Response: I recently wrote a response to a question that someone posed to me with regards to getting a second opinion on their annuity, to which I responded that it's always a good idea to get a second opinion about anything if you feel you are having a lopsided conversation. Meaning, if you are getting all the good, but feel as though the negative aspects are being left out... you might want to take some more time before making a decision. One blog reader posted a comment that essentially said that all annuities are bad, only snakes sell them and gave his interpretation on how an indexed annuity works and the advice that he offered his family members.
"Steer clear of annuities. The insurance company caps your return, invests your money in the markets and keeps all above the guaranteed cap. Example, they guarantee 4% a year to the annuity holder on $100,000. Then, they invest the entire $100,000 in stocks of their choosing. Imagine a year like 2013 when the stock market averaged returns of about 34%. In that year, the insurance company keeps 30% and gives the annuity holder their 4%... What a great deal. It is a terrible product and only snakes sell them. If you ever want out, it takes fierce phone calls and about two to three months to get YOUR money back from them. I know because I had to help relatives get out".
At first I thought it was comical how an "armchair" expert could have things so absolutely wrong and then I became concerned. I have conversations weekly with people who are clearly stressed over either their purchase of an annuity or own one or a handful of them and learn something about them that they didn't know when I provide them with a detailed Annuity Report Card. My point in this response is that seeking advice from someone that you know who may be very smart... may not be the best choice for your source of information. These are confusing, complex investment vehicles that and there are a lot of bad ones out there as well as bad people selling them. However, making an emotional decision about what to do from someone who doesn't understand what they are speaking about might just very well take a bad situation and make it even worse.
My advice is not to seek advice or even a second opinion, just get it from a qualified source and someone who is willing to tell you not only the good, but the bad as well. Getting those good and bad details in writing.. even better.
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Response: When it comes to getting a second opinion I would suggest that it's always a good idea. What can it hurt? I would suggest a few rules of engagement when dealing with multiple advisors during this process and here are a few tips to help you wade through those waters.
1. Be up front with the advisor you are working with. You are expecting the person you are speaking with to be upfront, truthful and transparent with you... you should offer the same courtesy.
2. If you ask the advisor your speaking with if it's ok to get a second opinion and they discourage you from doing so... there might be an issue with that person.
3. If you are going to get a second opinion get it from a qualified source not your golf partner or someone who watches CNBC a lot and you think is pretty smart.
4. Get everything in writing from both sources... remember, there has to be a clear economic benefit to you to make changes with your portfolio.
5. Be deathly afraid of the advisor who's reasoning for suggesting you make a change is because of a bonus or some other enticement in the contract... this will end up costing you money.
6. Don't do the disappearing act with the first person you spent time with. Being up front with both advisors is not only common courtesy, but it will also ward off the "follow up" phone calls.
Thanks so much for the annuity question Kelli
Response: Today's question came in from Daniel from Westin Florida. The quick response to your question Daniel is to say absolutely not. This is a classic example of an advisor selling the features of an annuity trying to entice a sale and setting an expectation of safety when one doesn't exist. I'm quite certain based on the question that the discussion of fees for these "guarantees" was not part of the conversation either. I want to be perfectly clear to state that NO variable annuity offers its owner principal protection or any sort of guaranteed return. To take that a step further, many sales presentations include a discussion about either an income rider or death benefit rider which many consumers misunderstand. Both of these riders are costly additions to your expense schedule and in short an income death benefit rider guarantees your beneficiary's that they will not inherit less than your original deposit plus a nominal rate of return. Please note that this IS NOT spendable cash by you while you are alive. An income rider is a feature that provides for a "roll up" in value and a guaranteed payout for life from that "income account" NOT your cash value. There is a huge difference here. You should also be aware that if you add these riders, there are fees involved. You should know what the total cost of your annuity is before considering the purchase. I would also be asking to see the track history of the performance on contracts that include the riders to show you the net affect of those expenses.
Thanks so much for the question Daniel.
Response: Great question from Sue T. in Noblesville, IN. The very first question I'm asking any advisor that I'm meeting with to discuss annuities is "how many companies do you represent or are you contracted with?" Ask for a list to see what you will have access to. Let's face it, you can't possibly buy the most competitive product, from the best rated companies if the person you are speaking with doesn't have access to it.
Next I want to know about fees, caps and things that cost me money. Have the advisor prepare an outline of all of the contract limitations, things that will cost you money like expensive riders and go through them with you. If you are being presented with a annuity that has a rider, like an income rider or death benefit rider, ask if it's optional and why this vs. a lower cost product which will probably offer you better performance.
If the annuity has a bonus, don't jump to the conclusion that this is automatically a good thing. Ask if it's a cash bonus, if there is some sort of recapture or vesting schedule or is it paid to an "income account" accessed through exercising an income rider or annuitizing. These are critical to understand.
Last I want to learn about liquidity, how you access your money if you need it. How much can you take without incurring a fee and last but not least, what happens should you pass away while owning this contract.
I think these are some of the most critical questions you should be requesting responses to Sue and of course there are many more follow ups to them but at least this points you in the right direction.
Keep the questions coming.
Response: Thanks so much for the questions Sonja...there is plenty of dirt on the topic of annuity bonuses. It's interesting how even some of the most well read investors when you ask them why they purchased a particular annuity the first thing out of their mouth more often than not is "well I was paid a bonus". Wearing this like a badge of distinction as if they were so crafty they outwitted the insurance company and beat them like the gambler who is going to take down a Las Vegas casino. First off, there is no "getting over" on the insurance company. If you haven't notices, these are for profit companies and aren't in the business of giving money away. Having said that, I normally discourage my clients from entertaining a bonus annuity product as I do with most other annuity riders. Why?... because after the thrill of "being paid" wears off typically in the long run they end up costing YOU money. Let's take a look.
When you are paid a bonus it's either paid to you in cash, added to your deposit or if you have an income rider, it's added to your income account. The difference between the two is extreme. Funds in an "income account" or "income rider account" not only are costing you in fees which have a negative affect on the earnings of your actual cash value, but you typically either need to exercise that income rider or annuitize the contract to realize that value. I've seen cases where bonuses were used to offset surrender fees coming out of another annuity contract and the bonus was paid to the income rider account, not the cash value... this should never happen. Rule number one, don't own a rider that you aren't prepared to use at some point otherwise you are just tossing money away.
The alternative to being paid into an income rider account is when that bonus is added directly to your cash value.. a much better situation since that is real spendable money, but there are downsides here as well. Normally when you are paid a bonus is cash there is something called a "bonus recapture" schedule. It's a vesting schedule much like the surrender charge schedule on your annuity but it applies to your bonus. If you leave early, you give it back, it's that simple.
The questions that must be asked when you are being enticed with a bonus are:
The more annuity bells and whistles you buy... the worse your performance will be.
Response: Thanks so much for the question Sam and here's the straight scoop. First of all the underlying fuel for a disgruntled owner of anything including an annuity is their expectations. When you sit in front of someone who is talking to you about market like returns with protection and bonuses and guaranteed income etc. people tend to get excited. What I have found in my 25 years of experience is that when it comes to annuities in general, consumers are sucked in by the flashy enticements like bonuses, income riders, roll up rates that they typically think is a guaranteed return and Death Benefit Riders. Consumers love the features and things that make these products sound fantastic... the downside is that they rarely if ever understand the affect of having these features included in their contract on the underlying performance of their investment. Investors don't typically complain about the 10% bonus a year or two later... what they complain about is the fact they learned some new terminology like what a cap is or that there was a fee for those riders and a vesting schedule for that bonus.
When I sit down with someone to discuss an annuity that they own or we are talking about putting funds into a new contract the very first thing that we talk about is the use of those funds. Are we buying an annuity for appreciation and growth or to produce income. Often those two varieties will lead us down two very different paths. I see so many annuity contract owners who come to me for an Annuity Report Card® who are unhappy because of their returns, but don't understand the very things that excited them about making the purchase is the same items that are causing their funds to perform poorly.
The lesson of the day is when it comes to annuities as well as so many other things in life... "you can't have your cake and eat it too". If you are buying annuities laced with additional costly features, don't expect your investment return to knock your socks off. Most often you can have one or the other but not both.
Thanks again for the question Sam.
Response: Thanks so much for the question Pam. I know there is a lot of frustration in owning an investment vehicle that you think you understand or that you buy because of the "the pitch" and then you learn something about it later that wasn't quite clear to you. Riders of any kind, whether they are income riders, long term care riders or death benefit riders are without a doubt the most misunderstood and least explained "add-ons" to an annuity and they can also be the most costly.
A death benefit rider is like owning a small insurance policy inside your annuity contract that guarantees your beneficiaries a certain return on your investment regardless of how your actual investment performs. These are very popular with the sale of variable annuities and the pitch is "protecting your heirs and their inheritance in case you happen to pass away during a down market... they aren't penalized." Some call it a "peace of mind" feature... however the catch is the fee especially with the already expensive variable annuity. I'll give you an example. I prepared an Annuity Report Card this past week for someone who owned a variable annuity for the previous seven years. Her complaint to me was that she was unhappy with the performance and she wanted to better understand why. After dissecting her contract I'm going to show her when we meet this week to review this report that she not only had a Death Benefit Rider attached to her contract but also an Income Rider as well. She was paying 1.50% in M&E charges, .75% in asset management fees .15% in admin charges and a whopping 2.5% in rider fees for both riders. Total fees for her ownership of this annuity is 4.90%. Her total return on investment net of those fees 4.17%. My opinion is that if you are purchasing a variable annuity on the integrity of the underlying performance of the managers that you are already paying... why do you need this extra expensive insurance policy. I get the untimely death thing and I'm sure there have been cases where it has paid off for the consumer, however, how about the fact that these are being sold, or should be sold as long term investment vehicles. If you are paying 1.00% in fees to guarantee a 4% return on a vehicle that long term should do a multiple of that... where's the attraction? Are you betting that your portfolio managers will not return to your heirs 3% or better performance?
"I purchased a product that does not mature. I can never withdraw the full amount from my account... EVER. I can however annuitize or withdraw the money over a 10 year period. I complained about the sales pitch and misrepresentation of the product because I would never buy anything that I could not take my money out of after so many years. The Rep informed me I was given and signed a Contract. Be careful - when an Advisor tries to sell you something - make them show the points in writing they use as product benefits. Always ask what happens when you die - make them show you that info in writing as well".
Response: All I can say about this is I'm sorry. As an industry we typically chase after the advisor and blame only the sales practices involved in this type of scenario. My opinion is that that is only the tip of the iceberg here. The root of the problem is the fact that this type of contract, when presented to the states for approval to be sold should be denied immediately and without question. A product with an never ending surrender charge and forced annuitization should never make it to the kitchen table as an option for anyone.
I have run across this product before and interestingly enough I had a perspective client ask me about this company and a similar product just this past week saying "It looks like a pretty good deal... what are your thoughts" This is a classic example of how individuals don't get past the sales pitch and dig a bit. This is exactly the reason why I employ my Annuity Report Card®. I actually take it a step further and not only prepare the Annuity Report Card® but also show the breakdown of the annuity that I am comparing it to. Please feel free to check out the Annuity Report Card® I did for this case.
As far as what you can do at this point if you find yourself in this situation.
Response: Thanks so much for writing in Robert.. I truly appreciate you taking the time to ask your question. As you know from reading or listening to anything I have ever published I am not a fan at all of rules of thumb. Everyone that walks through my door and interviews with me has a completely different set up circumstances. As a starting point for discussion, before I meet with a new perspective client I have them complete the Color of Money Survey. This is a simple test to give me an indication of their risk tolerance as well as other things that should be considered in determining asset allocation. As with any asset class, owning too much of one particular type of investment has it's risks. Individuals who were heavily invested in real estate over the last 10 years felt the affects of being heavily weighted there. Having too much of your money invested in annuities may not cause you risk of loss but instead you have liquidity concerns.
The two biggest gripes about annuities are fees and liquidity and if you are too heavily invested in annuities a number of things have gone wrong. Here are a few things to pay attention to:
Response: Thanks so much for the question Donna and income riders are probably the most misunderstood, oversold and least explained feature that can be added to an annuity. I can't tell you how many annuity owners I meet with that are so proud of the fact that they own an annuity that they were bonused 10% when they made the purchase, their money is growing at a guaranteed 6% rate and life couldn't be better... Then I do the Annuity Report Card on their contract and they find out that their real spendable cash is not growing at 6%, that's either the roll up rate that their "income account" is appreciating at. The learn that they are paying a fee for that income rider which is sapping the growth of their actual cash and that the bonus that they were paid was added to their "income account" and not their cash value. Typically the red flag that brings them to me is they see that their cash value is not growing nearly enough or as much as they anticipated.
A few things to understand about income riders:
Carl Barnowski has 25 yrs. of experience as a retirement income expert specializing in principal protected annuities.