Tuesday, February 7, 2017

Why Ken Fisher Hates Annuities, And You Shouldn't Care

Allow me to start by saying I don't know Ken Fisher, we've never met and I have nothing against the guy. However, if you watch any type of investment news I'm sure you've heard his rant on how he hates annuities and everything about them. He's based his entire business around beating up on annuities for their fees, lack of returns, surrender periods and complex language. The frightening thing about this is, once you make a bold statement such as, "I'll never sell an annuity" that doesn't give you much room to retract if these products evolve and became attractive or fitting for some of your clients. For the sake of clarity and transparency; yes, annuity products have complex language (as all insurance products do), and can come with surrender periods ranging from 0-7 years. The "gargantuan" fees as he refers to them in his Forbes article have been compressing so much so that you can own many annuities now for close to the same price as any other investment. The poor account performance isn't false, but there's a big part that he isn't disclosing when making that claim which we'll touch on later.

After getting licensed as a financial advisor in 2015 I spent my entire first year familiarizing myself with the business, different investments, and understanding where certain tools fit into a financial plan, all of which has given me great insight and prompted me to write this piece. In my opinion, someone buys an annuity for two reasons; to build up income that they can draw off of in retirement and/or for tax deferred growth of their investments. Two very legitimate reasons to utilize an annuity product.

I want to break this up into 3 points highlighting the main reasons that Ken Fisher dislikes annuities. The are as follows:
  • Fees
It seems as if fees are the center of every conversation surrounding any type of investment, particularly an annuity. Ken Fisher believes these annuity products have astronomical fees and that advisors recommend them to a client solely to collect a commission. Fortunately for investors this isn't the case. An annuity can have extremely similar commission options as a standard mutual fund investment. Sure, an advisor can elect to receive a one time up front fee or he could elect to have that fee paid out over the investments lifespan. So his argument as it pertains to egregiously high fees only paints the picture he tries to portray and does not give the whole story. Some of the fees associated with these contracts also pay for the added benefits directly associated with them. If you have an income annuity it only makes sense that you'll need to pay for the benefit of being able to draw lifelong income off of your protected value (discussed below) as opposed to your contract value.

  • Lack of Investment Returns
There are two meaningful values when your receive a statement from an annuity product. This section applies to annuities that have an income rider attached to them. The first is your contract value and the second is your protected or income base value. If you learn anything at all about your annuity contract please understand these two values. Your contract value is the value of your underlying investments within the product. This is the value that people like Ken Fisher will say earns lack luster returns. This money is purposely invested conservatively so that the insurance company ensures minimal volatility. The value that truly matters in an annuity contract with an income rider is your protected or income base value. This is the value that does not decrease and is typically credited simple or compound interest the longer you keep the contract without turning on income. This value is so important because it is what you will ultimately be drawing income off of once you're over 59 1/2 and decide you'd like to begin your life payments.  In summation, it is true that your contract value can have very little movement but when you're using this annuity for income that value has little relevance. It's that value that people like Ken Fisher will try to focus on to make you believe your contract is giving you nothing for your money.


  • Surrender Periods / Liquidity
Last but certainly not least is the surrender period or amount of time the money must remain in the contract if you decide you'd like to forfeit your annuity and walk away. To begin, let's discuss why they would even have such a thing built into these contracts? Well, the insurance company has their actuaries run the numbers and decide the amount of time money must be kept in this contract in order for them to be able to fulfill the guarantees that are associated with it. My argument on this is similar to the fee argument I discussed earlier. Many older contracts had these long surrender periods, however, the industry has been shifting and we've seen these time constraints diminishing or even disappearing altogether. Furthermore, no advisor should ever recommend to put all of your assets into an annuity product. They're simply used as a sleeve in your portfolio to give you some protection against market risk. It's another form of diversification or a way to supplement retirement income if that's something you believe you'll need more of.


My intention when writing this was not to attack Ken Fisher in anyway. I simply wanted to make it known that if your advisor recommends an annuity product to you that doesn't mean they're looking to exploit you for fees. More often than not they probably did so based off your risk tolerance or desire for more financial security. Believe me in saying I do not favor annuities over more traditional forms of investing, however, I do see them fit for certain circumstances. Being that Ken Fisher never uses them even in situations where they could be beneficial worries me that some of his clients may not be receiving the best advice. Ken states in one of his commercials that he has solutions to provide you with anything that an annuity can do, but I challenge him to find a solution that will continue to make income payments long after the money invested is gone. Don't get me wrong, there will be an additional cost to receive that safety but it's hard to put a price on peace of mind.


In closing, with perhaps the most controversial president of all time taking office this year, wouldn't it be comforting to take a portion of your investments and place them into something that can give you a guaranteed income regardless of what the rest of the market does? Our financial markets are at all-time highs and we now have a president who can send the whole economy into a tailspin with one tweet. For many, the mere thought of this makes them uneasy which is why I pose this question, are you more inclined to take a sure thing or a maybe?


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