As a securities attorney, I spend much of my time helping other attorneys prepare their cases for hearings before the SEC, FINRA and various state regulatory agencies or acting as an expert witness. When I am not involved in these activities, I spend a significant amount of my time on the road lecturing to financial professionals about annuities and retirement planning. In my work, I’m constantly asked my opinion of fixed indexed annuities (FIAs) and whether I believe they are appropriate investments. My answer is always the same: All financial products are appropriate for certain investors. However, all financial products can be sold in such a way that they would not be suitable for some investors. For example, a managed commodity account might be an appropriate investment for a young physician making $500,000 a year, but such an investment clearly would not be suitable for a 60-year-old widow with a small retirement nest-egg.
Hardly a month goes by that I don’t read an article in some financial magazine or newspaper claiming that FIAs are not appropriate investments for anyone. These articles almost always compare the FIA to equity investments such as a portfolio of stocks or mutual funds. The reporters making these comparisons are quick to point out that FIAs, unlike stocks and mutual funds, do not receive dividends nor do they provide the full upward movement of the stock market. The problem with such comparisons is that the reporters who make them assume that anyone who purchases a FIA would also be a good candidate for owning a portfolio of stocks or mutual funds. Such an assumption is rarely accurate and demonstrates just how little the reporters who criticize FIAs know about these products.
By applying this same flawed assumption, U.S. Treasury bonds would be an incredibly poor investment for anyone. The reason for this is that U.S. Treasury bonds don’t receive dividends nor do they receive the full upward movement of the stock market. To reach the absurd conclusion that no one should own Treasury bonds, one would have to assume that anyone who wanted to buy these bonds would also be equally willing to invest their money in the stock market. Obviously this is not true. An elderly investor might feel comfortable having his money in U.S. Treasury bonds where he receives a small but guaranteed rate of return on his money coupled with principal protection without having to worry about the vacillations of the stock market. Such an investor would not be a good candidate for owning a portfolio of stocks or mutual funds.
What an investor wants
Before any comparison can be made between any two financial products, a baseline question must be answered – what does the investor need from a potential investment? For example, if an investor wants to invest his money for a relatively short period of time and receive a rate of return that could be greater than what he might receive from bank CDs while protecting his principal, he would be an excellent candidate for a FIA but a poor candidate for a stock portfolio or mutual fund. Without understanding what an investor needs from an investment, any attempt to compare the FIA to a portfolio of stocks or mutual funds becomes a useless exercise.