My LinkedIn Conversation:
I was scrolling through my LinkedIn feed and came across a conversation that one of my friends was having with a lady whose profile said she was a CFP® and also a “Fee Only Advisor.” What were they discussing? Annuities! You veterans know how this conversation was going with a “fee only advisor” discussing annuities! This conversation did not disappoint. Below is one of the responses the fee only advisor made, literally cut and pasted:
“Most of them (annuities) never made sense to me. If a client has plenty of assets, the guaranteed lifetime income option would never be used because almost 99% of time you will have to annuitize the annuity. If a client has limited resources, very few choose to go with the guaranteed income option either because you lose the access to the lump sum, which is risky in its own way too. In rare situations, it might make sense, depending on the clients overall asset and income level. To be honest, I’ve only seen 1-2 clients in retirement really annuitize the annuity for guaranteed lifetime income. The majority of them use free withdrawals and kind of treated it as poorly performed investment account. Most of the time, annuities, especially fixed/fixed index were sold to investors who are scared of market ups and downs with very high commissions.”
The above is exactly the talking points that we have all seen from folks like her–anti annuity and usually “Fee Only” advisors. And these talking points are misinformed.
Now, on a website (LinkedIn) where many professionals come together to learn from others, I would typically find this commentary very benign. Afterall, none of us know everything about everything. However, you and I deal with this crap every week coming back to us from our clients that had been communicated to them by another “advisor”! You and I both know that this “Fee Only Advisor” communicates this misinformation with their clients every time the annuity conversation comes up. As a result, this misinformation is perpetuated and consumers that need annuities are now convinced that annuities are bad. So, to folks like this: It is OK to be ignorant. As a matter of fact I will help people like her overcome her ignorance on annuities because that is what I do. However, communicating this same ignorance to clients is very harmful.
Where is she wrong? First off, most annuities that are offered to clients for guaranteed lifetime income are not offered with the intention of annuitizing the contract. Annuitizing the contract does indeed–as she said–forfeit a good amount of control. Furthermore, the most prominent lifetime Income annuities today have “Guaranteed Lifetime Withdrawal Benefit” riders that are merely withdrawals from the contract that are guaranteed to last forever, even after the accumulation value hits zero. If one dies before spending down their value, the balance goes to the beneficiary. If one wants to cash out at any time, they can. Beware of surrender periods however. This “Fee Only Advisor” is living 25 years in the past when GLWB riders didn’t even exist and “lifetime income” was achieved only through annuitization (GMIB riders for xample).
I also love it that somebody who is likely charging her clients 1% to 1.5% on assets into perpetuity is citing “high commissions” on annuities. Over a 10-, 15-, or 20-year period of time, she would have likely charged her clients multiples of what the commissions would have been on an average annuity.
Don’t Be a One Trick Pony
Lastly, I love the stock market because “over the long run” there have been very few vehicles that have created as much wealth as the US stock market. However, I also love index annuities with GLWB riders. With that, I view our obligation to our clients to not be a one trick pony.
For instance, for a 46-your old client, many securities professionals (Note: I am an IAR myself) would say it would be completely stupid for that client to have any of their money in an annuity with a guaranteed lifetime withdrawal benefit. They would say that over the “long run” the stock market will accumulate to a value so large that the resulting income at retirement cannot be replicated by an annuity.
That thinking is actually false in a majority of the situations. This is where I would punch the data into my simulations (Monte Carlo) and illustrate what a guaranteed lifetime withdrawal benefit would provide this 46-year-old at say age 65 and compare that to even some fairly rosy stock market assumptions. Well, even while considering rosy stock market assumptions, if the annuity with a guaranteed lifetime withdrawal benefit is projected to provide more lifetime income, then why wouldn’t that 46-year-old put a chunk of their money in an annuity?
The Fee Only Advisor would likely say that I am just trying to rip off that 46-year-old client by giving them a bad product so I can get my “big fat commission.” Well, that Fee Only Advisor will have a tough time with that one because last year it was me that was that “46-year-old client.” I did this analysis on myself and bought that index annuity for $200,000. Did I rip-off myself? Nope. In fact, that annuity will provide me and my wife with $44,000 per year income at my age 65. Joint Income! That is important because my wife will likely live forever. With my genetics, on the other hand, I don’t even buy green bananas anymore. But I digress.
If I can demonstrate that the income in the annuity exceeds what a rosy market projection would do, the only objection left that I can see some “Fee Only” rep giving me is, “But with my wizardry, I can manage your money and give you an even rosier stock market scenario versus the already rosy scenarios you ran. And by the way, I am a fiduciary.” Puke!
Ignorance is bliss, unless you are sharing your ignorance with consumers. Then, that is not bliss, that is flat-out harmful. If you are a “Fee Only Advisor” then don’t be closed minded and have an annuity “agent” you can refer your clients to if those clients need an annuity. Conversely, annuities aren’t for everybody! So, if you are “insurance only,” it may be smart to have a Registered Rep or an RIA/IAR where you can refer business to.
