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  • Poterack Capital Advisory

“I Hate Annuities”

Ken Fisher with Fisher Investments® can be seen advertising on TV, heard on radio, and read in media, railing against annuities. I’m a contrarian and a critical thinker, so I thought we could have some fun with Mr. Fisher’s claims.

  1. How does it make sense to “hate” a product? Annuities are one of the oldest and most widely used financial strategies in the world.

    1. One type of Annuity is an Income Annuity. Here are two examples you are likely familiar with:

i. Pensions (once the backbone of retirement security for millions around the world) are Income Annuities.

ii. Social Security (a critical part of retirement security for most retired Americans) is an Income Annuity. Can you imagine a politician running for re-election with the mantra of “I hate Social Security”? Yah, good luck with that pitch!

  1. A Variable Annuity has investment risk and features not available in any other product in the industry.

i. With most Variable Annuities, your beneficiary is guaranteed to receive at least what you invested even if there were substantial losses due to a market downturn. No mutual fund or stock can do this. These unique benefits do not come for free obviously.

ii. You can choose to buy an income rider and guarantee a lifetime income that is unaffected by a market decline.

  1. A Fixed Annuity has characteristics similar to a Certificate of Deposit or Bond.

i. You choose a time period (1-year through 15+ years) for your money. You might choose a longer time period because you can receive higher interest. You may also divide your money up within several different time periods.

ii. So you pick your time period, receive guaranteed interest and guaranteed principal, with no fees or expenses. At the end of the time period, you move your money wherever you wish. Pretty simple.

iii. You may also choose a guaranteed income rider.

  1. Ken Fisher and his company do not offer Annuities so it makes sense he might rail against a competing strategy his company doesn't offer.

    1. His opinion is clearly conflicted.

    2. Selling fear and hate is as old as dirt. To me, it’s unprofessional.

On the Fisher website, these are the “Common Issues with Annuities” you should be wary or informed about:

  • Conflicts of interest

    • All types of annuities are manufactured by Insurance companies only. With any commission-based product, there is an inherent conflict of interest. This is true when you buy a house or a pair of shoes. At PCA we predominantly use fee-based annuities, and our compensation is neutral whether we recommend an annuity or not. Therefore, a conflict of interest does not exist.

    • Disclosure is important, as money drives behavior. Ask how much the commission is on an Annuity before you buy if you care. You also know Mr. Fisher doesn’t spend all that money on advertising without expecting a return on his investment!

    • Annuities are contracts, so many terms are guaranteed unlike investments.

  • Misinterpretation of guaranteed returns

    • If you choose an Income Annuity, then you are receiving guaranteed income for a certain time period or your lifetime. The income payment represent a return of your own money plus interest.

    • If you choose a Fixed Annuity, then you get a guaranteed rate of interest for a guaranteed period of time. You may not want guarantees, but I don’t understand why anyone would hate guarantees?

  • High fees

    • Variable Annuities have “high fees” relative to many investments. This is because there are additional benefits not available in other investments. If those benefits do not provide value in your situation, then don’t pay for them. No hate, just take a pass.

    • I have never seen or heard of an Income Annuity charging a fee, ever.

    • I have never seen or heard of a Fixed Annuity charging a fee, unless the owner decided to pay a fee for a guaranteed income rider or additional benefit. If you don’t want to pay a fee for a benefit you do not value, then I recommend not paying the fee. It’s your choice.

  • Your assets are locked up for a certain time period

    • Fixed Annuities are no more locked up than when you choose a Certificate of Deposit or Bond with a future maturity date. The longer you want to “lock up” some of your money, the higher the interest rate is likely to be. This is a consumer choice whereby you may be able to choose a higher rate on some of your money because you don’t need all your money at one time!

    • The vast majority of Fixed and Variable Annuities provide penalty-free liquidity equal to 10% of the Annuity value every year. This is substantial liquidity, especially if you use Traditional IRA money. Very few people ever take more than 10% of their taxable IRA money out even if it is 100% penalty-free because the money would be subject to taxation.

  • Excessive surrender charges

    • Surrender charges are contractual therefore cannot change and are obvious in advance. The longer the time period, the higher the surrender charge (cost to cash in). This is also true of a Certificates of Deposit. Higher penalties allow the financial institution to pay higher interest, because they can use and invest those deposits for longer terms themselves.

    • You shouldn’t put all your money in any financial instrument. This is true with stocks and with Annuities. With Fixed Annuities, you do not have investment risk or typically fees but there’s no free lunch! The surrender charge is linked to the time period you promised you’d keep your money on deposit in the Fixed Annuity.

  • Annuity income typically isn’t adjusted for inflation

    • Neither is a pension payment adjusted for inflation, typically. There are Annuities that do adjust for inflation, and of course you can choose to pay for this additional benefit. No hate, just choices.

    • An Income Annuity can provide guaranteed income for life, which none of Fisher’s products (stock, mutual fund, or Exchange-traded fund) can. You may or may not value guaranteed income. This is a choice that can be made without hate.

What Ken Fisher and too many others fail to recognize is that every product or strategy has benefits and limitations. Your financial outcomes are either improved by them or not. The hammer salesman doesn’t go around saying he hates screwdrivers! Mr. Fisher’s premise is silly.

Many well-constructed plans involve a wide array of products and strategies, customized for each family and their financial objectives. Annuities are not better or worse than other financial instruments. We educate our families on what various products and strategies actually do, and do not do. With full disclosure, transparency, and a Fiduciary approach to planning, the labels don’t mean anything. Choose love over hate, readers!

Guarantees provided are based on the claims paying ability of the issuing company. Riders are available for an additional fee - some riders may not be available in all States. Nothing contained herein is to be considered a solicitation, research material, an investment recommendation or advice of any kind. Any investments or strategies referenced herein do not take into account the investment objectives, financial situation or particular needs of any specific person. Product suitability must be independently determined for each individual investor. A fixed annuity is intended for retirement or other long-term needs. It is intended for a person who has sufficient cash or other liquid assets for living expenses and other unexpected emergencies, such as medical expenses. A fixed annuity is not a registered security or stock market investment and does not directly participate in any stock or equity investments or index.

Please consider the investment objectives, risks, charges, and expenses carefully before investing in Variable Annuities. The prospectus, which contains this and other information about the variable annuity contract and the underlying investment options, can be obtained from the insurance company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

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