We'll do our best to provide analogies that won't offend anyone, but still help drive home an understanding of why people don't like annuities. Here goes.
When someone decides to build their home rather than buy someone else's home, they're faced with the fact that they'll have to rely on experts in order to make it happen. They'll need an architect, general contractor, mason, plumber, electrician, heating and air conditioning, painters among others.
One could probably agree that if you can afford to hire these individuals you can also afford to just buy the materials and do it yourself. There are parts of the project you might not be able to do due to license requirements, but there are parts that you could do yourself, but choose to hire professionals to do it on your behalf.
One could also assume that when you hire a professional, you also have an understanding that they're in this business to make a little bit of money as well. Their fee so to speak.
The last part that you're giving up is control. Yes you decide what it looks like, mostly, but you have very little control over timeline, process, availability, etc. This is the part that people have a problem with that makes the analogy work with annuities.
You see, when you buy an annuity, (there are many different types) you're really investing your money with a company that is going to build your wealth, manage or wealth, or preserve your wealth or all three. The annuity isn't the home in this analogy. The annuity is the professional. The annuity is the general contractor, the architect, the plumber - because your professional takes on the project and assumes responsibility for the project and the potential liabilities of that project.
An agent of the insurance company sells you an annuity in which you invest a portion of your savings. They then tell you what to expect from that product including any guarantees, riders, and other features along with fees and surrender charges. In the Fixed Annuity arena, the investor purchases the annuity and then potentially gives up on the big returns of the stock market or other investment markets. But for that submission, the investor also realizes that an annuity can provide one with principal guarantees for each year. For example, the stock market goes down 25% this year - the investor lost nothing...in the annuity that is.
Some Wealth Mangers and Financial Advisors have made the argument that an investor would be better off over a long period of time with a "well diversified portfolio" of stocks, bonds, mutual funds, ETFs, and others. This is not untrue. However, what about in the short-term? What about the long-term that will eventually be the short-term?
Is an annuity for everyone? Maybe not. Should you only buy annuities? Probably not. Is there a benefit to having both? Absolutely. An annuity's market risk mitigation, principal protection, and overall consistency and safety allows an investor to be a little more tolerant of risk in there overall investment strategies within the stock market. If an investor knows that they properly planned for the worst by investing in a product that has guarantees, than that investor can be a little more risky knowing that if things go poorly - they haven't lost it all.
But you lose all that liquidity right? ...Right?? You have access to 10% or more of your account each year without penalty. You still may need to be mindful of tax consequences, but no penalty and no surrender charge. But I lose out on all the market gains! ....Right?? Indexed annuities with principal guarantees still allow you to participate in some of the index's gains so maybe you don't get all of it - but that's the price you pay for good sleep at night.
But the advisor makes soooooo much money on it! Really? Different annuity companies pay different amounts, but let me ask you this? Which would you prefer? A one time fee paid to the selling agent of 1 to 8% that comes from the insurance company and not your account, or would you like a 1% fee of the accounts balance each year to come out....for let's say 20 years? If the market crushes your account and you lose 20% of your account value - the advisor still gets paid his fee.
A nice example: An account value of $200,000 that loses 20% loses $40,000. At $200,000 the advisor's fee was $2,000 and after you lose your money his/her fee is $1,600. Please understand we're not demonizing wealth managers and financial advisors, we work very closely with those individuals and call many of them our friends. We refer business to them and they do the same in return for their clients.
But unfortunately, there has been a movement over the last 8-10 years that has said annuities are horrible. That agents are getting fat. That insurance companies sell these for huge profits. But there are people ignoring their place in an overall financial plan.
If you have any questions, reach out to the GWSP sales team at (718) 704-0900 and press 1. They can answer your questions and provide you with enough information to help you decide if it's right for you.
I'm busy working on my blog posts. Watch this space!