Annuities

I'm not a fan of annuities.  I come to this with clean hands, meaning there is no hidden agenda when I say this.  Nothing prevents me from reorganizing my company so I could sell annuities.  In fact in an earlier life when I was a broker I sold a few of these.  But the annuities I sold then were simple fixed income annuities.  They initially yielded 8% and had a floor of 4%.  A few of my clients still have these.  That product or something like it doesn't exist today as far as I know.  I think if it did we'd all be hearing about it.    It would be lucrative for me to be in the annuity business.  The average commission is between 5 and 8%.  I'm guessing that I could probably add $30,000-50,000 each year to my bottom line if I did so.  But my first responsibility is to my clients and nobody has ever convinced me that the majority of annuities {especially the way they are currently structured} are good investments.

There's an interesting article about these over at "Business Insider" yesterday.  I'm going to list the main points below.  In fairness before I do so, I will note that the article I'm linking is sponsored content.  It was not written as far as I know by "Business Insider's" staff.  The article is sponsored by a money management outfit like myself.  It is fair to say that they could potentially have an ax to grind on this subject.  However, even if it's in their self-interest to talk about annuities, that doesn't mean the points they bring up are invalid or not something investors should consider before they invest in one of these.  

Here's the articles two main points against annuities:

High Surrender Charges:  "Surrender charges are high fees assessed for leaving the contract soon after you buy it. “Soon” to an insurer typically means about seven years, with the fees starting out highest in year one and falling slowly through year seven…...Fisher Investments has analyzed thousands of annuities over time, and they’ve seen initial year surrender charges as high as 20%. But you don’t have to take Fisher’s word for it. CNN cites the same 20%. According to the Texas Department of Insurance (the state’s insurance regulator), surrender charges “commonly range from 5 to 25 percent of the amount withdrawn.” 

High Cost of the Annuity:  "Another motivation for these high exit penalties is the insurer has costs to recoup, a major one being the compensation paid to the agent or broker who sold you the annuity. Typically, these commissions are far higher than equity or mutual fund commissions. ABC News cites a common range of 5%-8%, not dissimilar from typical surrender penalties in the first few years. Over time, the fees embedded in the annuity are designed to recoup these costs plus some — after all, annuity firms generally aren’t not-for-profits. The surrender is more or less structured to give you incentive to either own the contract long enough for the insurer to recoup their costs— or make you outright pay up if you don’t."

I'll list a few more issues I have with annuities.  For example there are potential tax implications with annuities that you don't have in other products, they are complex and hard for investors to understand and in my opinion every annuity strategy can be replicated by investors {or their advisors} for a much lower cost than the annuity.   

I don't think a single annuity would be sold in this country if the person selling the annuity didn't make that 5-8%.  Now to be fair, people in good faith can differ on issues.  I'm happy to debate anybody who wants to email me about why annuities are good investments.  If I think they have a valid point I'll put up there response here on the blog.  I'm guessing though that I'll only be met with silence.

Next post Monday.

Link:  "The Real Story Behind Annuities" {Sponsored Content Over At "Business Insider"}