Variable annuities may be great for agents and insurance companies, but generally, when you take a closer look, they are not good for investors. Ironically, however, they are very popular with investors. But that’s because they don’t completely understand the full story.
Unfortunately, this happens a lot in the financial services world. As I say time and time again, the financial services industry is a confusopoly, where clients are purposely confused for personal financial gain.
Take for example a meeting I had recently with a new client. This client had nearly all of his investments in products that were good for a broker, but not good for him. A majority of these were in variable annuities. Why? Because most of the products had commissions of 7 percent or more up front. Like many investors, this client probably didn’t work with a fiduciary financial advisor, because we can offer similar products with lower fees, making it a better fit when you put the investor’s best interests first, not the “advisor’s.” In fact, we can often save our clients 3 percent or more in annual fees.
If you, a friend or a family member owns a variable annuity or whole life insurance, I have some good news for you: We can rescue the annuity by getting it out tax free if necessary and saving you tens of thousands of dollars a year. We can also show you how much your decision to “insure” income is really costing your beneficiaries!
If you really need the income and you have a low-risk tolerance, a single premium immediate annuity may be what you are looking for. Because we don’t accept insurance commissions, we can often help investors find a low-cost, no-commission annuity that will pay 6.2 percent or more per year, guaranteed for 20 years if you really need the income and aren’t concerned about the death benefit. The point is, an intelligent conversation, regarding the goal for the money has to happen first!
What is an Index Annuity?
Index annuities are a class of annuities that yields returns on your contributions based on the performance of an equity-based index. And unfortunately, there are a lot of folks out there (including radio talk-show hosts) who promote these products when markets correct, preying on investors’ fears and simply not telling them the truth. Some of my clients (very intelligent clients) have been pitched these.
It’s true that to make money, you must take risk. But investors make money by making good choices based on the odds. The odds should be based on the fundamentals, which we believe to be investment quality, valuation and growth. If an “advisor” pitches you an annuity or insurance, we would love to explain to you what it is they’re asking you to do and give you some honest alternatives. Wealthy people don’t own annuities. Investors who work with fee-only advisors (advisors who have no conflicts of interest and don’t earn large commissions by selling you a specific product) don’t own annuities. They know the truth.
Here’s the Hook
What typically happens when someone at an insurance firm or big bank sells their clients variable annuities is they promise they can take a set percentage (say 5 percent) as income for the rest of their life. This is appealing to many investors because they don’t want to lose money. But the problem is, this comes at a high price. When you buy a variable annuity, you have to pay in multiple ways.
There are four key ongoing annual expenses in variable annuities: The Mortality and Expense; Subaccount Revenue Share; Death; and Living benefits can easily add up to 4 percent. What that means is the investments in the annuity have to make about 4 percent more per year than similar investments outside of the annuity just to break even.
Which means, most of the time, the insurance company is only really returning principal!
How Does That Affect You?
I want to share another client experience with you.
I had a client with $800,000 to invest. Unfortunately, an unscrupulous insurance agent showed him an illustration that encouraged him to invest in a product that had fees like this. My client was told that, assuming an investment made 8 percent per year after fees (in green), an investor in the fund would have about $2 million more than the annuity after 20 years and $5 million after 30 years. While the effect is less if you forego the living benefit, it is significant.
Luckily, this client is not stupid. Annuity and life insurance salespeople use market downturns to sell a “guarantee,” which is often an empty promise. This client thought twice before making this investment.
But annuities can be intriguing! If you are still tempted by a “5 percent minimum lifetime income guarantee,” please beware!
At Global View, our team of Certified Planning Professionals, financial planners, accountant and tax attorney work hard to educate our clients and make investments that are not only suitable for them, but first and foremost that are also in their best interests. We are not just fee-based; we are fee-only. We never get paid by anyone other than our clients. And here’s what I’ll tell you: We have yet to find a loaded annuity that we believe is in our clients’ best interest first!
In fact, we spend a lot of time finding strategies that will rescue investors from inappropriate, high-cost annuities.
Investors Must Avoid Hidden Agendas
How do you prevent these slick salespeople from getting to you? Here are some tips:
- When it comes to financial planning, avoid working with the big banks and large conglomerates. These entities always have a special interest, be it stockholders or relationships with investment product families. Very rarely, if at all, do they have your best interests at heart. Chances are good that an “advisor” at a large firm will sell you something that benefits him or her; not you.
- Make sure that you are working with a fee-only fiduciary. This is the only way to ensure that your best interests are indeed being put first. When “advisors” work on commission, they have an immediate conflict of interest – the most of a certain product they sell, the more money they make.
- Educate yourself. Global View offers many educational tools, including complimentary eBooks, free portfolio reviews and articles like this on our blog. Knowledge is powerful when making the important decision to trust someone to handle your life’s savings.
These factors are even more important now that insurance companies and big banks believe the fiduciary rule will fall by the wayside.
Contact us to find out how Global View can help.
