How To Easily Identify An Annuity Hater
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.
P.S.S. – Be sure to subscribe to our weekly e-mail newsletter so our most popular educational articles describing the Good, the Bad, and the Ugly of the annuity industry can be delivered straight to your Inbox. To subscribe, just click on the “E-mail Newsletter” button in the top right corner of this screen.
Was this article helpful to you? If so, please click on the Social Media icons on the right side of your screen to share it with others.
Well done A123!
Another great article guys!! Keep them coming.
Tom Hopkins says, "The mark of a true professional is how much learns after he knows it all." The issue here is that the advisor isn't focusing on the clients needs first, they're coming in with an unhealthy bias. Your blog does an excellent job of pointing this out.
Thanks for the nice compliment and for your help in the cause.
Thanks for leaving the comment, Rob. More importantly, thanks so much for making your fantastic educational videos available to us all….keep up the great work!
Nice job!! My only criticism is that I wish you would not call index annuities "hybrid". That term is often applied to annuity contracts containing substantial long term care benefits, and that application makes sense. But index annuities are NOT part fixed and part variable (as "hybrid" would suggest); they're FIXED ANNUITIES, having the defining characteristics of that term: guaranteed principal and guaranteed minimum rate of return.
Yeah, I know I'm a nitpicker. But labels matter, particularly when they're misleading.
Thanks for the great comment, John. We completely agree that the phrase "Hybrid Annuity" is a misleading term for Index Annuities….we included it as an "aka" to help those who have only been told about Hybrid Annuities to start linking that name to its more proper term – "Index Annuity".
When it comes to annuities, for the most part, which side you take is based on where you are professionally. If one is primarily insurance based, then your natural tendency will be to favor annuities. Your income options for a retiree are limited. And if you are a financial advisor with a broker dealer, you will recognize an annuity as 1 of many tools in your arsenal.
I have been on both sides. I owned my own insurance agency for 27 years, and now am at a large brokerage firm. While at the insurance agency, I loved annuities, sold many of them, and believed I was doing the best thing for my clients. But over the past several years, now seeing the vast array of options available, I now see how in some cases my insurance clients would have been much better off in other retirement vehicles. Just this past week a widow comes in to my office with 3 annuities an insurance agent had placed her in, having rolled over $1.9 million of IRA assets into these annuities. These policies have a 12 year surrender period. While maybe 1 annuity providing a guaranteed life income to cover her required expenses might have been an option, she is now handcuffed.
In many cases I run across, the annuity solution ends up being wonderful for the agent that sold it and just ok for the annuity owner. As I told the widow….you could have done much better, but you are ok and have not been irreparably hurt.
So as an advisor, it is not that i have such a sour view of annuities…but I see how , in the majority of the cases I run across, they have been sold by someone that a) does not understand them, b) knows very little about financial planning, and the need to first complete a comprehensive financial plan for their client in order to, in the end, understand the clients goals and how best to get them there, and c) end up making decisions based on their needs and not for the client.
John, thanks for the comment. We completely agree with your assessment that one’s stance on annuities is often slanted towards his/her area of focus/interest….and we all should be able to agree that it goes both ways. Our core desire is that the various types of annuities are properly explained to the clients of all insurance agents and all financial advisors. Annuities of course are not a fit for everyone, but they should at least be appropriately discussed by all professionals involved in helping our fellow citizens plan out their retirement years.
Instead of recognizing “an annuity as 1 of many tools” in one’s arsenal, we believe that the each type of annuity (Fixed, Index, Longevity, MYGA, SPIA, Variable) should be specifically addressed and individually considered as 1 of many tools in everyone’s arsenal (since the word “Annuity” is an umbrella term that hosts a broad array of offerings similar to the word “Investment”).
In regards to your last statement…it is an unfortunate fact that all service-based industries have some who are not adequately informed themselves or too self-centered to rely upon, so we all must perform some due diligence into researching both the “professionals” themselves and their recommendations to ensure we’re receiving the most appropriate help. The article above was put together to help retirees quickly and easily weed out some of those who blatantly bash annuities with misinformation instead of presenting the pros and cons of the various types of annuities with specific reasoning applied to each one on why they are or are not a good fit. It appears as if you are in it for the right reasons, and we appreciate your help in the education-spreading cause.
Mark, thanks for leaving a comment. We hope you enjoyed this educational site and that you visit us again. We wish you the best!
Please respond to: “I hate Annuities and So Should You” advertisement By Ken Fisher, Investments
Chicago Tribune Monday 10/21/13. Is it possible to have a similar article printed in newspaper to refute this? Or can you send me a separate LEGIBLE written Reply for my clients? Thanks, Fred Gallico
Fred, thanks for the comment and for notifying us of what appears to be very blatant annuity hatred. We’ll be happy to do some research on the claims made in this article and then draft a response. Being an education-focused site (not sales), we certainly do not have the budget to submit competing articles in newspapers, but we’ll at least be able to construct a response that you can use however you see fit. Be sure to register to our e-mail newsletter to ensure you receive the rebuttal once it’s completed.
Was the Fisher response ever completed. I’d like to see it as well.
When doing research, we found a good unbiased rebuttal to the “Fisher Investments Annuity Insights” guide – http://annuitygator.com/why-ken-fisher-hates-annuities-and-thinks-you-should-too
One doesn't even have to ask a certain billionaire financial advisor your question. He already has posted ads in major newspapers expounding on "Why I hate annuities and so should you". My question is, what can we do to debunk this guys statements and misconceptions in his ads and his "Annuity Insights" report? Please note, I am not an annuity salesman. I just happen to own a couple of fixed indexed annuities with Income Riders that are going to guarantee me lifetime income when I turn 70. This guys only statement regarding GLWBs is in his "Fees and Charges" section.
Jon, thanks for leaving a comment. In answer to your question, we can start by sharing educational articles about annuities like this with our family and friends and ask them to spread it forward. It is obviously difficult to compete with billionaires for advertisement space, so we'll have to work from the ground up to help explain the true pros and cons of annuities to the public.
Annuity123 Thanks for the response. Interestingly, I took the guy up on his offer to evaluate the strengths and weaknesses of my two annuities. Never got a response until I threatened to complain to the Insurance Commissioner. Then I was contacted by their so-called "Annuity Counselor". Waste of my time. The guy is not licensed to sell annuities in my state, and he couldn't relate to my having bought a "pension". It is a real shame. But, I'm about to start my own blog and my first post will be: "I love my annuity and you should love yours too!"
Jon, we're pleased to see that you're making such great effort to help spread the truth about annuities. We wish you and your upcoming blog the best!
Just met with a Fisher rep today and, as I suspected, he was not high on annuities when I brought up the subject. I am in two multi-fund portfolios with a different fund manager and am looking into changing fund managers and/or moving to annuities. Thanks for your blog – good data to consider.