I just read an article titled, “10 Reasons I think variable annuities are a Bum Deal” which is yet another poorly written article by a huge anti-annuity person. It is safe to assume the author does not have a clue to what he is talking about.
Let us begin our journey of showing you why he is oblivious to how and what variable annuities can do for people.
He first states that 90% of annuities are being sold wrong, that is, of course, his opinion and not based on any facts. I am willing to bet that he believes all people should invest with him and pay him a hefty advisory fee though.
He then goes on to say this, “No-load, low-fee variable annuities do exist, but few people ever buy them because they’re not actively marketed. On the other hand, high-commission annuities are sold aggressively – mostly by insurance agents. Instead of educating their customers about annuities, many insurance agents take advantage of the fact that their customers don’t understand annuities.”
Umm, hello! Have you been to Vanguard, T. Rowe Price or Fidelity’s websites recently? Perhaps you may read money magazine or any other drive by advisor’s commentary on variable annuities. They ALL brag about the no-load Variable annuities, if that is not aggressive marketing I do not know what is, but don’t let the facts get in the way of your rant.
If you want to talk commissions then let’s talk commissions. Is paying you 1.5% in an advisory fee annually for 6 years more or less than a 6 or even a 7% variable annuity commission? Now, are you really educating people on variable annuities? No, you are not. Instead you fill the internet with garbage. I, on the other hand, take a more balanced approach to things and do educate people on annuities. Again, do not let the facts get in the way of your rant.
He then goes on to mention the usual arguments, fees of course. He states that a variable annuity fee is 12 times higher than a no load mutual fund. Umm, ok so you sell your clients no-load funds and charge them for it? Why, isn’t that the pot calling the kettle black?
He also states that some annuities charge you to trade between sub-accounts in the contract. This is only true if you make more than, usually, 12 or 25 exchanges in a year. Anything more is considered market timing, you know the thing mutual fund families got in trouble with a couple years back. By the way, most contracts do not charge you the 30 to 50 dollar charge if you have an account balance over $50,000.
Back to the commission thing for reason number 2 and this is what shows me he has NO clue to what he is talking about, he says this; “(Some heavily promoted “bonus” annuity contracts pay commissions up to 14 percent.)” Well contrary to popular belief the limit variable annuities do not pay more than an 8% commission.
To my knowledge, in the last 14 years, no variable annuity has ever paid a 14% commission. They have equity index annuities that pay out that high of a commission, but not a variable product. Plus, bonus variable annuities actually pay the agent LESS commission, not more.
His next reason is that variable annuities have an IRS early withdrawal penalty if you take money out before 59 ½. He fails to mention that the penalty is only on the growth of the account, not the principal amount. He also fails to mention that these are exactly the same rules as IRA’s and 401 (k) plans.
Yawn, here is what he said next; “variable annuity investors who want their money back in the early years have to pay what I consider punitive surrender charges in the form of early-withdrawal fees that enrich the insurance company.” Punitive charge? You mean the contingent deferred sales charge that every agent has to have the client sign multiple disclosures for? In fact, the fees and the CDSC is the most disclosed item on a variable annuity and there are far more disclosures for variable Annuity charges than for mutual fund charges. Here is a solution, if you need your money quickly do not invest in anything other than a money market account.
On to his next reason, taxes, here is what he said; “The tax benefit of a variable annuity is often its strongest selling point – yet in real life it is usually a cruel illusion.” I guess he likes paying taxes on money he has invested regardless of whether or not he has used it. Also, considering that the average mutual fund has a 78% turnover rate and most distributions are taxed at ordinary income, not taxed at his prized long term capital gains rate, this argument is useless to him.
Then he gives a poor example of how this tax treatment works, in his view. What he fails to show is all the money you had to pay, either out of pocket or from the investment, in taxes on owning a mutual fund because of the annual distributions. I love how these drive by advisor’s use gross numbers for their side of the argument and net numbers to show how ‘bad’ the annuity is, that’s fair and balanced, right?
Number 7, variable annuities inside of IRA and 403 (b) plans. This is an oldie, but a goody, here is what he said, “But inside an account that is already tax-sheltered, there is no additional benefit to an annuity. The extra costs pay for nothing. In my view, placing Variable annuities inside already tax-sheltered accounts should be illegal.”
OK, this is like beating a dead horse, a variable annuity is not sold for their tax deferral inside of an IRA. They are sold, more so in recent years, because investors value the future income guarantees that a variable annuity provides through living benefits. Investors realize that the market can turn bearish at anytime and they now know it can be severe. These living benefits protect them from this, but I guess that point does not matter to him.
Wait! A new one, oh, never mind…annuities stink for beneficiaries. Seriously, how many people are investing their money for their heirs? Not only that, but there are non-qualified stretch annuity concepts to be used, control from the grave and a ton of optional death benefits that can be selected to help the heirs pay the taxes on the investment. The fact remains that Annuity investments are made by the owner because s/he likes the idea of a living benefit or tax deferral. These are, usually, not investments made for the heirs of the contract owner.
Finally, he says this, “If your financial advisor is suggesting that you buy a variable annuity without fully educating you on these points, you could be in grave financial danger. The rest of this person’s advice has to be suspect, now and forever. Trust is the primary ingredient in any investor-advisor relationship; it would be very hard for me to trust anyone who recommended such a product without fully explaining its ramifications.”
Considering he has not educated anyone about anything, in regards to annuities, I find his analysis a joke and an insult. If he cannot even get the commissions on a product straight then how can you trust him to know exactly what he is talking about.
And, do not forget this, he makes his living off of charging people a management fee for buying no-load mutual funds and that makes him suspect and biased in my eyes. If you want information on variable annuities, than go to someone who has some authority on the issue. Do not go to someone who is predisposed to hating them and only specializes in managed money. It is like the old analogy; if you want great seafood then do not go to a steakhouse.
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