I’m not a financial advisor who puts a lot of emphasis on talking about particular financial products, but on the complete financial planning picture. To me, product selection is the last thing that should be considered in financial planning. Moreover, product selection, when properly done, is very specific to the needs of the individual investor. Trying to sell one product and make it fit everybody’s financial needs isn’t being a financial advisor, it’s being a salesman. So you will rarely find me making broad recommendations either for or against particular products.
I’m going to make an exception today, and I’ll probably get my humble little financial planning practice in trouble with somebody for it. I want to publicly challenge the value of the single most sold product in the financial services industry today. I think it is a terrible investment, and I see no place for it in a well-managed portfolio. You’ve probably heard of it – it’s called a variable annuity.
What’s my problem with variable annuities, and why are they no part of the financial planning service I offer to my clients? First, it’s one of the highest cost products in the market. You buy mutual funds (which have fees) inside of another product that also charges fees. Most of the variable annuities I’ve analyzed (and I can’t even count how many that is) have fees that average 4 or 5 percent. Compare that against the 10% growth in the S&P over the last 38 years. So you’re paying 4% – 5% to make 10% so your net return is 5% – 6%? That’s terrible, even in a best-case market. How much do you pay in fees when the market is going down? The same 4 or 5 %. You’re trying to win a horse race with a 500 pound jockey riding your horse!
Has the financial planning service you work with filled you in on this? What’s worse, the mutual funds inside a lot of variable annuities are less than optimal. Lots of mutual funds that don’t make it in the open market find a second life inside of a variable annuity. Why? Most people who buy variable annuities aren’t focused on the mutual funds, they are focused on other aspects of the annuity, like lifetime income. Now, I’m a huge proponent of lifetime income. And there are lots of ways to get lifetime income from a portfolio. But when you try to get lifetime income from a variable annuity, usually by way of a lifetime income rider, you get charged a half to three-quarters of a percent more in fees to get you the guaranteed 5 or 6% income. But then you’re required to hold the product for a certain period of time, and then you’re subject to other restrictions (annuitizing, taking the income using the rules of the rider etc.).
Most investors don’t know how to ask their financial planning service if a financial product is right for them. They know they have particular financial goals, and their so-called advisor tries to convince his customers that variable annuities meet those goals. The customer says, “Can I get 5% income for life from this?” “Yes,” says the advisor. But the advisor doesn’t mention that if inflation goes to 10%, your 5% guaranteed income isn’t remotely going to keep up with the rise in your living expenses.
I know I’m making a troublemaker out of myself by saying this, but it has to be said: variable annuities benefit nobody except the financial planning service that sells them. Let me show you how to get out of variable annuities and into something with better inflation protection, better diversification, lower taxes, a better income, and all for much lower cost.
The moral of this story? Don’t buy variable annuities and if you think you are trapped in one you aren’t let me help you with our Annuity Rescue Plans.
