There is Great News for consumers as many Annuity companies are changing their advisor compensation models!
The word “Annuity” has too often triggered bias, ignorance and misinformation among financial professionals and consumers alike. You may have seen very large investment firms promoting “I hate annuities and you should too”. What a profoundly stupid statement for anyone, let alone a financial firm, to make. Yep, I said stupid! Candidly from a compliance perspective, it is surprising any financial firm can broadly say to the public any product or strategy is to be hated or loved.
The Fiduciary responsibility requires a financial professional to recommend products and strategies in the best interest of their client. Of course nobody should be surprised a securities firm that doesn’t offer annuities or comprehensive financial planning would hate annuities. The Ford truck dealer probably hates Toyotas as well!
Social Security has characteristics similar to an annuity. A Pension has characteristics similar to an annuity. Annuities, for most of America, represent the financial backbone of retirement income yet they are to be hated? Seriously? Our clients have used Fixed-Indexed annuities to earn guaranteed returns* in their overall allocation for many years.
In this low interest rate environment, with 10-year government bonds paying 2.2%, I simply don’t understand why any financial professional or consumer would “hate” 3% on short-term annuities or 4-5% on longer term annuities. By the way, there are no fees or expenses on the vast majority of Fixed-Indexed annuities unless you choose optional benefits.
I said I simply don’t understand why anyone would hate annuities (or any product), but actually I understand perfectly. BIAS. You see I am frequently asked by people why they hear negative things about annuities. Here is how I might respond:
• “What have you heard about annuities that is negative?” During my nearly three decades in the financial industry, I’ve heard basically three answers to this question from people; (A) “High fees” (B) “High commissions” (C) “I just heard their bad” This last response takes many forms but has no factual or logical support (Example would be “my uncle Louie had one once and didn’t like it”).
• I then explain the following regarding “High fees”….. “Variable annuities have high fees because they have benefits not available with any other financial product in the industry”. “If those benefits do not apply to your situation, then a Variable annuity is not in your best interest because it’s never in anyone’s best interest to pay unnecessary fees or expenses”. “Fixed annuities, including Fixed-indexed annuities, do not typically have any fees so if a Fixed annuity is in your best interest then fees are not an issue”.
• I would then explain the following regarding “High commissions”….. “100% of annuities, fixed or variable, are insurance industry products and the insurance industry distributes their products on a commission basis.” “The annuity commission is typically paid by the annuity company and that commission does not come from the client’s deposit or annuity value” “An advisor, potentially motivated by the commission, may recommend an annuity when it is not in your best interest” “If an annuity is in your best interest, then you have many choices in the insurance industry and the distribution cost (commission) is paid by the annuity company you choose” Basically, if an annuity is right for you then the annuity company is going to pay the advisor a commission.
Here’s the lesson of this article…..
Every client should be focused on their own best interest and every advisor should be focused on the best interest of their client. What a product or strategy actually does or does not do is what matters. Not what a newspaper ad, mutual fund salesman or your best buddy says. However, anytime there is a commission, there is an inherent conflict of interest! This is the case everywhere in our daily lives when we buy a house, car or pair of shoes.
A conflict of interest has been present with nearly all sales of annuities since the beginning of time but that does not equate to not being in your best interest. What I love about the DOL/Fiduciary regulations is their objective of eliminating any conflict of interest between the advisor and a client. Love Trumps Hate!
Finally I get to the Great News! Many annuity companies are now compensating advisors similar to how we (PCA) are compensated to manage investments! The revenue to our firm is influenced by the actual annuity performance. You and I want the same financial outcome, higher values in your investment portfolio and your annuities. Commissions paid up front with annuities created a situation whereby it didn’t (financially) matter to an advisor how the annuity performed. At PCA, we have always been committed to transparency, proactive communication and service even if we are not receiving ongoing revenue from annuity values as we do from investment portfolios.
For people who have not been able to get beyond “Annuity Bias”, this is a great development! The three negative concerns some people have are being addressed by annuity companies. Like any investment, an annuity either has a fee (high or low) or it does not have a fee which is disclosed. High upfront commissions are being replaced with fee-based or level commission revenue. Therefore, advisors are rewarded long-term for developing and maintain long-term client relationships as opposed to hit-n-run short term thinkers in my industry.
With these two issues changing, the third issue will eventually go away. Yes, emotion and bias will likely be a part of financial decision-making forever. However, with full transparency and no conflict of interest regarding annuities, people everywhere will align their strategies with their objectives based on facts and not on hearsay from Big Lou or anyone else!
*Guarantees are subject to the claims paying ability of the issuing company.