‘*8% guaranteed’? Follow the asterisk before buying
“The illusion has become real. And the more the illusion seems real, the more desperate they want it.” Michael Douglas character Gordon Gekko from the movie, Wall Street.
I recently received a typical blast email solicitation for an annuity that mirrors the sales message in the ads currently on TV and local radio across the country. The subject line read “8% Returns – Lock In Your Savings Today!” Also within the ad were misleading lines like “Find Annuities that Yield as much as *8% Guaranteed” and “Find Highest Yielding *8% Annuities.”
I have been warning people for years about the unregulated sales messages that drive too many annuity sales, especially with indexed annuities. In a low interest rate world, the thirst for yield is palpable for most people that still remember Jimmy Carter era CDs.
This email was the breaking point for me personally, and I hope this commentary will be the impetus for these types of ads to finally be regulated and stopped by the annuity industry.
*Asterisk* annuity marketing 101
If you read the above paragraph quoting the misleading annuity email solicitation, you will see an *asterisk* beside the number 8. I guess the annuity promoters think that * saves them from these bogus promotions, but they are wrong. This asterisk type of marketing strategy is exactly what’s wrong with too many annuity sales messages.
If you look up the definition of the asterisk symbol and its use, the asterisk represents “a reference to an annotation or to stand for omitted matter.” It’s the omitted matter part that indexed annuity promoters are currently being allowed by the industry to take advantage of and hoodwink the consumer. The omitted fact and explanation within that email promotion and other misleading annuity ads is that the 8% isn’t really yield, but a phantom income only account.
No actuarial genius available
With the 10-year Treasury hovering around 2%, there is not some actuarial genius at an annuity company that has figured out how to get you a true 8% yield. The fact that I have to keep pointing out this common sense fact to the hundreds of people who call me with these dream sales pitch scenarios is both depressing and scary.
The 8% these annuity promoters are referring to is what’s called an income rider. An income rider is benefit that can be attached to a deferred annuity (typically an indexed or variable). That’s the 8% number associated with the asterisk, and there is usually an annual fee assessed for this benefit for the life of the policy.
The catch to the “8%” is that you cannot peel off the interest like a bond or CD, get to it in a lump sum, or transfer that total amount. It can only be used for income, and if you don’t use it for income then it becomes monopoly money and worthless. In addition, once you start the income stream, this high rider percentage credit permanently stops. Sorry to be a buzz kill, but this is the contractual reality.
Words matter … the word ‘yield’ matters
The word “yield” in the investment world is sacred, uncompromising, and its true definition should be vigorously defended. Yield means real interest. Yield means access to growth without touching the principal. Yield doesn’t mean income riders attached to an indexed or variable annuity.
These ongoing and misleading annuity “yield” advertisements are the most heinous versions of bait and switch marketing I’ve seen in my decades in the financial services business. Uninformed but trustworthy people are buying the hope that this type of yield exists, and too many agents are eager to sell them that dream.
I expect the annuity industry to continue to defend the status quo and point to the securities industry as “worse than we are.” That’s a pretty hollow defense, but predictable for an industry that is now arguing to keep agent sales incentives that fly in the face of the customer’s best interests. I guess their argument for these misleading yield ads is that “at least we used an asterisk.”
My real disappointment with the “*8% yield ads” is the fact that income riders can be used as effective and efficient strategies for guaranteed income starting at a future date. There is no need to be misleading, or to over hype annuities in any way.
I have an idea that is foolproof and problem free. Let’s have the annuity industry tell the truth about these products and stop using bait-and-switch tactics to sell product. Why not regulate and stop these types of ads, and give the consumer all the information (good and bad) so they can make an informed decision.
What’s ironic about this common-sense approach is that if this level of transparency existed, annuity sales would actually increase. I’m sure even Gordon Gekko would agree.
Originally published by MarketWatch.com 5.19.15 – http://www.marketwatch.com/story/8-guaranteed-follow-the-asterisk-before-buying-2015-05-19