For a product that once was about as plain vanilla as a financial instrument could get, the fixed annuity is proving to be surprisingly controversial. Utility isn’t the issue; advisors continue to tout fixed deferred annuities, both the traditional kind and its younger cousin the fixed index (or equity-indexed) contract as legitimate products that merit use in a variety of applications.
Indeed, when the right situations arise, advisors such as Richard W. Stumpf, CFP, John Freiburger CLU, ChFC, CFP, and Samuel Gott, CFP, say they’re open to recommending a fixed annuity to their senior clients. But when it comes down to their individual product preferences, the three advisors part company.
Stumpf, principal at Financial Benefits Inc. in Wichita, Kan., concedes that some fixed index annuity products are “junk” but that others, with the right mix of features, are well-suited to certain clients, despite the black cloud that continues to hover over them amid charges of shifty products and slippery sales tactics. “I think it’s a legitimate product when used appropriately,” he says. “Unfortunately, some companies know they have junk products and so do the agents who sell them. If they keep it up, they’re going to kill the golden goose.”
That goose long ago lost its luster for Gott, who contends that indexed annuities aren’t suitable for the kinds of senior clients he serves, due to the confusing and potentially disadvantageous provisions embedded in some products and the questionable tactics used in some quarters to sell them. “Frankly, I think they’re a rip-off and there is going to be a lot of litigation because there’s been so much flagrant abuse by salespeople,” says Gott, whose practice is based in San Antonio, Texas.
Instead, when the situation calls for a fixed product, Gott says he turns to a traditional fixed annuity. “Where a client is risk-averse and is looking for absolutely the most safety for the money, a fixed annuity works well.”
Somewhere between the two camps sits Freiburger, principal at Partners Wealth Management in Naperville, Ill., who says he’s willing to use either fixed product – and sometimes both together in the same client portfolio. In one such case, a couple wanted to restructure their $2 million portfolio. Ultimately, they endorsed Freiburger’s plan to put some assets in an institutional money management account, some in a traditional fixed annuity and some in a fixed index annuity. “They get more aggressiveness and sophistication with the institutional account,” he explains, “The [traditional] fixed annuity gives them a guaranteed return from a highly rated insurance company and the [fixed] index annuity gives them a floor, with some upside potential on top of that.”
Situations such as that aside, the overall appeal of fixed annuities appears to be waning. According to Beacon Research, which tracks the annuity market, indexed annuity sales in 2006 were down about 7 percent from 2005. The sales drop-off for traditional fixed deferred annuities was even sharper in 2006, at 13 percent, according to Beacon. And the decline continues here in 2007. Sales of fixed annuities, including indexed and traditional fixed contracts, in the first quarter of this year decreased 17 percent from the previous quarter, according to Beacon, and 18 percent from first-quarter 2006.
Yet even advisors like Freiburger who aren’t shy about using highly complex investment instruments say the no-frills fixed annuity still holds an important place in the advisor’s arsenal of financial instruments.
Traditional fixed annuities, he says, are best suited to clients seeking the “sleepability factor”- a guaranteed rate of return. They appeal to those kinds of investors because they offer several things an alternative investment such as a CD does not, namely tax-deferred growth and protection from probate and creditors in some states. Further, annuity income doesn’t count toward calculations for Social Security benefits. With those features, a fixed annuity doesn’t necessarily need to beat the yield offered by a CD to be a worthwhile investment, says Gott.