Fiduciary Rule: A Sincerity Test for Annuities

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I’ve received quite a few emails lately asking about my opinion on annuities.

To understand what I think about these products, you just need to look in my book, You Don’t Have to Drive an Uber in Retirement, at the title of the chapter that is focused on annuities.

… The chapter titled “The Worst Investment You Can Make.”

Though I have to admit something – I mistitled the chapter.

Annuities aren’t investments. They’re insurance.

Let me explain…

When you buy an annuity, you are insuring your future income as well as your capital. And like most insurance products, they’re expensive. When was the last time you paid your auto or homeowners insurance and thought, “That bill seems reasonable”?

You pay an insurance company a sum of cash, and it invests it. Then it gives the money back to you in drips and drabs. In most annuity contracts, you are guaranteed a certain amount of income, often for life. You pay fees and commissions for that guarantee. Not only that, but the insurance company is making money on your money while it returns slivers of it back to you each month or quarter.

In my book, I mention that annuities aren’t wrong for everyone – just most everyone.

I know my inbox and the comments section below will fill with angry rebuttals from people who are happy with their annuities and from salespeople who will say that I don’t understand anything about annuities. It happens every time I write about the topic.

To the people who’ve bought their annuities and are satisfied, I’m happy for you. I hope they give you the peace of mind you paid for.

For anyone doubting whether these are awful products, consider that a new rule was passed by the Department of Labor in 2016 that would make annuity salespeople (and other financial professionals) fiduciaries. A fiduciary has a legal obligation to do what’s best for their client and not for themselves or their firms.

You may be surprised that most insurance and stock brokers are not fiduciaries and can pretty much sell you any financial product that is “appropriate,” no matter the cost.

In other words, if you’re a conservative investor who can’t afford to take any risk, your broker can’t sell you penny stocks. But they can sell you a mutual fund with a 5% sales fee and high annual fees rather than a similar fund with low fees.

A fiduciary can’t do that. A fiduciary has to find the best product for you at the best price.

This is important because when the 2016 fiduciary rule was passed – simply passed, not enforced – annuity sales fell off a cliff. Annuity salespeople ran for the hills rather than risk running afoul of the law by selling these garbage products.

Annuity sales fell 8% in 2016 and 18% in 2017. Sales of variable annuities, which are the worst annuities, plummeted 22% in 2016.

So ask yourself why these salespeople, who had success selling products they supposedly believed in, suddenly stopped selling them at the slightest hint that they would be held accountable for any bad advice or unethical recommendations.

Note that the rule that would have made brokers fiduciaries was scrapped by the Trump administration, so these products are once again being foisted upon unsuspecting investors.

Other problems that I have with annuities include the fact that your money is locked up for a certain amount of time with significant penalties for early withdrawal. Also, annuities limit how much upside you can make in a bull market. Finally, in some annuities, if you die before you’ve received all of your money back, that’s just too bad for you and your family. The insurance company keeps the funds. If you want to make sure that doesn’t happen, you pay for it.

If you need to insure a certain amount of income for a set period or the rest of your life and are willing to pay for that guarantee, an annuity may help you sleep at night. That’s what they’re designed for.

But make no mistake about it… Annuities are also designed to generate huge profits for the insurance companies and people who sell them.

I believe those huge profits are better off in your pocket than in an annuity salesman’s.

Good investing,

Marc