Be wary of local banks selling annuities
With interest rates at historic lows, annuities have become a major profit center for many local bank branches across the country.
My parents are the prototypical CD buyers, and appropriately live in the oldest city in America, St. Augustine, Fla. They both grew up in deep south North Carolina, and their investment conversations always focus around interest rates and their current CD holdings. My dad used to love to go to the local bank branches and try to negotiate a little higher rates for the small amount of money that they were trying to grow. He really enjoyed the verbal back and forth between him and the local bankers, and would boast if he got any extra yield on his CD holdings.
My how times have changed. Now my dad avoids the local bank branches like the plague because every time he steps foot in the door, they are trying to sell him an annuity. He’s even tried wearing my Stan The Annuity Man® logo’d hat and shirt, and they still blindly move forward with their annuity pitch. He even get’s calls at home from the banks that “stumble upon” the fact he has a large money market balance to see if he would like to consider talking with one of the branch advisers about an annuity. I give the bank branches credit for sales persistency, but enough is enough.
Annuity sales through banks have risen steadily over the past decade, and that trend will most likely continue. Let’s take a look at what has caused your local bank branch to become the next place trying to sell you an annuity.
Starving for yield
With interest rates at historic lows, the traditional “saver” and CD buyer is in a state of yield depression. Typically, a fixed-rate annuity can provide a slightly higher yield than its CD counterpart, but doesn’t carry the same FDIC safety that most CD buyers love and feel comfortable with. Fixed-rate annuities are backed at the state level by individual state guarantee funds, but this coverage can’t and shouldn’t be compared to FDIC.
A growing problem in my opinion is that CD buyers are being convinced to replace that traditional fixed-rate strategy with variable or indexed annuities. Judging from the weekly calls I receive from people wanting me to explain the annuity they just bought from the bank, too many of them are confusing an attached benefit income rider percentage with actual yield. Income riders can only be accessed in payment form, and can’t be accessed in a lump sum like CD’s. The overwhelming majority of deferred variable and indexed annuities purchased today are sold with these attached benefit income riders, but the bottom line is that rider growth isn’t yield.
Recent second quarter results from the Bank Insurance & Securities Research Associates (BISRA) reveal the growing popularity of indexed annuities being sold through banks and credit unions. Over 1 billion dollars worth of these too often over hyped indexed annuities were sold in that 3 month time period. Just to put that number into a disturbing perspective, sales of variable annuities through bank branches consistently dwarf the sales of both fixed-rate annuities and indexed annuities.
Starving for profits
I understand the need for corporate profits from both the bank side and the annuity carrier side. Annuity companies are starving for the customer base and convenient physical locations that local bank branches have to offer. The bank branches are understandably having a hard time selling CD’s during this low interest rate environment, so higher annuity commissions and fees are a welcomed revenue relief.
You can’t blame these companies for looking to increase profits, but I think the quest for these bottom line goals could be at the expense of an unsophisticated investor client base that only does their “money shopping” at the local branch.
Shooting fish in a barrel
Most hard working Americans have grown up trusting banks as the place where they keep their money. The majority of people don’t feel comfortable with typical Wall Street risk related investments, or interacting with a local brokerage firm or investment adviser. Because most people have their mortgage with the local bank, and have their checking accounts there as well, there is a level of trust that banks have well earned with their customer base.
If my parents didn’t have a son who calls himself Stan The Annuity Man® and lives and breathes all things’ annuity, I’m pretty sure that they would have purchased one or more of the numerous variable and indexed annuities that they have been pitched over the past few years. To this day, my dad will call me and say that “the bank has an annuity paying 7%.” My answer is always, “No dad, that’s an income rider that you can only use for income and isn’t yield.” Like most people that are the same age as my dad, they remember the Jimmy Carter days when CD’s were at very high levels, and yearn for those days to return.
Some of my friends in the business that actually work within these local bank branches say that “it’s like shooting fish in a barrel” because the customers are so loyal and trust the bank implicitly. No long-term CD buyer wakes up wanting to purchase an annuity. Annuities, for now and for the most part, are sold.
So the next time you walk into your local bank branch, be prepared to hear about something other than that CD your are familiar with. Be prepared to see the latest financial craze sweeping the country … the “bank branch annuity dance.”
Originally published 10.1.2013 by MarketWatch.com – http://www.marketwatch.com/story/be-wary-of-local-banks-selling-annuities-2013-10-01