How false optimism sells annuities
As retirees continue to be barraged by constant annuity sales pitches, a common theme occurs with too many annuity purchases. That one constant is the dream of unreachable potential returns that runs contrary to the contractual realities of most annuity policies.
If you watch cable TV, listen to talk radio, or surf the Internet for anything financial, you have probably noticed a recurring pattern of aggressive annuity ads. Some mention the word annuity, some just list some high percentage or uses fill in the blank meaningless phrases like “reasonable rate of return.” All of these pitches are targeted toward the greedy part of your subconscious.
With over $200 billion of annuities sold each year, and with that number growing steadily, the vast majority of annuities purchased revolve around two types; variable and indexed annuities. The reason that these two products dominate most agent recommendations comes down to one thing, the dream of potential growth. Another underlying fact driving these sales is that variable and indexed annuities also pay the highest commission to the agent.
Funny how sales levels and commissions correlate, eh?
Why variable and indexed annuities exist
In 1952, the first deferred variable annuity was introduced by the company we now know of as TIAA-CREF. No load, no surrender charge, fully liquid variable annuities still are great strategies for tax-deferred growth using mutual funds (which are called separate accounts in the annuity world). Unfortunately, the no load version of the variable annuity isn’t what is being purchased or pitched. Load variable annuities are the most sold annuity type in the country, with an average annual fee of 3% for the life of the policy.
The variable annuity dream sold is that you can get your market growth and add guarantees with attached riders. Sounds great in concept, and sometimes those planets do align themselves, but usually that’s not the case. With most variable annuity products, once you start adding rider guarantees to the policy, the carriers start limiting your fund (separate account) choices. Kind of squashes the growth dream in my opinion.
Indexed annuities were designed in 1995 to compete with CD returns, not market returns. However, that’s not how they are typically pitched and the current advertising assault on TV, radio, and the Internet reveals just how little regulation there is over this overhyped “hybrid” nonsense dream. Indexed annuities aren’t considered a security, and the advertising guidelines (if any) aren’t enforced like a security (stock, mutual fund, variable annuity, etc.) would be. An indexed annuity agent can literally say, promise, or advertise almost anything to sell the dream.
The sad part is that indexed annuities, when explained in full and understood by the client, could have a place within a portfolio. Unfortunately, the product is on track to go down as one of the most mis-sold strategies in financial history by a sales force that is largely under trained and solely focused on just indexed annuities.
Low-information annuity buyers (LIABs)
This is a description that I use to describe the type of annuity buyer that too many agents like to target. I call them “LIABs”, or low-information annuity buyers. These are people that aren’t financially savvy, and want to trust the advice they are hearing. They want a too good to be true product to exist, and if an agent tells them what they want to hear, there is a good chance they will buy the annuity that is being pitched.
The “bad chicken dinner seminar” circuit has now been replaced by constant TV ads, Internet videos, and spots on conservative radio shows. All of these pitches are primarily geared to the LIABs of the world, which is unfortunate, because this group of people are the ones that can’t afford to make a mistake when making an all important retirement decision.
If the ad doesn’t say the word annuity …
If you ever needed proof that the indexed annuity industry is unregulated, then you haven’t been on the Internet, watch cable television, or listed to the radio. If that’s the case, then consider yourself fortunate.
The current advertising trend in the indexed annuity world is to never, and I repeat never, mention the word annuity. And if the ad does happen to mention the word, it happens after high percentage numbers have been flashed across the screen to attract anyone with a pulse to at least pay attention to hear more. These vague promise ads would never be allowed in the securities industry, and if they were tried, the perpetrators would be severely punished.
Not so in the indexed annuity world. Carriers love premium, and have turned their heads in unison as they accept middle America’s hard earned money into these strategies. States regulate annuity sales, which explains why the annuity promoters have matriculated to national platforms that aren’t overseen or enforced.
I’ve grown tired of contacting state insurance departments, with nothing happening to stop this type of advertising. They obviously aren’t interested in cleaning this mess up, and I guess have made the decision to deal with the eventual problems when they happen.
‘I own an 8% annuity’
This phrase is the epitome of the false optimism that sells too many annuities and represents the hundreds of calls I get on a monthly basis where the person claims they “own an 8% annuity” or that they “get all the market upside with no downside.” It’s sad and tragic because the contractual realities of the policy will always supersede the dreams that the agent has either promoted or let go uncorrected. By the way, the 8% number is typically an income rider that cannot be accessed for anything other than income, and isn’t yield. The other pitch is used by a large part of the indexed annuity agent army.
Annuities are simply transfer of risk products that, in a perfect world, should be owned for their contractual guarantees. A large part annuity industry isn’t on board with me on this view on annuities, and has let me know loud and clear their feelings. However, I think I’m right and I stand firm that annuities should not be purchased for hypothetical, theoretical, projected, back tested, or potential return scenarios.
Always own annuities for what they will do, not what they might do. It’s really that simple.
Originally published 7.15.14 by MarketWatch.com – http://www.marketwatch.com/story/how-false-optimism-sells-annuities-2014-07-15