to address a specific and targeted need of the owner. Conclusion – terribly misleading and factually incorrect talking point.
- “Annuities provide lower returns than what you can get in mutual funds or managed portfolios.” This argument is true, but that should be blatantly obvious. Annuities were not designed to compete with Wall Street’s emphasis on Growth….they are designed to provide owners with a means of modest returns while focusing on protection from significant risks to retirees such as market uncertainly and life longevity (outliving ones assets). Given the transfer-of-risk (insurance focused) benefits that annuities provide to their owners, market based investments of course have the ability to obtain a higher growth rate. The core value of most annuities is their ability to minimize the potential loss to their owners (often completely shielding their owners from any potential loss). If it was possible for any entity to offer guarantees while also providing returns comparable to Wall Street, then Wall Street would be the ones offering guarantees. Conclusion – inconsequential argument….an apples to oranges comparison.
- “Commissions on annuities are way too high….this presents a conflict of interest between you and the insurance agent.” At first glance, this argument seems to carry some weight assuming the annuity hater specifically refers to the annuity type that actually does have high commissions (index annuities….aka hybrid annuities). However, the key clarification to this very common talking point is rarely made causing many people to falsely believe that all annuities provide high commissions to agents/advisors. Moreover, this argument fails to hold true when actually analyzing the numbers….for instance, this argument is often presented to an investor to imply that an insurance agent who sells them an index annuity will receive more income than a fee-only advisor who makes a small amount on an annual basis based on assets under management. The truth is often is the other way around when you consider the durations of the proposed solutions. The only annuities carrying high commissions contractually require the funds to be held in the annuity for long durations….often 10 or more years with a high probability of the policy getting annuitized….meaning that the funds would be held in place for 20+ years in many cases (a 10-20+ year solution). These long-term index annuity contracts often carry commissions in the 5% to 8% range which does seem high given many are paid up front. However, a fee based advisor typically would receive more overall income from their small annual fees assuming the assets stay under their purview for an equivalent duration of time. Many fee-only advisors receive annual fees of half percent to even a full percent of the assets under their management, so their solutions often generate a much larger overall income when you analyze the numbers using apples-to-apples durations (10 to 20+ years). Most importantly, make sure your overall decision is based on what a proposed solution does for you….not what it does for the sales associate. If for some reason this does cause you discomfort, just ask the sales associates how they get paid and do the arithmetic. Both sides provide value and of course have to earn a living, so there should not be any issues with them letting you know how they get paid. Conclusion – argument is misleading, but it shouldn’t even be a factor in the first place.
- “The very long surrender periods with steep charges in annuity contracts are gimmicks to make sure the Insurance Company wins and you lose.” Although overly dramatic, the statement is partially correct. Insurance companies of all kinds of course must bring in at least as much as they dish out, otherwise, they wouldn’t be able to offer guarantees and would quickly be out of business without being able to fulfill their contractual obligations to you. The surrender periods are not used as a means for them to make an easy profit….they are there to help ensure that you hold up your part of the contract (yes, serious contracts go both ways) because they heavily rely on the duration that you promised when signing the contract to maximize the results for all parties. If you are not comfortable making long term commitments with portions of your retirement assets, then just research offerings that have shorter periods to see if any are suitable to your needs (yes, many have short periods and some even promise that you can pull all of your money out at any time without incurring any charges). Overall, the core value of any type of insurance is its ability to protect you as an individual from a specific risk using their fine-tuned art of pooling risks across large groups and utilizing institutional pricing in their long-term planning strategies. You of course don’t buy your car or health insurance using analysis metrics that you’re going to get an annualized return similar to what you could get on Wall Street….you do it to protect yourself from significant risks you’re exposed to like a serious car crash or health issue, and the actual return for both sides is fully dependent upon uncertain events that may or may not take place in the future. Annuities are designed to offer you customized levels of protection from significant risks like a large market downturns or living longer than your retirement assets can support. Conclusion – overly dramatic ploy to pull you away from the fact that annuities are protection-focused…best utilized to directly address specifics risks that you are faced with in a customized way.
- “Annuity contracts are only good for sucking in your money without ever dispensing it back.” This argument can be quickly squashed by the fact that annuity types like MYGAs mentioned earlier have short, specified durations acting very similar to CDs. Further, most haters incorrectly believe that the insurance company keeps the owners’ money when they pass away. This happens only when an annuity owner specifically elects to have a “life only” contract, which provides the owner with an income stream that will continue for the rest of their lives regardless of how long they live while leaving nothing to beneficiaries upon an early death. Life only contracts provide the highest annual payout to annuity owners since both parties are equally sharing the significant life longevity risk. These are the original annuity contract types, so many of the Wall Street advisors who are just passing down talking points for their older mentors believe all annuities are like this. Today, many more options are available such as having contractual lump sum death benefits (anything left over at death passes on to beneficiaries), the ability for spouse to continue receiving payments, the ability to stretch the annuity out for kids/grandkids, etc. Conclusion – very misleading talking point….only a small segment annuity purchases these days are Life Only policies.
Please know that this article is not designed to make you think that all investment focused advisors are biased against annuities….that is far from the truth. Many have a very good understanding of the annuity industry and are great at directing their clients towards the appropriate product types. Only a minority will fail the hater test, but the pool of investment focused advisors is so large that even the minority has an immense audience and are causing many retirees and pre-retirees to decide against annuities based on half-truths and sometimes even complete fallacies.
So what is the best answer to the “What are your thoughts about annuities” question you may be wondering? Given the wide variety of annuity types out on the marketplace, the overarching answer should describe annuities as retirement planning vehicles that can allow you to transfer significant risks such as market uncertainty and life longevity over to insurance companies who can shoulder these risks given their access to large pools of individuals and to institutional pricing.
As mentioned at the beginning, this information is most useful if you actually perform the test out in the real world. Reading about bias is one thing, but seeing it firsthand from someone who is supposed to be giving retirement guidance is truly eye-opening. Our best hope is that you cannot find anyone who fails this annuity hater test. However, we have been extremely disappointed in high percentage of failures that we witnessed in our testing thus far.
For those who qualify themselves as annuity haters, we sincerely ask that you inform them of the fact they are giving very misleading advice….this is the only way this problem can get resolved. You can do this by using the information in “annuity hater talking points” sections described above….just opening the eyes of just one annuity hater can save hundreds of retirees from receiving damaging misinformation in the future. Also, feel free to send them a link to this article to help them see the error of their talking points.
Most importantly, education is key to allow you to most effectively address your retirement income needs, and we hope this article helps you decide who you can rely on for unbiased guidance.
P.S. – We would love to hear your thoughts on the message of this article (good or bad) by either submitting a Comment below or sending an e-mail to firstname.lastname@example.org. We did our best to keep this as factual as possible and will gladly adjust any inaccurate statements to ensure this doesn’t add to the annuity confusion. This isn’t about selling….it’s about education, and open dialog across parties of all backgrounds is essential.
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