The 1980s called. They want their “Attack on Annuities” back.
Scare Tactics: An out-of-town investment firm recently ran a full-page ad in our local newspaper to attack annuities as expensive, complicated, illiquid, and too generous in the commissions paid to agents. These are the same old, tired, worn-out attacks against annuities that have been made for decades by financial folks selling other products and services. Despite the competitors’ best efforts to marginalize annuities, these products remain a very popular financial tool in America: $2.3 trillion went into them during the last ten years (LIMRA SRI). A lot of money is at stake, so, financial firms that only manage clients’ investments for a fee probably don’t want you to consider annuities.
Annuities Unspun: Since my firm offers both fee-based money management and annuities, I have the luxury of recommending the products and services that best fit each person’s financial situation, goals, and risk tolerance. Some of my clients have annuities. Some do not. I offer the following rebuttal to those who would make unfair and sweeping generalizations about annuities:
Expensive? There are four different types of annuities. Some have high fees, some have low fees, and some have no fees. To suggest all annuities are expensive is just plain wrong!
Complicated? Some annuities are complicated, just as some stocks, bonds and mutual funds are complicated. Many annuities are actually easy to understand.
Illiquid? 10% can be drawn annually from most annuities. More importantly, the cost to get your money out of an annuity is known when you buy it. What will it cost to get your money out of stocks if the market drops 38% like it did in 2008? And bonds . . . if interest rates go up just 2%, 20% or more could be lost when redeeming a ten-year bond. From a prudent planning perspective, none of these vehicles should be viewed as short-term investments.
Commissions? The typical annuity sale pays 5 to 7% to the agent. Assuming it is 7% for a 7-year annuity, an agent would earn the equivalent of 1% a year. That’s in line with the 1 to 1.5% the fee-based money managers charge.
Get the Facts: If you’d like straightforward information about the costs, features, safety and income potential of annuities, call my office for your free copy of the “Annuities as Part of Your Retirement Plan” booklet.
David D. Holland, a CERTIFIED FINANCIAL PLANNER™ practitioner, hosts a weekday radio show at 9AM on AM1380 Ormond Beach, AM1230 New Smyrna Beach and AM1490 Deland. He has also authored two books in his Confessions of a Financial Planner series. Holland offers investment advice through Holland Advisory Services, Inc., a registered investment adviser in Ormond Beach. He can be contacted at (386) 671-7526. Email your financial questions to info@DavidHolland.com.