Rube Goldberg was a cartoonist who was famous for depicting gadgets and inventions that performed the simplest of tasks in extremely complex and convoluted ways. To this day, there are annual contests named in his honor where the winner is the person that creates the most complicated machine to solve for a brainless task. Mr. Goldberg unfortunately passed away in 1970, but his legacy has now found its way into the world of fixed indexed annuities (FIAs).
I continue to be dumbfounded about how complex our industry is making these products. Rube Goldberg would be proud of this unneeded complexity, and laughing at how ridiculous some of the product designs that annuity actuaries are pumping out to the FIA army of agents.
Before I get started, and for the record, I think indexed annuities do have their place in some people’s (not all) portfolios if the contractual realities and legitimate return expectations are fully explained to the prospective buyer. If you don’t know this already, it’s important for everyone to remember that indexed annuities were actually designed to compete with CD returns, not the stock market. That’s a fact, and something that I think should be prominently displayed on every piece of indexed annuity promotional material (print or digital) in bold letters. I know, I’m a dreamer.
Selling the dream
What I am talking about here are the indexed annuity presentations I am emailed by people, not to mention the numerous Internet video promoters and their too-good-to-be-true charts and dream-slinging annuity sales pitches.
My point is that I’m convinced that most indexed annuity buyers don’t fully understand how the index options work. I know that most agents think they “cover it” by saying such clichés as “you get some of the upside with no downside” and by showing the often-used and worn-out “stair-step” chart. I think we all can agree that those typical agent measures are not enough from a client comprehension and suitability standpoint. That’s an understatement.
Spreads, caps, point to point, monthly sum, annual sum, and all of the other actuarial return calculation craziness would make Rube Goldberg proud and probably inspire him to start his own “hybrid” (aka: “hype-brid”) FMO. The Rube Goldberg Senior Planners, or something that is overly generic and misleading.
2.5% x 12 = 30% potential annual returns
This indexed annuity presentation should be called the Rube Goldberg Special. I get calls from “suspects” on this one all of the time. It’s the monthly sum dream pitch: 2.5 percent cap per month x 12 months in the year = potential 30 percent annual return. And to pile on, the pitch always comes with the “no downside” warm cozy blanket. To sum up all of the planets aligning themselves, the pie-in-the-sky pitch is the potential of 30 percent upside with no downside. And, oh by the way, you can get an upfront bonus as well. Where do I sign up?
“The rest of the story” as Paul Harvey would say is that there is a cap on the upside, but no cap on the downside, and the cap needs to be at least 2.9 percent for you to have a mathematical chance of any positive returns. Oh, that’s right, facts don’t matter with the Rube Goldberg annuity pitch.
When indexed annuities were first introduced in 1995, they were very simple and easy to understand. And from the return numbers I have seen from those original products, they were effective and pro-customer as well. Rube Goldberg would have hated those old indexed annuity products because they were designed to be simple. That should be reason enough for the annuity industry to return to these transparent designs.
Solving the “Rube-ics” annuity cube
Rube would have laughed out loud and probably created an entire comic strip series on word “hybrid” (aka: “hype-brid”) being used to sell indexed annuities. He also would have enjoyed the confusion created by riders, bonuses, doublers, unknown indices created out of thin air, and the newest addition to indexed annuity complexity…stacking. Sounds like a Rube Goldberg burger joint. Good grief!
The bottom line is that consumers want simplicity and transparency from start to finish. They don’t want a complex product that really has a simple conclusion. They want easy to understand products that have simple and efficient contractually guaranteed solutions. Period (sorry President Obama). The first serious carrier to get to true simplicity with indexed annuities and attached benefits wins…and wins big.
I know that there are a handful of simplistic indexing strategies available, but they are certainly not being presented and sold as much as the numerous selections of the Rube Goldberg indexed annuity models. As an industry, we have to come to a consensus that less complex products are better for everyone involved, from client to agent. As Rube Goldberg would never say, it’s just that simple.
For more from Stan Haithcock, see: