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  • Writer's pictureDaniel Satz, CFP®, MPAS® CRPC®, AWMA®

At Times Like These, It’s Raining Annuity Pitches

Key Takeaways

  • Anyone can call themselves a “financial advisor” these days.

  • You want to work with a fee-only advisor who has a CERTIFIED FINANCIAL PLANNER™ certification and who does not earn commission on products and services.

  • If something sounds too good to be true it probably is.

  • With the right financial plan in place, you can improve your long term purchasing power and families wealth better than so-called “no risk principal protection” products offer, for much lower fees and fewer restrictions.

Both stocks and bonds are down sharply since the beginning of the year, which is something we haven’t seen in half a century. You’re probably receiving unsolicited pitches from people claiming to be “financial advisors” who want to talk to you about “guaranteed” ways to protect your money and to “preserve your principal” no matter what’s happening in the financial markets or economy. There’s usually a life insurance benefit built in.

During uncertain times like these, such pitches can sound appealing. Annuity and insurance companies love recessions and bear markets because they can prey on people’s fears about depleted retirement savings. This generates a whole new infusion of assets for the insurance companies to manage – and some hefty commissions for their salespeople in the process.

What annuity companies don’t make clear to nervous investors is that “guaranteed no loss” products like theirs usually lock policy holders into long-term contracts with high fees, restrictions on withdrawals, tax disadvantages for their heirs, and limits on growth -- all in the name of preserving principal.

I should know. I started my career in the annuity business shortly before the global financial crisis of 2008-09. Needless to say, we were busy. I was doing well in the business, but I didn’t feel like I was providing clients with solutions that were truly in their best interest. I certainly wasn’t building long-term relationships with them. Once we sold the annuity contract, that was the end of our relationship with the client, and we simply moved on to the next one. The only time we would want to have a further meeting with the client was when their annuity was free and clear to withdraw, and they could be locked up in something else that provided another stream of commissions for us. This happened whether it was in their best interest or not. Fortunately, I had an opportunity to move over to the fee-only wealth advisory side where I can work as a fiduciary and really help people. I haven’t looked back since. I’m not here to bash annuities or insurance companies in general. There is a right time and place for their offerings in certain situations, although those offerings are rarely applicable for the affluent. If you choose to go down the annuity route, just make sure you know what you’re signing up for. Let me try to simplify the three main types of annuities here since it’s often hard to get a clear explanation in plain English from providers:

Three main types of annuities:

1. Variable.

Variable annuities allow you to invest in the market, typically by tracking an index or several indices. Your account balance goes up when the market goes up and your account balance goes down when the market goes down. Unlike direct investing, however, variable annuities have an insurance (aka principal protection) component which can sound very appealing at times like these. For instance, if you invest $500,000 into the contract and it ultimately goes down to $400,000 when you die, your heirs still receive the full $500,000. That’s great. But variable annuities are much more expensive than buying stock, bonds, funds or ETFs directly and those high annual fees (typically 3%) are a significant drag on performance. Also, variable annuities do allow you to transfer the policy to your heirs upon your death, but when your beneficiaries inherit your policy, the distributions become a taxable event if they’re in a non-qualified account. If there is any unrealized gain in the account, then you would have to give a good chunk of the money back to Uncle Sam. There’s no step-up in cost basis for your heirs like there is when inheriting a real estate or after-tax brokerage account.

2. Fixed.

Fixed annuities provide a fixed rate of return on your original investment no matter how high or low the stock market or economy goes. Let’s say you invest $100,000 into a fixed annuity with a guaranteed 3% rate of return. You’ll keep getting that $3,000 in income year after year no matter what else is going on in the financial universe. It’s very similar to a CD. Typically, because the lock up periods are longer, you can usually get a higher rate than a CD, but then you are back to a liquidity issue.

3. Indexed

Indexed annuities are popular because like fixed annuities, they protect your downside risk in a bear market. No matter how low stocks or bonds fall, your principal will never go down. What the annuity companies don’t make clear to policy holders is that you don’t get to participate in much of the market’s upside. For instance, if stocks are up say, 25%, like they were in 2021, your return may be capped at 5% for the year -- and the insurance company keeps the rest of the upside. This works in the insurance company’s favor because of the long lock up period and because they know long-term average return will outpace the annualized amount the contract holders will receive (say 3% due to factoring years with 0% return). Why not take on the volatility risk yourself with the understanding that you will benefit in the long run and get to keep all of your money?

As you can imagine, indexed annuities are being marketed very heavily right now – and they also pay the highest sales commissions to the insurance agents (typically 9% or 10%). Also be aware that with most types of annuities, the regular stream of income payments that you start upon annuitizing the contract stops upon your death. That means you can’t pass it on to your heirs like most other financial assets you own.

When annuities may make sense

As mentioned earlier, there are occasional cases in which annuities make sense for our clients. Generally, they’re for those who have not saved well enough for retirement before they came to see us and if they have trouble controlling their spending. Unlike most insurance companies, if the best option for one of our clients is an annuity, we only sell “no load” annuities, which means we make no commission on them. As fiduciaries and CFP® professionals, we are not permitted to make money from products and services we recommend to clients, and we must always act in our client’s best interests before our own.

The big takeaway here is that with the right financial plan in place and with the right asset allocation matched to your risk tolerance and time horizon, you can usually accomplish a better outcome than so-called “no risk principal protection” products can accomplish. And you can do so with lower fees, fewer restrictions and better tax advantages. Conclusion

Anyone can call themselves a “financial advisor” these days. You want to work with a fee-only CFP® professional who doesn’t earn commission on products and services they recommend to you and who is required always to act in your best interests. If you or someone close to you has concerns about your portfolio’s ability to withstand inflation, market volatility and currency fluctuations, please don’t hesitate to reach out. We’re very experienced in this area and happy to help.


DAN SATZ MS, CFP® is a Wealth Manager at Novi Wealth 


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