Why Are Banks Now Pushing Annuities?
Question: My parents live in Florida, don’t have much money, and have only bought CDs from an investment standpoint. Now every month, it seems, they are calling me to explain an annuity the bank is trying to sell them. Why is their bank branch now pushing annuities so hard? from Fred in Sarasota, FL
Answer: Great question, and this is happening nationwide, not just in Florida. This madness all started a few years ago when it became legal for banks to sell investments to their depositors. And when I talk about banks, I’m not talking about a Wells Fargo brokerage office, I’m talking about the local branch that your parents go to.
Whatever happened to the days when you went into the bank to do traditional banking things like get a loan, open a savings account, or buy a Certificate of Deposit (CD)? The sad part is that people really trust banks, and what banks have to say. So if the bank is saying “annuities”, then there is a level of trust that I feel is being exploited.
Annuity sales have become a huge profit center for bank branches. Ironically, variable annuities are the primary product sold to a legion of bank customers that are probably used to only buying Certificates of Deposit (CDs). The bank annuity sales story is troubling in my opinion, and could eventually become a problem once/if clients learn what they actually own and have been sold, and the actual risks they are now shouldering.
I am friends with some of my ex-compatriots from my years at the large brokerage firms who have left Wall Street and now work out of a bank branch. To put it in their words, “it’s like shooting fish in a barrel.” The first thing they told me is that they have the tellers on unadvertised and unmentioned “finder’s fee” agreements to funnel people with large money market and CD balances to the “investment advisor” (them) at the branch. Heinous, I know, but true. In addition, my friends also tell me that they have computer access to the client base accounts at the bank, and simply “scroll” through accounts looking for “opportunities” and large pools of money. Before all of you banking purists start complaining, I know that all bank branches are not this devious…..but this type of prospect targeting does happen.
You need to understand that of all the products available to the “investment advisor” in the branch for them to sell, variable annuities and indexed annuities probably offer the highest commission. Hate to say it, but there is a correlation between that fact and the increasing annuity sales.
My displeasure from this situation stems from the large gap between the risk, reward, and liquidity aspects of safe bank offerings like CDs compared to securities products like variable annuities. For the owners of CDs and money market funds who obviously prefer safe and simple retirement planning tools, it seems as if they would be more suited for annuity products like Multi-Year Guarantee Annuities (MYGAs) and Single Premium Immediate Annuities (SPIAs), which happen to have much lower commissions due to their simplistic design.
As another example of this bank annuity practice, my parents (who live in Florida) tell me that they are solicited some type of annuity every time they go to the bank. And that’s with my dad constantly wearing a “Stan The Annuity Man” logo’d baseball cap! I guess revenue is revenue from the branch’s standpoint, and I don’t think this annuity sales trend with banks will end any time soon. In fact, indexed annuity sales through bank branches just set a record in 2012!
Tell your parents to proceed with caution when anyone is aggressively pushing them towards something out of their comfort zone. If they do feel a need to highly consider a new direction, then hopefully they will put in the due diligence and study the product specifics and/or seek second opinions to make sure their needs are most effectively addressed.
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