Every week I receive many calls from people who have either just bought an annuity or are being pitched one. They are always hoping that I will validate their decision, or at minimum, better explain it to them. Just like a restaurant critic doesn’t like every restaurant, and a movie critic doesn’t like every movie, I consider myself a true annuity critic. There are some good annuities out there, but some bad ones as well.
The recent trend of these calls concern how agents are trying to force the wrong annuity strategy into a situation where there is a clear and simple solution. This “one size fits all” approach that a lot of agents use is one of the main reasons our industry has earned its bad reputation and ongoing negative stigma.
Case in point. Everyone in our industry knows that over 10,000 baby boomers retire every day, and with that movement comes the need for some lifetime income solutions to start immediately. Regardless of interest rate levels, the highest contractual payout for the client and the most efficient solution for immediate income is a single premium immediate annuity (SPIA). This is a mathematical fact and cannot be argued from a rational client suitability standpoint.
In spite of this obvious solution, I am getting calls from people across the country telling me that they have either purchased or are being advised to purchase a variable or indexed annuity for immediate income! There is no way that recommendation can be suitable or appropriate from a highest contractual payout standpoint. We all know the primary reason for an agent to suggest this approach is that the commission for selling a deferred annuity is much higher than for an immediate annuity.
In addition to blaming the agent’s justification of “if you believe it’s the truth, it’s not a lie” (George Costanza – Seinfeld reference) mentality, I also blame the carriers and the FMOs for feeding into this “learn this product and go” marketing plan.
In a recent conversation with an FMO, I was told that over 95 percent of their record-breaking business in 2013 has been with one carrier and one specific annuity product. How is that possible if the industry claims to be actually listening to the client and trying to solve for each situation from a suitability and appropriateness standpoint? This one product focus has to change before any type of legitimacy is given to the world of annuities.
A friend of mine that is a respected industry executive calls this myopic product mentality “the next shiny thing.” In his opinion, the majority of agents are just looking for that next hot product or “shiny thing” so they can go and sell it to everybody. That’s like having a hundred people go to a restaurant and everyone orders something different, but the waiter brings pasta to every single customer. It makes no sense, and we all know that restaurant would not survive long-term unless they started catering to each individual customer. Correlation, anyone?
I know that this “one and done” product sales mentality has existed for a long time in the annuity industry and is how a lot of money is being made at all levels of annuity distribution. I also know that some FMOs are one-product shops, which is strange in my opinion from a business model standpoint. I’m probably dreaming that this will ever change, but I think this “one size” insanity is the reason that wealthy investors have shunned annuities as possible portfolio solutions. A recent study showed that over 70 percent of annuity buyers have a household income of less than $100,000. Big money is watching, and they don’t like what the annuity industry is offering.
Agents need to come to grips with the fact that an annuity might not fit for a specific situation. Gasp! Or, maybe a single premium immediate annuity is the appropriate choice for immediate income and, though you might make a lot less in commission, it’s the right thing for the client.
Just because spandex can “adapt” to any body size doesn’t mean that everyone should wear it. Just because agents now use an automobile reference like “hybrid” or say that an annuity has “multiple benefits” doesn’t mean that one annuity fits every single person and every single situation.
The annuity industry is currently looking into a “circus mirror” (fat looks like skinny) when it comes to the “one size fits all” product approach. The industry is justifying this strategy because the money is rolling in, and is not coming to terms with the eventual reality that change will come. We as an industry need to look in a real mirror and be honest with ourselves at every level of distribution. Annuities will never receive the respect that they deserve as a much needed transfer of risk solutions until this archaic sales practice ends.