“Annuity Critics EXPOSED 2.0”
By Ty J. Young
What should you do when a product that you choose to invest in is subject to questionable negative advertising by competitors?
As we know, there is a consistent drumbeat of negative advertising against the value and benefits of an index annuity. Most of which are inaccurate, if not downright deceptive. One of the things you can do is get fully informed on the issues.
Our blog today will share with you “The Myths of Annuities 2.0” – a title taken from a famous dinner seminar of mine years ago, but one that accurately describes how the consumer can miss out on the right choice of investment because members of the financial industry perpetuate myths that prove to be, to the astute investor, untrue.
Not all members of the financial community. In 2009, in the wake of the 2008 financial crisis, many in the wealth management profession who had protected the principal of their clients were being lauded as “brilliant” in their investment strategies. You can find such a panel of experts on CNBC with the host claiming that “….your principal is protected,” and one of the guests stating “….you should be thanking the person that sold you that index annuity” and for putting you in that product! (watch here) The point being that growth, with protection, was a strategy even Wall Street money managers were extolling when the banks collapsed.
So why the negative vibe? Shouldn’t all investment strategies be considered, and then you choose the one that best fits your long-term objectives?
Some of the advertising about annuities completely misses the point. We are going to look at some of the ways the advisory community gets the index annuity wrong, and to help arm you with information when you face such questionable advertising.
1) “Payments from an annuity come as an income stream…” When that is all the information you are given, it is factually inaccurate. An index annuity can be disbursed as an income stream, but also as a lump sum along with several other methods of payment delivery, including lump sum to your beneficiaries. It is a great way to achieve real growth, with real protection, and get your money out in the manner you see fit. SOME annuities disburse funds only through an income stream, but not all, and not the products we recommend. The statement above is not wrong, just incomplete, a way of presenting you information without giving you all of the information, but it is technically not lying.
2) Some advertisements suggest annuities can be quite complex and require “investor due diligence” and that “terms and conditions” can vary widely among companies. This is another marketing ploy. The language chosen is designed to sound “scary” to the investor, to make you feel like the product is overly complicated, or that it is somehow different than other investment options.
But what is left out is the fact that all investments require due diligence by both the advisor and the client. Brokerage investments, stocks, securities, they all have complexity that require due diligence, and/or advisor input. Should you invest in something that you have not studied, reviewed, or asked questions about? Of course not, yet when you read lines like you see above, it can suggest something is different and more difficult. We advise all of our clients to learn, study and come prepared with lots of questions when we conduct our new business interview. The idea that only index annuities require “investor due diligence,” on its face, is factually inaccurate.
3) “Ongoing regulatory changes may also impact annuities.” This is what I like to call the “Master of the Obvious” advertising strategy. I want to say, “…no, really, I never thought of that.” Advisors who use this line are purposely leaving out that the entire investment industry is regulated, changes occur daily, and that is a constant occurrence in our profession. To suggest, not state verbatim, but suggest, that this is solely for index annuity products is again factually inaccurate on its face, and highly deceptive. More importantly, index annuities have received less regulatory change than the securities industry, which was hammered by the Dodd-Frank Law in 2010 (although thanks to the 2016 Presidential election, unnecessary regulation may be reversed). To date, most index annuity regulation is found in your State.
Regulation is important to protect consumers from the worst actors in the marketplace. But suggesting index annuities receive special attention would simply be wrong. Bernie Madoff wasn’t found guilty of scamming investors by using annuity products – but rather he was found guilty of securities fraud, the same business as many wealth managers are in as well.
4. You have liquidity in annuities “…for some withdrawals, however, if the distribution amount is greater than what is specified in the contract, the investor could pay steep penalties.” Annuities are completely liquid, subject to a surrender charge. There are of course surrender charges for withdrawing early. Any advisor you speak to should disclose this up front. Early withdrawal, or exceeding the 10% penalty free withdrawal you are allowed in the contract, can generate a cost or a penalty. But the good advisor will remind you of the fees that are charged to manage your brokerage account, as compared to no fees in the best index annuity accounts. Advisors who market against annuities may sometimes fail to disclose that when the market goes down, or goes in half as it did in 2008, you lose your money! Does the advisor offer to return his fees when that happens? In a good index annuity, you would have lost nothing. In a good index annuity, the only way to lose money even if the market goes down 50% is to take your money out early, and even the worst case is most likely a 10% charge. In 2008, many investors lost money AND were charged a fee. This doesn’t have to happen to you.
In the case of the advisor who wants you in risk associated assets, he’s getting paid no matter what happens in your account through the fees he/she charges – whether you have gains or losses, they are taking their cut. In the index annuity, the only way to be charged on the account is for you the owner to take out more than you have agreed to, or to take it out too early. In the former case, no matter what you do, the advisor is getting paid from your account. In the latter case, the only charges that can be applied are for actions you take which go against what you agreed to in your contract.
5) “The variable annuity advertised as ALL annuities.” Advisors love using the example of a variable annuity as representing ALL annuities, you’ve probably seen this recently on TV. It would be nice and easy if it were the case, but comically, and as those placing the negative ads KNOW, variable annuities are one of many forms of an annuity, but which an index annuity it is certainly NOT. Variable annuities can have fees, and perform like a hybrid of an index annuity and a brokerage account. That makes it the worst of both worlds – high fees for the advisor and limited options for the account. We rarely if ever recommend a variable annuity, and once a client knows all the facts, they rarely if ever want one. To use the variable annuity account options and imply they are the same as an index annuity is quite deceptive. Be sure to call out any advisor who attempts to conflate these two as one and the same.
6) The infamous “hypothetical” graph. It is the easiest method for advisors to compare “hypothetical” products over equivalent periods of time. If it only was that easy. When you are comparing a specific Index Annuity with the stock market, it can be a fair generalization of an index annuities performance, if you have the details of how the product was supposed to perform, and it was a comparison to an actual product used. But that would of course still remain arbitrary. However, that is not what is happening in much of the promotional material that attacks index annuities. In many cases, you are being given a graph which is presented as compelling evidence, but which is again factually inaccurate. The “hypothetical graph” I am describing uses a hypothetical brokerage account. But you can’t have one of those – either you have an actual brokerage account, or you use the market itself, but you can’t “make up” an account and therefore “make up” its performance. There are less polite words to describe this method of marketing. Indeed, in a court of law, the judge would disallow such evidence because it deceives the jury. This is deceptive advertising.
This hypothetical brokerage account is then compared with a hypothetical index annuity account. Sadly, this faces the same dilemma – you cannot have one hypothetical compared to another. In both cases the account is made up, there are made up rates of return, and made up fees. Our savvy clients know to combat such marketing by pointing out such factors, but a lot of the investing public misses out on protecting some or all of their money because of the questionable advertising practices of many in the advisor community.
7) “Fees, fees, and MORE fees!” You name it, and the Wall Street advisor will charge a fee for it! Our clients know that there are many companies that offer index annuities, but only a precious few do it well, and there are all different kinds of annuity accounts. We do not recommend accounts that have fees, but to show what you might see from other advisor advertising, you could have these fees and more charged to your account:
* Mortality and expense fees (variable annuity)
* Operating and administrative fees (variable annuity)
* Sub-account expense ratios (variable annuity)
* Guaranteed Minimum death benefit (variable annuity)
* Variable annuity lifetime benefit (again….variable annuity)
Any investor should immediately confront such misinformation, by pointing out that the best index annuities do not charge fees. Fees are not in the accounts my company nor our advisors recommend.
8) “Only the strength of the insurance company will insure that you get your money back.” By law, Index annuity funds are segregated into accounts subject to state-required reserving rules. It was the banks, NOT insurance companies, that needed bailing out in the banking collapse of 2008. It was the Wall Street investment, and the Wall Street investor – NOT the index annuity account holder – who lost money in the market downturn of 2008.
Many advisors will refer to AIG needing a bailout in 2008. AIG insured the derivatives trading market, and their losses were in that market. In a famous scene from “Too Big To Fail,” Timothy Geithner, our former Treasury Secretary and at the time the head of the New York Fed, asked the CEO of AIG why he didn’t just use his insurance accounts to cover the losses. The answer was straight forward – insurance accounts are segregated and reserved by state law….”I can’t touch them.”
It should be a calming experience for an investor, safe in the knowledge that your investment IS protected by the strength of your insurance company, and not the wheeling and dealing of Wall Street.
A famous quote about Christmas goes like this: “If ifs and buts were candy and nuts, we’d all have a merry Christmas.” Unfortunately, many advisors don’t bother with the “if” or the “but,” they just throw their denunciations into the media, hoping something sticks. Not every advertisement regarding index annuities will be wrong, or misleading. Most of the advisors you meet work diligently to understand the products, and be prepared to recommend something that works for your investment objectives. But for most companies and advisors, the strength of our investment advice does not require misleading marketing strategies. It only requires a commitment to getting your money into a protected place, believing in a reasonable rate of return, and not charging you any fees to do so. So the next time you see an “anti-annuity”, “Annuity Myths” or “I wouldn’t sell an annuity” advertisement, you know these ads are at best highly subjective, and at worst – attempting to deceive you.