As an owner of a registered investment advisory firm which is fee-only, I should be expected to go along with the group think in my industry and hate annuities. The thinking on this is so strong that it almost raises to the level of a cult. In fact, there is an entire organization called NAPFA whose members must be fee-only advisors.
I don’t know if it stems from a feeling of purity and superiority or from either a lack of knowledge or interest in using annuities in helping clients plan for retirement. But I am always surprised that at the intensity of the hate for a type of investment that can effectively help clients plan for a successful retirement.
So why DON’T I hate annuities? Here’s my list.
Number 1: Clients love them!
Yes you heard that right. When clients talk about their annuities it is in glowing terms. They say “While everyone was worried about the market in 2008, my annuity kept churning out 4% every year.” “I can count on the income from my annuity despite what the market is doing.”
Annuities, when used properly and judiciously, can provide a reliability factor that no bond or equity market can produce consistently for clients and clients know it.
Number 2: Annuities are not as costly as you think.
I have seen clients bring in portfolios from other “fee-only” advisors where they were charged 2% in a management fee and the funds in the managed portfolio have internal expenses well over 1%. That’s over 3% per year!
Many annuities, especially single premium immediate annuities, deferred-income annuities and fixed-rate annuities have very low commissions and many have low or no annual fees. It’s true that variable annuities have high fees and commissions and for that reason, I don’t like them either. Index annuities have annual fees that are not as much as I have seen from “fee-only” managed portfolios so to make the assumption that annuities are bad because of the fees is an over generalization. An annuity should be assessed on its value based on the cost of other types of investing.
Number 3- Annuities are a valuable tool in planning for the distribution phase of investing—Retirement.
I don’t know of any investment other than an annuity that can guarantee a life-time fixed amount of income. The gap, in reliable income during retirement that is a result of the decline in corporate pension plans, can be filled through the use of annuities.
The benefit of an annuity is that the money grows tax deferred until needed during retirement. Other than a variable, an annuity investment is also risk free. So annuities can be a good way to save for an income stream when clients are no longer working.
Caveat
Not to use annuities as a tool in helping clients plan for retirement is analogous to the proverbial “fight with one hand tied behind your back.” It is the responsibility of the advisors to use annuities judiciously. I have met with far too many retirees with few liquid assets because everything they had saved was in an annuity or two or even more. These clients were obviously sold investments without consideration of their existing portfolio or knowledge of their future retirement needs.
Annuities can benefit clients but only when used in the context of holistic financial planning and in moderation. Clients benefit when we act in their best interests.
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