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ANNUTIES: THE GOOD, THE BAD, THE UGLY

April 30, 2008

Mark on the markets Mark Patterson

Annuities; the good the bad the ugly.

Annuities come in two flavors, fixed and variable. A fixed annuity is offered to the consumer via banks and brokers, but are products of insurance companies. A typical fixed annuity will have a 7 year commitment, and 7 year surrender charge. There is often a bonus year or years when the annuity pays a better rate of return than the “guaranteed rate”. You must figure out what the rate of the higher earlier rate and the usually lower later rate is by calculating the rate of return for the whole 7 years.
Recently “Dateline” aired a show that exposed “Annuity salespeople” preying on the elderly. They would not disclose the surrender charges which typically start at 7% for the first few years of the annuity. Sometimes the words “tax free” was used, instead of tax deferred.” Guaranteed, just like the bank”, which is untrue. The insurance company backs the annuity not the FDIC. The seedy salespeople often claimed that there is “no commission”, and that is not true. The popularity of these products is driven by the fact that the commissions are typically 5-7%. That is why there is a 7 year commitment to the annuity with a typical surrender charge of 7%. The sales person has been paid, and if you want your money back, it will be less the commission. Many banks sell fixed and variable annuities to their customers. It is not uncommon for a typical CD investor who’s CD is maturing to be introduced to the “investment representative”, who may or may not work for the bank.
The banker who the customer has known for many years is ushered into the “investment reps’s” office, and by the way, the investment rep knows that you have a maturing CD.
The investment rep’s job is to sell you the annuity, which creates a commission, split with the bank and rep to some degree.
All of this is legal and ethical if the customer receives full disclosure about the annuity and the relationship with the bank. Unfortunately I have spoke with way to many people who felt that the disclosure was not there. And you could probably have guessed that they were elderly.
Variable annuities are an insurance company product with mutual funds in them. Between fees, expenses and riders, it can cost you 4% of your money annually, and of course there is the 7% surrender charge, which decreases as time passes.
There are some good applications for fixed and variable annuities, but not in IRA’s that are tax deferred already.
Do your homework when presented with an annuity. They are high commission for the salesperson, and in my opinion, sold far too often. A better strategy for your money is often available.

Mark Patterson is a registered investment advisor with MHP Asset Management LLC, and can be reached at 447-1978, or Mark@MHP-Asset.com