The utility of annuities as investment products is one of the most sharply contested subjects in the financial world. The objective of dispassionate observers should be to help clear the smoke and offer simple guidelines to form smarter opinions about one of the most promising—but also reputedly one of the most damaging, tax-oppressive, costly, and hard to get unstuck from—investment options on the current landscape.
Annuities are arguably among the most poorly grasped —and most controversial — financial products around. It seems most commentators either love them or loath them. Certainly, financial “advisors” can love them for the amazingly lucrative, hard-to-spot commissions many annuities crank out. Some, perhaps less invested, pundits, consumer advocates and other advisors – often with their own conflicted business model agenda – can hate them because of sometimes very “nosebleed” costs, back-end commissions, fees, and high potential taxes.
Of course, everyone – including this humble author – has an agenda.
Ken Fisher— honcho of one of the biggest financial advisories in the US — is unequivocally on the record. He “hates” annuities, has said annuity salespeople “lie,” compared them to Ponzi schemes, and even said some should be illegal.
Given some of the abuses this author has frequently seen in the trenches of the retail investment marketplace, there is much merit for this position.
Others, like financial planning godfather Harold Evensky (Professor of Financial Planning at Texas Tech), were past opponents, but now say they recognize that the “right” annuities are valuable, consumer-friendly products that have important places in fiduciary financial planning. A few years ago, he said that “the immediate annuity will be the single most important investment vehicle of the next 10 years.”
Other academics concur with Evensky. York University professor Moshe Milevsky: “There is a magical, secret ingredient, a secret sauce, inside an annuity that can’t be replicated by other retirement products.” Milevsky added, “There is almost a consensus in the ‘ivory tower’ that annuities make sense for the consumer . . . there have been 2,000 articles about annuities written by card-carrying professors since the 1960s, and 99.9% of them are pro-annuities.”
Michael Finke, Professor of Wealth Management at The American College, said that annuities “ . . . could serve as an ideal default for most Americans rolling their defined contribution assets into an IRA. A competitively priced variable annuity product is hard to beat compared to an unprotected investment portfolio.”
Wade Pfau—a Princeton Economics PhD and another Professor at The American College said, “This is a very important retirement tool. It’s very straightforward: a simple lump-sum payment, and you get income for life. It pools longevity risk across a large [group] of individuals; and because of its mortality credits, those who don’t live long subsidize those who live longer. The mortality credits are part of a [retiree’s] spending power. An income annuity can help preserve the remaining portfolio when someone lives a long time in retirement.”
But popular commentator, Suze Orman, doesn’t like them, and Forbes.com two decades ago ran an article with the clear colored title of The Great Annuity Rip-Off.
So who’s right? The confusing truth is that both points of view are “right.”
There are many horrible things about some annuities, and there are wonderful things about some others.
The right annuities—and getting it right is of huge importance—can do great things that nothing else in the world will—if you need these things done! To learn more about these products in simple, easy to follow language, click here to see a longer post I’ve written.
Unfortunately, the annuities most consumers are likely to encounter can be of the wrong sort, at least as far as costs and commissions are concerned. There is an old expression, that “life insurance is not bought, it’s sold.” The salient point here is that consumers are often convinced to buy life insurance products by commissioned sales agents who are handsomely compensated to hawk these wares. The wise would be wise to remember that annuities are in fact a type of life insurance contract, and often are as confounding and opaque when in comes to understanding costs and commissions as their death-benefit brethren.
The “good” annuities are out there, more and better every year. You won’t hear as much – maybe nothing – about them, since no one is paid to sell them.
As with most things, the truth is somewhere in between various positions, and very much depends on your personal needs. Unfortunately, since annuities are so varied and complex, the “in between” part covers a lot of ground, and it’s easy to get lost. For those interested in a much deeper dive, click here for my annuities whitepaper.