Annuity sharks smell blood with market volatility
Any time the stock market has a bad week or experiences extreme volatility, the annuity sharks start smelling blood in the investment waters and will be on the attack to lock your money into their “perfect product.” Current indexed- and variable-annuity sales pitches can sound enticing and almost too good to be true, so it’s important to keep your head and understand the contractual realities and proper uses for annuities in a portfolio.
Don’t let fear make your decision
It’s always unnerving to see the markets move violently south, and these downturns make even the most hardened market veteran question their long term strategies. Remember that annuities are not true market growth products, and there is no “have your cake and eat it too” annuity strategy available that can give you real market potential with underlying guarantees. However, that is exactly the sales pitch you will hear.
Making a quick decision, or being high pressured into one, is never a good decision. We all know that to be true, so it’s a good reminder as you are getting ready to be inundated with annuity sales pitches.
Advisor payday cop out
If all of a sudden your advisor’s solution to the angst of market volatility is a variable or indexed annuity, then you are getting ready to handsomely compensate them for not taking responsibility of professionally managing your money. You may remember that was the reason you hired them in the first place, and justification for that ongoing management fee.
Variable annuities typically have limited mutual-fund (aka: separate account) choices, and annual fees for the life of the policy averaging over 3% when riders are added to the contract. In my opinion, income riders attached to variable annuities are nothing more than a “bail out” if your mutual funds go south. If you want to buy mutual funds, then go buy mutual funds or ETFs. You don’t need an annuity structure to do that.
Indexed annuities were designed to provide CD-type returns, so the “market upside with no downside” pitch is a factual nonstarter. Income riders attached to indexed annuities do provide an income guarantee, but are a commodity and should be shopped for the highest contractual payout if you are planning to turn on income in the future. If the agent inappropriately uses the made up word “hybrid” to try and sell you a “too good to be true” indexed annuity, hang up the phone or walk out of the meeting because you are being misled and sold.
If you want to buy your agent or advisor a car, then go to the dealership and get one. However, don’t reward them with a high commission annuity for taking the easy way out when times are tough.
Annuities are not the perfect ‘PILL’
An annuity is a contract between you and the issuing carrier. Its common sense that you need to read the contract, because that is what will actually happen. Remember that annuities are not investments. They are contractually guaranteed transfer of risk strategies. That is a fact.
Annuities solve for only four things.
- Principal protection
- Income for life
- Long-term care
Or “PILL.” If you do not need to solve for one or more of these contractual solutions, then you do not need an annuity. It sounds simple, because it is and should be this basic when making an annuity buying decision. Annuities should always be owned for what they will do, not what they might do.
Annuities do have their place in some (not all) portfolios, and should be considered as a non-market asset. Just make sure that you are contractually solving for a specific solution, and not basing your decision on a non-guaranteed return scenario that an agent is promoting.
Annuity ‘caveat emptor’
There are many annuity promoters that have had their “market downturn” advertisements ready to go when the next round of volatility happens. Well here we are, so get ready for the upcoming onslaught.
The bad-chicken-dinner seminar invitations will start appearing in your mailbox, and the TV and radio ads are in cue. The Internet scare videos have been edited, and your email inbox is getting ready to get hammered with unregulated annuity solicitations.
The bottom line is that the perfect annuity product to solve all of your portfolio fears does not exist.
No one has the perfect answer for market volatility. That includes the person trying to sell you that too-good-to-be-true annuity.
Originally published 8.25.15 by MarketWatch.com – http://www.marketwatch.com/story/annuity-sharks-smell-blood-with-market-volatility-2015-08-25