Annuity IQ

The Motley Fool published an article today called ‘3 Reasons to Buy a variable annuity’. I guess the author was trying to be cute and witty, he wasn’t, and laid out a poor argument against variable annuities and, instead, recommended individual stocks.

It is no secret that I hate the Motley Fool, I think they are, more or less, the jackasses of financial reporters. I still remember their high flying recommendations they made on Oprah in the late 90’s. They said to the audience that they should buy what they like because it would be a good investment, of course, they were dressed in their stupid fool outfits. After the market melt down they again returned to Oprah, but this time there were no fun and games. Oprah ripped into them and it was fairly amusing, I guess they learned nothing from their past embarrassments.

Now, I do not like to use this word or maybe I am in a combative mood today, but this guy, John Roesevear, is an idiot. In his poorly crafted article he said there are 3 reasons to buy a variable annuity, I guess he can’t count because his third reason was really 5 additional reasons to buy a variable annuity.

Here are John’s ‘3’ reasons to buy a variable annuity:

Your broker’s Ferrari is getting a little long in the tooth, and you want to make sure he can afford a shiny new one.

Really John, is that the best you have? Do you think this is funny? How about your bosses Ferrari that they earned by falsely giving people the idea that investing is simple? How about you all apologize for your crappy recommendations of buying Janus funds and tech stocks back in 98-99? Yeah, I thought not.

Not only is that statement insulting it is totally untrue. In all of my experience I have never seen an advisor drive a Ferrari to work, ever. A variable annuity is no different than buying mutual funds or managed money, they may cost a few basis points more, but they guarantee more and provide tax deferral.

The difference between a variable annuity, mutual funds or managed money is the variable annuity has the option, not a requirement, to collect all the commissions upfront. Mutual funds and managed money may pay upfront but they also provide trail commissions over the long term. At the end of the day all loaded funds, managed money and variable annuities pay about the same over a 7 year period.

You’re not eligible to invest in a hedge fund, but you still want the cocktail-party cachet of paying outrageously high fees for mediocre investment performance.

Apparently John looks at averages and not investment strategy. If you average all mutual funds together, including your prized Vanguard funds, they are ALL mediocre in performance. If you look at specific investment strategies on the other hand you may see stellar performance. I am sure that hedge fund investors and managers take offence to your idiotic comments as well. If it weren’t for hedge funds Sears and Kmart would not have merged and the stock would not be anywhere near the $190 mark it is currently at. I can point out several other examples, but the hedge fund guys need no help from me to defend themselves.

Here is where John cannot count:

You’ve maxed out your 401(k) and IRA contributions, are still 15 to 20 years from retirement, are in a high tax bracket now but expect to be in a lower one when you retire, want a product that will provide you with a “guaranteed” minimum income, and don’t want to spend much time on investment research.

John, each comma represents a separate thought and, in this case, a different reason. Man, I thought I did poorly in English, but at least I have an excuse, I am dyslexic. I especially like the quotes around the word guaranteed, I guess he is asserting that that is bogus. Let me run through each of these 5, not 1 John, but 5, points he makes in this final reason.

He is correct on the maxing out of your 401 (k) plan, but that is no secret, everyone says that. What disturbs me the most, is that everyone of these drive by advisors always say that before you invest in an annuity max out your retirement plan, but they very rarely make that point when talking about mutual fund investing.

If you are 15 to 20 years away from retiring then a variable annuity may make sense, so can a host of other investment options. What John clearly does not get is the fact that the variable annuity can provide living benefits that can generate income without annuitization. John does not understand that retirees are seeking a growth and income plan, not an accumulation plan alone.

A variable annuity fits a growth and income plan with living benefits and are, therefore, suitable for retirees as well. Yet, the Fool continues to push accumulation stocks instead of income producing products.

If you are in a high tax bracket now and expect your taxes to go lower, which happens to most retirees, a variable annuity definitely makes sense. What John does not understand is the taxation of mutual fund distributions and how they affect your taxes. Unless you are in the lower tax brackets, 20% or less, then a variable annuity does make sense, again I will talk about taxation at a later date.

People are buying variable annuities with a guarantee living benefit, why the hell do you think sales have taken off so much over the last 7 years, John? 80% or more of all new annuity business has a living benefit rider on their contract. What bothers me about his reason is the quotes around the term guaranteed. John, these are contractual guarantees not made up guarantees.

As a matter of fact, variable annuities are the only equity based product that can use the term guaranteed. I think that statement speaks volumes, don’t you? I mean how many mutual funds do you see saying they can guarantee you anything? Yeah, that’s what I thought John, none.

His last point about not wanting to do investment research, this proves he’s a complete idiot. Most sub-accounts are researched by consumers, brokers and, of course, the insurance company. As a variable annuity comparison site I get questions all the time about sub-accounts and living benefits. Clearly John has no idea what investors are thinking or feeling at this stage of the game. Way to know your audience John.

John also claims that there are loads to some of the sub-account investments in variable annuities. In 14 years I have never seen a load inside of a variable annuity contract. I would like to see what product he is talking about. I guess I am not surprised that a financial writer has not taken the time to learn about these products. Instead they pick out what other writers criticize and stick with that, they like to spread ignorance.

Here is how John wraps up his article:

If you do decide an annuity is for you, consider letting your broker find another way to finance that Ferrari — there are lower-cost varieties available directly from leading fund companies such as Vanguard and Fidelity. But for most investors, buying a portfolio of solid long-term performers like Nokia (NYSE: NOK) or Starbucks (Nasdaq: SBUX) — or even just a simple index fund — will yield much better results in the long run.

OK, again with the Ferrari comment, get over it, John. Maybe the editors at the Fool should consider cutting your salary because you are just not funny enough. As far as your low cost solutions, they stink. No-load variable annuities have few sub-accounts to choose from, they have weak death benefits and they offer no living benefits (which negates one of your reasons for buying a variable annuity, duh).

Instead you recommend individual stocks? Is that your way of reducing risk? Wow, good advice John. To make the statement; “Will yield you much better results in the long run” is an irresponsible statement. John, do you know what stocks are going to do over the long run? Do you know for a fact that those stocks will be strong performers or that they do not have accounting or fraud issues? Do you really think people will continue to pay $4 for a cup of coffee? You don’t know, but you make the assumption that you do know.

What I do know is that taking income at the wrong time from a portfolio is retirement suicide. I do know a variable annuity can help solve that problem. I do know that variable annuities offer guarantees far superior than any other product. I do know you have absolutely no clue about what you are talking about and are out of touch with the individual investor. I do know that people who read this and say, ‘wow, he must be right’ are actually being misled by you. I do know this officially solidifies The Motley Fool as foolish.