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Before Buying an Annuity

By Steven Higgins, Financial Advisor, Principal

In 500 words I hope to provide enough information to dissuade any reader from purchasing an annuity (or another annuity).

I’ve spent almost two decades serving clients in the capacity of financial advisor. I’ve been in countless presentations by investment and insurance companies pitching the latest fund, strategy, or annuity. I’ve seen the promises and the guarantees and I understand the sincere emotions in clients as they try to find the balance between investing and protecting their hard earned money. Insurance companies and peddlers of annuities know the soft spots and the sales presentations and literature have psychological pin point accuracy. Annuities seem to provide the exact remedy for your angst. Any discussions about annuities are as complicated as the multitudes of pages in the contracts themselves. However, the most simple way to understand the limits of a financial product and expose what seems to amount to outright fraud is this; Any product or instrument made up of underlying components (stocks, bonds, and cash) can not accomplish a feat that none of the underlying components can themselves accomplish. There is not a magic potion and you can not have your cake and eat it too.

It is incredibly important to understand that the only thing that matters is what is in the contract; what the sales person says is irrelevant. Jim Cramer in an interview stressed, “The peace of mind is born from the sales pitch, not the contract. Only the contract is truth.” Annuity contracts are almost impossible to understand and the average person doesn’t read them. Sadly, the industry and protection mechanisms are failing to protect and inform potential purchasers of annuities and after the contract is signed, unfortunately, it’s too late. People should know that insurance and annuity sales people are not held to the Fiduciary Standard that Registered Investment Advisors (RIAs) are. Sellers of annuities literally do not have to disclose all of the components of the products they sell. Alan Gassman, a board certified estate planning and estate lawyer states, “Disclosures of an advisor who sells annuity contracts is very low compared to the normal fiduciary standards that apply to trust companies and fiduciary investment advisors who agree, or are required by their mode of operation, to do what is in the best interest of their client.”

I have seen hundreds of cases and I can tell you that I have never seen an annuity plan work the way it was sold and in every case, the client would have been better off to own a traditional portfolio of stocks, bonds and cash reserves in accordance with an investment policy and financial plan.

Four reasons why you should be very cautious before buying an annuity:

• Penalties of 10% or more for sometimes more than 10 years to take out your own money. Why should anybody EVER be handcuffed to a product?
• Commissions of often more than 10% upfront to the person selling you the annuities. That’s $10,000 per $100,000! Why should anybody make 10% upfront? How does getting paid upfront motivate an advisor to provide quality service over time?
• Internal fees often between 3-4% per year (Variable Annuities). How can you ever expect to make money with a 4% hurdle?
• Possible caps on upside returns making it almost impossible to make money over time (Indexed Annuities). By the way, this was sold by saying, “you can participate in the upside of the market without any of the downside.”

Securities offered through LPL Financial, Member FINRA/SIPC. Investment Advice offered through HD Wealth Strategies, a registered investment advisor and separate entity from LPL Financial.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.