Why I neither love nor hate annuities
Written by Gary Silverman, CFP®
Ken Fisher hates annuities. You did not hear that here first. Ken has been spending a lot of money on ads to let you know that he hates annuities. And, being the good guy he is, he’s going to pay the surrender fees on your annuity to help you get out of them.
So, what’s so hateful about annuities according to Fisher? One of his biggest gripes is that annuity salespeople mislead their clients. Fisher says they imply high returns on a low risk investment. Add to that the complicated contracts and the fact most people don’t read them. Then there are the commissions.
In a recent interview, Fisher said that annuity salespeople either lie or tell falsehoods they think are true. He thinks variable annuities should be against the law. He even compares them to Ponzi schemes.
Well, just as I have issue with people who think annuities are practically the perfect answer to everyone’s investing problems, I also have issue with someone who considers them wrong for everybody all the time.
Indeed some annuity salespeople lie or they are so ignorant about what they are selling that they don’t even know what they are saying is false. That’s some salespeople, not all.
Indeed annuity contracts, especially those with living benefit options, are rather complex. Have you ever looked at life or health insurance contracts? How about all that paper you sign when you buy a house or car? They are complex as well. If complicated contracts were reason enough to avoid something, you might as well get rid of all insurance, home ownership, and start walking everywhere (though it might be a healthier, albeit slower, mode of transportation).
Indeed, annuities can have some rather high commissions on them. First, that doesn’t mean the compensation to the salesperson is excessive. But even more important, there are annuities out there that have very reasonable expenses and no commissions. Perhaps Fisher isn’t aware of what’s been happening in this area in the last 20 years.
And there is another feature that exists in some annuities: Lifetime income benefits. It’s pretty much the only way you can mimic what a company pension plan does.
All that said, annuities can indeed be a horrible idea for an investor depending on their circumstances. But the same can be said for a pair of shoes, a movie, chairs, or a pet.
Fischer does have a point though. You need to ensure that if you use a financial professional to help you he or she is knowledgeable about what they are recommending to you (longevity in the business does not guarantee this) and are working in your best interests. You need to read what you are signing or at least have it explained to you in some detail. A key here is that your adviser should point out the good and the bad about the investment. All investments have both.
This article was published in the Wichita Falls Times Record News on January 24, 2016.